Tobacco Compensation Cess: The government is preparing to increase the tax burden on cigarettes, pan masala and gutkha. The reason for this is that the compensation cess imposed under the GST system is going to end soon. The government wants that after its removal, the total tax on these products should not reduce, hence a plan has been made to introduce a new cess. Finance Minister Nirmala Sitharaman will present a proposal to amend the Health Security National Security Cess Bill, 2025 and the Central Excise Act in Parliament today.

The aim of the government is to impose a new cess in place of compensation cess, so that the total tax rate on tobacco products and pan masala remains the same as before. The Cabinet has recently approved both the proposals. The Economic Times quoted the official as saying in a report that the government wants to ensure that the total tax on tobacco products does not reduce after the removal of compensation cess.

Why is new cess being introduced?

The draft bill mentions that this cess is a step towards raising additional resources to meet national security and public health expenses. This cess will be imposed on the machines or processes from which the prescribed products are made.

Defense budget expected to increase by 20%

The Defense Ministry hopes that its funding will increase by 20 percent in the coming budget. This new cess will help in raising additional funding for the defense sector. In September, the government made major changes in the GST structure. Earlier there was a tax slab of 28 percent, which was removed and 40 percent tax was imposed on some products. This rate is now applicable to tobacco products, aerated water, carbonated drinks, caffeinated drinks, large cars, bikes above 350cc, aircraft for personal use and yachts. Compensation cess, which was earlier levied at rates ranging from 1 per cent to 290 per cent, has been removed from most products, but continued on tobacco products.

How long was the compensation cess supposed to last?

When GST was implemented, the states had to implement it only for 5 years i.e. till June 2022 to compensate for the loss of revenue. But, to compensate for the financial loss suffered by the states during COVID-19, it was extended till March 2026 or till the borrowed money is repaid. As the compensation cess is nearing its end, the government is preparing to introduce a new levy on products which earlier used to generate huge tax income.