Post by : Saif Rahman

The Indian government is set to transform its tax system concerning harmful products like tobacco and pan masala. Recently, two significant bills were introduced in parliament, aiming to uphold national revenue and public health as the GST compensation cess is scheduled to conclude next year. Finance Minister Nirmala Sitharaman emphasized that the intention is to sustain elevated taxes on health-damaging products that pose long-term risks to society.

Since its inception in 2017, the GST compensation cess has played a crucial role in helping states recoup revenue lost during the Goods and Services Tax rollout. This additional tax predominantly targeted “sin goods” and luxury items. However, as the cess comes to an end once existing loans related to the GST are paid off, the government is proactively revising the tax framework.

With the proposed Central Excise (Amendment) Bill, 2025, excise duties on tobacco products will fluctuate between 60% and 70%. Tax rates for cigarettes will vary based on their size and whether they are filtered. Such substantial taxes underline the government’s dedication to mitigating consumption of these items. After the GST compensation duties conclude, the cess on tobacco will also be revoked, but elevated taxes will persist through the new excise measures.

The Health Security and National Security Cess Bill, 2025 introduces a separate cess for pan masala and potentially other goods in the future. This cess aims not just to curtail demand for harmful products but also to generate funds for health initiatives and security measures. Establishing this dedicated fund signals the government's intent to utilize tax policy for long-term public welfare advancement.

A notable change involves linking the levy to manufacturers' production capacity rather than actual output. Essentially, this means that taxation will be determined by potential production rather than reported quantities, which is expected to curb tax evasion and fraud in the tobacco and pan masala sectors. Producers, whether small-scale or large, will be mandated to register and remit a set monthly tax, striving for equity and closing any loopholes.

These two new bills are integral to the broader strategy of overhauling India’s taxation landscape before the GST compensation cess officially ends. The next phase includes thorough examination by parliamentary committees, with a vote anticipated next year, likened to necessary precautions for public health and revenue sustainability.

India’s proactive stance aligns with a global movement towards using taxation as a means to regulate health-compromising products. Research indicates that high taxes on such goods can diminish consumption rates, particularly among the youth, while also serving as a government revenue source for public investments.

As India approaches a new direction in tax reform, these bills exemplify the government’s commitment to safeguarding its citizens, stabilizing its economy, and fostering a more equitable framework. By keeping harmful products costly and ensuring accountability among manufacturers, India envisions a healthier and more secure future.

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