Finance Minister Nirmala Sitharaman clarified that the proposed Health and National Security Cess will apply only to demerit goods such as pan masala and not to essential items. She said the revenue collected will be shared with states and used for health related programmes.
Introducing the Health Security se National Security Cess Bill 2025 in the Lok Sabha, the minister explained that the goal is to create a dedicated and predictable source of funds for health and national security. She said, “This is a cess, and it is placed not on any essential commodity. The purpose of this Bill is to levy a cess on demerit goods, which are associated with significant health risks. We wish to impose such a cost, so that it is a deterrent, so people tend not to use it.”
Pan masala will be taxed at a maximum Goods and Services Tax rate of 40 percent based on consumption. Sitharaman said this cess will not affect GST revenues because it will be imposed separately. The new cess will be calculated on the production capacity of machines in pan masala factories. “The cess liability will be different for every factory, depending on their production capacity,” she said.
She noted that GST is charged at the consumption stage and excise duty cannot be applied to pan masala. This is why the government is introducing a separate cess to ensure the product is taxed at the production stage.
The minister confirmed that part of the cess revenue will be shared with states for health awareness efforts or other health related schemes. Currently, pan masala, tobacco and related goods attract 28 percent GST along with a compensation cess. When this compensation cess ends, the GST rate will rise to 40 percent.
Excise duty will also be added on tobacco, while the new Health and National Security Cess will be charged on pan masala. A day earlier, the Lok Sabha passed another Bill to amend the Central Excise Act of 1944 and impose excise duty on tobacco in addition to the 40 percent GST.
These two Bills have been introduced as the GST compensation cess period is coming to an end. The compensation cess was created in 2017 for five years and later extended to March 2026 to repay the loan of Rs 2.69 lakh crore taken to offset state revenue losses during the Covid period.
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