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Informist, Thursday, Jan. 1, 2026

 

NEW DELHI – The Health Se National Security cess, which will be levied on pan masala from Feb. 1, does not set a general precendent that allows the government to "arbitrarily" impose any cess on items that attract goods and services tax, finance ministry sources said Thursday. The ministry late Wednesday notified that a new cess will be imposed on pan masala, replacing the GST compensation cess.

 

"The Health Security Se National Security cess does not dilute the GST framework in any manner--conceptually, constitutionally, or administratively. Instead, it operates in a parallel and fully compatible fiscal space that complements GST while addressing concerns earlier raised by states," the sources said. 

 

Parliament had given its nod in December to impose a new cess on pan masala, replacing the existing GST compensation cess levy on such 'sin goods'. "A purpose-specific cess is used only when GST cannot accommodate the fiscal need –- for example, when rates cannot legally be increased further, or when ring-fenced usage is required. It is not a substitute for GST or an alternative general tax route," sources said. "The levy is designed to serve twin goals of public health and national security," they added. 

 

The GST compensation cess was introduced to bring states on board to adopt the GST regime in 2017. The Centre had promised to protect 14% revenue growth for states for the first five years by levying a compensation cess on certain luxury goods, including motor vehicles, expensive motorcycles, caffeinated beverages, and sin goods such as tobacco items and pan masala. Initially set to expire in June 2022, the cess was extended until March 2026 to repay INR 2.69 trillion in loans taken by the Centre to partly bridge the revenue shortfall of states during the COVID-19 pandemic.

 

Following the introduction of the Health Se National Security Cess, many states, especially opposition states, have raised questions about the fiscal disparity that it creates. Cess is beyond the divisible pool of taxes, and is therefore, not shared with states. Finance Minister Nirmala Sitharaman, breaking away from tradition, said that collections from this cess will be shared with states as it is for a national cause.

 

"States will be beneficiaries through centrally-funded programmes and schemes notified from time to time for national security and public health, thereby ensuring that state-level capacities also improve," sources said.

 

According to finance ministry sources, states pointed out that once the GST compensation cess sunsets, the effective tax incidence on pan masala, which is currrently around 88%, would fall sharply because GST law contains a statutory ceiling of 40%. This would automatically reduce the total tax burden, making pan masala significantly more affordable, thereby increasing consumption of a product already associated with grave public-health risks. On the other hand, states repeatedly flagged that pan masala is one of the most evasion-prone sectors in indirect taxation.

 

The Health Security Se National Security Cess squarely addresses both the issues, sources said. The cess will be payable by a person who owns or controls machines or undertakes processes to manufacture the specified goods. It will be calculated per machine installed or per unit of manual production.

 

For machine-based production, the cess will be based on the maximum rated speed of each machine and the weight of the product packed in each pouch or container. For example, the cess will be INR 10.1 million per month per machine for maximum rated speed up to 500 pouches per minute and each pouch weighing up to 2.5 grams.  End

 

Reported by Priyasmita Dutta

Edited by Vandana Hingorani

 

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