FM Sitharaman announces tax proposal for demerit goods only, keeping essential goods exempt
Finance Minister Nirmala Sitharaman on Thursday clarified that the proposed Health and National Security Cess will apply only to demerit goods such as pan masala, and not to any essential commodities. She added that the revenue collected from this cess will be shared with states for health-related programmes.
Introducing the Health and National Security Cess Bill, 2025 in the Lok Sabha, the minister said the objective is to create a dedicated and stable source of funds for two key areas — health and national security.
“This cess is not being imposed on essential items. It is targeted at demerit goods that pose serious health risks. The intent is to create a deterrent so that consumption of such products declines,” Sitharaman said.
She noted that pan masala will attract the maximum 40% GST rate, in line with its consumption-based tax structure, and the new cess will not affect GST revenues. Instead, the cess will be charged over and above GST, based on the production capacity of machines installed in pan masala factories.
“The cess liability will vary for each unit depending on its production capacity,” the minister explained.
Since GST is levied at the consumption stage and excise duty cannot be applied to pan masala, the government has proposed this cess to ensure the product is appropriately taxed as a demerit good.
A portion of the cess revenue will be distributed to states for health awareness and other health-related activities, she said.
Sitharaman added that because excise duty cannot be levied on pan masala, a separate cess law is required to tax its production — alongside GST, which continues to apply at the consumption level.
Currently, pan masala, tobacco, and similar products attract 28% GST plus a variable compensation cess. After the compensation cess ends, the GST on these items will rise to 40%. Along with this, tobacco will also be subject to excise duty, and pan masala to the new Health and National Security Cess.
On Wednesday, the Lok Sabha passed a Bill amending the Central Excise Act, 1944, enabling excise duty on tobacco products in addition to the 40% GST.
Both the tobacco excise Bill and the new cess Bill come as the GST compensation cess nears its expiry, since loan repayments are expected to conclude in the coming weeks.
When GST was introduced on July 1, 2017, a compensation cess was implemented for five years to offset states’ revenue losses until June 30, 2022. It was later extended until March 31, 2026, with collections being used to repay the ₹2.69 lakh crore borrowed to compensate states during the Covid period.