Sitharaman Says The New Cess Will Target Only ‘Demerit Goods’, Revenue To Aid Health Schemes

Finance Minister Nirmala Sitharaman on Thursday clarified that the proposed Health and National Security Cess will apply only to demerit goods such as pan masala and not to any essential commodities. She told the Lok Sabha that the Bill aims to create a “dedicated and predictable resource stream” for sectors of national importance, health and national security. The minister stressed that the cess would act as a deterrent against products that pose major health risks.

Sitharaman reassured that the revenue collected from this cess will be shared with them, specifically earmarked for health-related schemes and awareness programmes. She also underlined that the cess will not affect GST collections, as GST is applied at the consumption stage.

A targeted push against harmful goods, but will it truly discourage use?

Explaining the mechanism, Sitharaman said the cess would operate over and above GST and would be levied based on the production capacity of machines in pan masala factories. “The cess liability will be different for every factory, depending on their production capacity,” she said. The government opted for this structure because excise duty cannot be imposed on pan masala, and GST alone does not cover the manufacturing side.

Currently, pan masala, tobacco and related items attract 28% GST plus a compensation cess, but with the compensation cess ending, the GST rate on these goods will rise to the maximum 40%. Sitharaman clarified that pan masala will indeed be taxed at this maximum rate once the transition is complete.

New excise duties on tobacco products: A stricter regime, but states seek clarity

Alongside the cess, the Bill proposes steep excise duties on tobacco products. Unmanufactured tobacco will attract 60–70% excise duty. For cigars and cheroots, the duty will be 25% or ₹5,000 per 1,000 sticks, whichever is higher.

Cigarettes without filters and up to 65 mm in length will carry a duty of ₹2,700 per 1,000 sticks, while those over 65 mm and up to 70 mm will attract ₹4,500 per 1,000 sticks. These additions, the Centre argues, are necessary to tax tobacco adequately while GST takes care of consumption.

Health gains, enforcement worries: State may welcome funds, but monitoring production is key

For Maharashtra, a state battling high consumption of tobacco, gutkha and pan masala despite bans, the cess could bring additional health-sector funds. Public health experts in the state have long argued that Maharashtra needs more predictable financing for awareness campaigns, cancer care and de-addiction efforts. The Centre’s commitment to share part of the cess revenue may therefore offer some relief.

However, Maharashtra officials have previously pointed out the difficulty of monitoring production units, especially small-scale or illegally operating factories. With the new cess linked to machine capacity, enforcement agencies may face pressure to ensure accurate reporting and prevent evasion, a challenge the state has encountered before in the gutkha trade.

A Revenue Tool With a Social Mission

Sitharaman framed the cess as both a fiscal measure and a public health intervention. By raising the financial burden on harmful products while protecting essential goods from additional taxes, the government hopes to curb consumption and strengthen national health and security priorities. Whether the move delivers on these twin goals will depend on effective implementation, especially in states like Maharashtra, where the impact could be significant.