The Lok Sabha on Friday (December 5, 2025) passed a Bill which would levy a special cess on pan masala and use the fund for improving public health and strengthening national security. The ‘Health Security se National Security Cess Bill’, 2025, will introduce a new cess that replaces the existing Compensation Cess under the GST framework.

Union Finance Minister Nirmala Sitharaman said, “The cess will be shared with the States, as public health is a State subject.”

Replying to the debate on the Bill before it was passed by a voice vote, Ms. Sitharaman said, “Pan masala will be taxed at the maximum 40% rate under Goods and Services Tax (GST) based on its consumption, and there will be no impact of this cess on GST revenues.”

The primary intent behind the newly introduced Health Security (National Cess) Bill, 2025, is to levy a tax specifically on the production capacity of pan masala, a category the government says cannot be effectively brought under the conventional excisable regime, the Finance Minister had clarified on Thursday (December 4, 2025).

On Friday (December 4), she said the Bill intended to augment the resources for meeting expenditure on national security and for public health by levying a cess on the machines installed or other processes undertaken to manufacture pan masala and similar goods.

The purpose of the Bill is to create a “dedicated and predictable resource stream” for two domains of national importance – health and national security– she said.

The proposed Health and National Security Cess, which will be over and above the GST, will be levied on the production capacity of machines in pan masala manufacturing factories. Initially, the Bill applies to pan masala; however, the government may notify to extend the cess to other goods, if necessary.

Ms. Sitharaman added that the cess as a percentage of gross total revenue was 6.1% in the current fiscal, lower than 7% between 2010 to 2014.

Finance Minister Nirmala Sitharaman on Thursday (December 4, 2025) said the proposed Health and National Security Cess will not be levied on essential commodities, and the proceeds will be shared with States under specific health schemes.

Moving the Health Security se National Security Cess Bill, 2025, for discussion in the Lok Sabha, Ms. Sitharaman said the levy would be imposed on the production capacity of pan masala units, which is a demerit good.

“By levying the cess, we expect that it would act as a deterrent for pan masala consumption. Part of the revenue from this cess will be shared with States through health awareness or other health-related schemes/activities,” Ms. Sitharaman said.

“Pan masala will continue to attract the maximum 40% Goods and Services Tax (GST). On top of that, the Health and National Security Cess will be levied on the production capacity of pan masala manufacturers,” the Minister said.

“This cess will ensure a “dedicated and predictable resource stream” for two domains of national importance — health and national security,” she added.

Ms. Sitharaman said that since excise duty cannot be levied on pan masala, the government is bringing in a separate cess bill to ensure that production of pan masala is taxed, along with GST, which is levied on consumption.

The government will introduce two bills in the Lok Sabha on Monday (December 1, 2025) to levy excise duty on tobacco and tobacco products, and a new cess on manufacturing of pan masala.

The Central Excise Amendment Bill, 2025, will replace the GST compensation Cess, which is currently levied on all tobacco products like cigarette, chewing tobacco, cigars, hookahs, zarda, and scented tobacco.

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The Central Excise (Amendment) Bill, 2025, seeks “to give the government the fiscal space to increase the rate of central excise duty on tobacco and tobacco products so as to protect tax incidence,” once the GST compensation Cess ends, according to the statement of objects and reasons of the Bill.

The Health Security se National Security Cess Bill, 2025, seeks to levy Cess on the production of specified goods like pan masala.

The Government may notify any other goods on whose manufacturing such a Cess can be levied.

Sin goods like tobacco and pan masala currently attract a GST of 28%, plus a compensation Cess which is levied at varied rates.

Once the compensation Cess ends, sale of tobacco and related products will attract GST plus excise duty, while pan masala will attract GST plus the Health Security se National Security Cess.

Since the GST rate of 28% has been done away with, such sin goods will be subject to the highest GST slab of 40%.

“It is proposed to levy the Health Security se National Security Cess to contribute towards the twin purposes of enabling targeted utilisation for public health, as well as national security,” according to the statement of objects and reasons of the Bill.

The cess shall be in addition to any other duties or taxes chargeable on the specified goods under any law for the time being in force, it added.

Such businesses will have to file a self-declaration of all machines or processes for each factory or premises, and the cess would be calculated in the aggregate for each such location, it said.

The two bills are listed for introduction by Finance Minister Nirmala Sitharaman on Monday.

At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.

The levy of compensation cess was later extended by four years till March 31, 2026, and the collection is being used to repay the loan that the centre took to compensate states for the GST revenue loss during the Covid period.

Since that loan repayment is going to be fully repaid sometime in December, the compensation cess will cease to exist.

On September 3, 2025, the GST Council had decided to continue with the compensation cess on tobacco and pan masala till the loans taken are repaid.

On other luxury items, the compensation cess ended on September 22, when the GST rate rationalisation was implemented with just 2 slabs of 5 and 18 per cent. A 40 per cent rate was fixed for ultra-luxury goods, aerated drinks and other demerit goods.

The Central Excise Amendment Bill, 2025, and The Health Security se National Security Cess Bill, 2025 will ensure that the tax incidence on sin goods like tobacco and pan masala remains the same after discontinuation of the compensation Cess.