SYLLABUS
GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Context: Recently, the Central Excise (Amendment) Bill, 2025 and the Health Security and National Security Cess Bill, 2025 was introduced in the Parliament.
Background
- GST compensation refers to the mechanism used to reimburse states for potential revenue losses resulting from the implementation of the Goods and Services Tax (GST) system.
- The GST compensation cess is scheduled to end in March 2026, but it may conclude earlier if the Centre repays the pandemic-related loans taken on behalf of the states.
- Under the GST (Compensation to States) Act, 2017, states were assured a 14% annual compounded growth on their 2015–16 revenue base to offset GST-related losses for five years after GST’s introduction.
- Although this five-year compensation window ended in June 2022, the Centre extended the levy and collection of the compensation cess until March 2026.
- This extension was specifically meant to repay the borrowings that were raised to provide compensation to states for the period from July 2017 to June 2022.
Key Features of the Central (Amendment) Bill, 2025
- The Bill proposes to replace the GST compensation cess on tobacco products with a central excise duty.
- The excise duty will be hiked on tobacco and related products by Centre through an amendment to the Central Excise Act, 1944 to maintain the tax incidence after the end of the GST compensation cess.
- Proposed excise duty rates are substantial, for example, Rs 5,200 to Rs 7,000 per 1,000 sticks of cigarettes depending on their length.
- The objective is to keep the overall tax incidence on tobacco at a high level (currently above 40%) ensuring revenue neutrality despite the cess being phased out.
- The Centre will gain authority to impose and revise excise duties on tobacco products including cigarettes, cigars, chewing tobacco, and zarda.
- The Bill brings tobacco and related sin goods under a stable and long-term tax framework, ending the temporary cess system.
Key Features of the Health Security and National Security Cess Bill, 2025
- This Bill introduces a new cess on manufacturing pan masala and other notified products, replacing the soon-to-expire GST compensation cess on pan masala and marking a structural policy shift in sin goods taxation.
- It aims to generate a dedicated and protected revenue stream specifically earmarked for health programmes and national security initiatives.
- The cess is designed both as a consumption deterrent and a means to fund long-term public health and security priorities.
Implications of these Bills
- By replacing the GST compensation cess, which was a temporary levy linked to loan repayments to states, the government ensures continuity and stability in revenue collection from sin goods like tobacco and pan masala.
- The dedicated health and security cess signals a policy focus on channelling tax revenues directly to public health and national security, reinforcing tobacco taxation as a tool for social and fiscal policy.
- The move safeguards central government revenues in the post-GST compensation era, averting any fiscal gap that might have emerged with the lapse of the compensation cess.
- Consumer prices of tobacco and pan masala are likely to see an increase due to the high excise rates, which could further discourage consumption, aligning with public health objectives.
- The legislation provides a clear long-term framework for sin goods taxation, helping promote fiscal discipline and policy transparency.