Why Is This in News?
- The Union Government introduced two new Bills in Parliament:
- Health Security Cess Bill, 2025
- Central Excise (Amendment) Bill, 2025
- Objective: Replace the soon-ending GST Compensation Cess on tobacco with new revenue streams and bring pan masala manufacture under tighter fiscal regulation.
- Context: GST compensation cess on tobacco to discontinue after repayment of COVID-era borrowings.
Relevance
GS 2 – Governance / Polity
- Fiscal federalism: Centre–State financial relations.
- Legislative process (Bills introduced in Parliament).
- Public health as a State subject; non-shareable cess debate.
GS 3 – Economy / Public Health
- Pigouvian taxes.
- Sin goods taxation and behavioural economics.
- Revenue mobilisation post-GST cess sunset.
- Illicit trade, compliance, machine-based excise monitoring.
Basics
- GST Compensation Cess (2017–present)
- Levied on sin goods: tobacco, aerated drinks, coal, pan masala, etc.
- Purpose: Compensate States for revenue loss due to GST rollout.
- Compensation tenure: 5 years (2017–2022), extended to repay loans taken during COVID years due to shortfall.
- Tobacco & pan masala: High-elasticity sin goods used for revenue + public health control.
Key Features of the New Bills
A. Health Security Cess Bill, 2025
- Introduces a new cess on tobacco products.
- Purpose:
- Replace GST compensation cess as it sunsets.
- Generate earmarked funds for health and national security.
- Target of levy:
- Machines installed or processes undertaken in pan masala and similar harmful product manufacturing.
B. Central Excise (Amendment) Bill, 2025
- Enhances excise duty on tobacco products.
- Reconfigures the tax framework to ensure:
- Continuous revenue after GST compensation cess ends.
- Stabilisation of the tax base for sin goods.
Rationale Behind the Move
Fiscal Rationale
- GST compensation cess on tobacco is ending, but:
- COVID-era borrowings still being repaid.
- Tobacco is a high-yield, low-compliance-elasticity sector:
- Ensures steady revenue.
- Pan masala sector has high evasion risk:
- Machine-based cess improves traceability and compliance.
Public Health Rationale
- Tobacco-related deaths in India: ~1.3 million annually.
- Pan masala very high in carcinogens (areca nut).
- Higher taxes = reduced affordability, especially among youth.
Governance Rationale
- Machine-based cess on pan masala aligns with:
- FMCG excise surveillance model (packaging line tracking).
- Anti-evasion efforts used earlier (pre-GST) under the Pan Masala Packing Machines Rules.
Economic & Policy Implications
For Centre–State Fiscal Dynamics
- Signals the final drawdown of GST compensation.
- States lose a predictable revenue stream; Centre creates a new central cess (non-shareable with States).
For Industry
- Higher duties raise production costs for:
- Cigarettes
- Chewing tobacco
- Pan masala
- Likely impacts:
- Increased MRP
- Reduced consumption
- Pushback from industry lobbies
For Public Health
- WHO recommends a minimum 75% tax share in retail price of tobacco.
- India’s effective burden still < 60% for many tobacco forms.
- New cess + increased excise brings India closer to global health norms.
For GST Architecture
- Marks a shift from compensation cess to purpose-specific cesses.
- Raises debate on:
- Fragmenting GST into multiple cesses.
- Compliance burden on industries.
- Fiscal federalism concerns.
Political & Parliamentary Context
- Bills introduced amid Opposition sloganeering on unrelated political issues.
- Winter Session traditionally used for major tax reforms.
- Lok Sabha simultaneously passed the Manipur GST Amendment Bill, reflecting a focussed GST reform push.
Challenges & Criticisms
- States may resent loss of compensation-related certainty.
- Health cess not shared with States despite health being a State subject.
- Risk of increasing illegal/unregulated tobacco trade.
- Pan masala manufacturers may shift to unregistered, small units to evade machine-based cess.
Value Addition (Data + Concepts)
- India is second-largest tobacco consumer globally.
- Economic cost of tobacco use: 1% of GDP (ICMR estimate).
- Sin taxes follow Pigouvian taxation principles.
