The government is preparing to introduce a Health and National Security Cess Bill, signalling a major shift in the way taxes are levied on cigarettes, gutkha and pan masala.
Sharing the details of the bill, to be introduced on Monday, December 1, by Finance Minister Nirmala Sitharaman, sources told CNBC-TV18 that the proposed cess will be imposed on the “production capacity” of manufacturers.
“This will include an assessment of machines, processes and all aspects linked to production rather than the actual output, which currently is declared by the manufacturers to plug the tax leakage.”
Sources explained that “under the framework being drawn up, if a machine can manufacture 100 cigarettes and is operated three times a day, the cess will apply on 300 cigarettes per day, not just on 100.”
Sources say the objective is to align taxation with manufacturing capability and to plug gaps created by variable production cycles.
The new levy will replace the compensation cess currently charged under the GST mechanism on these products.
At present, tobacco items attract 28% GST, along with a compensation cess ranging from 5% to 290% depending on the nature and form of the product.
Once the Health and National Security Cess comes into force, the GST rate on cigarettes, pan masala and gutkha will increase to 40%, while the remaining portion—currently collected through the compensation cess—will be absorbed into the new cesses.
Importantly, the overall tax incidence for consumers will remain unchanged, sources emphasised.
Sources shared the calculation by explaining, “for example, the current taxation on a specific type of cigarette is 28% GST plus 290% compensation cess, adding up to a 318% total tax incidence.
Under the proposed structure, this will shift to 40% GST plus 278% Health and National Security Cess, keeping the total tax rate at 318%.”
Following the passage of the Bill, the government will notify detailed rules to ensure a smooth transition to the new capacity-based cess regime, sources added.
