Centre Drafts New Levy As GST Compensation Cess Nears End
Govt to move Cess Bill along with amendments to the Central Excise Act that would raise duties on cigarettes and other tobacco items
The central government plans to bring in a new bill to impose a fresh cess on tobacco products, ensuring that tax incidence remains unchanged once the GST compensation levy ends in March 2026.
According to top officials, the Cabinet had cleared the proposed legislation to introduce a health- and security-linked cess along with amendments to the Central Excise Act in its last meeting that would raise duties on cigarettes and other tobacco items.
The bills are expected to be moved on Monday, the first day of the winter session.
The move is aimed at preventing any reduction in the total tax burden on cigarettes, pan masala and chewing tobacco after the compensation cess — extended until March 2026 to service pandemic-era borrowings —expires. Officials said the new framework is intended to keep the effective tax incidence on tobacco products at current levels, safeguarding both revenue and public-health priorities.
Under the proposed structure, the new cess will apply primarily to pan masala and similar products, while higher excise duties will maintain cigarettes in the highest tax bracket under the revamped GST architecture.
On September 22, the earlier 28% GST slab was replaced with a special 40% rate for sin and luxury items, including tobacco, aerated and carbonated beverages, caffeinated drinks, mid- to large-sized cars, high-capacity motorcycles, and privately used aircraft and yachts.
Although the compensation cess—levied between 1% and 290% on goods in the former 28% bracket—was removed for most products, it continued on tobacco. This followed the government’s rollout of a streamlined GST framework in September, shifting most goods to a two-rate structure of 5% and 18%, while retaining a steep rate for sin goods and keeping tobacco outside the broader rationalisation.
The bills are expected to be introduced in the upcoming Parliament session, setting the stage for a smooth transition before the compensation cess is phased out. The cess, originally designed to compensate states for revenue losses during the GST rollout for a five-year period, was meant to end on June 30, 2022, but was extended until March 2026 or until the Centre repays the principal and interest on borrowings taken to offset Covid-period shortfalls.
