Health Security to National Security Cess Bill 2025: New Tax on Tobacco & Pan Masala

The Union Government of India has introduced two tax bills in the Lok Sabha for maintaining revenue neutrality of indirect taxes on tobacco, pan masala and related product categories. These proposed bills will also ensure that such addictive sin goods do not become affordable as part of the government’s strong commitment to public health. 

Key Takeaways

• The statutory deadline for the GST compensation cess is 31st March 2026, after which the new central excise tax will replace it.
• The new excise tax will keep these tobacco-based products revenue-neutral for the government exchequer. 
• The Health Security se National Security Cess plans to introduce a capacity-based tax burden on tobacco-based sin product manufacturers.  
• Tax revenue from this source will be used to fund public health and national security expenditures.  

What is the Health Security to National Security Cess Bill, 2025?

Health Security to National Security Cess Bill, 2025, is a legislation Introduced in the Lok Sabha on 1st December 2025. Subsequently, the Lok Sabha passed the bill on 5th December 2025 and Rajya Sabha passed the bill on 8th December 2025. It intends to generate a stream of tax revenue for the Union Government of India based on the declared capacity of tobacco and pan masala manufacturers. The revenue thus generated will finance public health and national security-related government expenditures. 

The salient features of cess to be levied under the Health Security se National Security Cess Bill, 2025 are: 

• It is not a sales-based tax. It is levied on the installed capacity of production of a manufacturing unit. 
• Tax liability will be a fixed sum calculated based on the total number of pouches of pan masala or sticks of cigarettes, and will be collected monthly. 
• The Union Government has the provision of notifying new sin goods under this cess. 

Existing Taxation Framework for Sin Goods

The existing taxation framework varies with product sub-categories under the broad category of sin goods. 

• Tobacco-based addictive sin goods - 28% GST, along with excise duty, NCCD, and Compensation Cess
• Alcohol and alcohol-based beverages - Except for certain ingredients used in producing alcoholic beverages, the finished product is not subject to GST. Only excise duty and VAT is applicable. Excise duty varies from state to state and also on alcohol content. It can be as high as 50%, as in UP. VAT is levied on cost + excise duty. 
• Online gambling/gaming - Online monetary gambling is banned in India with effect from 22nd August, 2025. Other categories of online gaming or gambling attract GST at 28%. 
• Luxury cars - GST at 40% with road tax based on engine capacity. 

What the New Bills Propose (2025)

Both the Health Security to National Security Cess Bill, 2025 and the Central Excise (Amendment) Bill, 2025, collectively intend to replace the GST Compensation Cess from the 31st March 2026. 

The key proposals of these two bills are: 

Government’s Rationale & Policy Drivers

The Union Government’s primary rationale behind the newly passed bills is to seamlessly manage the impact on tax revenue following discontinuation of GST compensation cess from 31st March, 2026. Besides, protecting Indian citizens from the hazardous health effects of tobacco-based intoxicants is also a crucial rationale behind the new bills. 

Based on these two key rationales, the major policy drivers are: 

1. Maintaining revenue neutrality of the taxation framework on tobacco, pan masala and similar sin goods.  
2. Creating consumption deterrence for common people in terms of the price points of tobacco-based intoxicants. 
3. Bridging the loopholes in tax administration on products, like pan masala, and solving the tax evasion tendencies in this category.  
4. Creating a corpus for meeting the expenditure in building India’s modern warfare capabilities and strengthening public healthcare system. 

Expected Impact of the Changes

• The Health Security to National Security Cess Bill, 2025, is expected to solve the problem of tax evasion in the pan masala industry. 
• Organised manufacturers (especially cigarette companies) will have greater clarity about tax implications. It will help them prepare ahead of 31st March 2026 deadline of compensation cess. 
• From the consumer's perspective, cigarette prices are unlikely to increase significantly (at least in the short term), as the new excise bill will replace the existing tax burden. 
• The excise duty is shared with the state governments, while the sharing of tax revenue from cess is discretionary. The new excise duty on cigarette and pan masala will increase state governments’ revenue. 
• Tax evasion by unorganised manufacturers in the pan masala and bidi industry will decrease.

What Do Businesses and Stakeholders Need to Do?