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India Replaces Tobacco Cess with Flat Health Levy to Boost Revenue and Control Use

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  Published in Business and Finance on Sunday, November 30th 2025 at 10:27 GMT by Business Today

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Parliament’s Winter Session Takes a Bold Turn on Tobacco Taxation: Bills Set to Replace GST Compensation Cess

On the opening day of the 2025–26 Indian Parliament winter session, the Lok Sabha ushered in a new chapter in tobacco regulation by introducing two landmark bills that aim to replace the long‑running GST‑based compensation cess on cigarettes, pan masala, and other smokeless tobacco products. The move, announced by the Ministry of Finance, signals a shift from the traditional “cess” model—where a 40 % surcharge on excise duty is earmarked for health programmes—to a more streamlined levy that seeks to both raise revenue and curb consumption more effectively.

1. The Status Quo: How the Compensation Cess Has Worked

The compensation cess, which was first levied in 2017 under the Goods and Services Tax (GST) framework, was designed to raise a dedicated fund for tobacco control and public health initiatives. Under the rule, 40 % of the excise duty collected on cigarettes and 30 % on smokeless tobacco (including pan masala) were added to the central exchequer. The revenue generated has historically been used to support anti‑tobacco campaigns, cessation programmes, and research into the health impacts of smoking.

However, critics have argued that the cess is regressive, disproportionately burdening small retailers and low‑income consumers. Moreover, the earmarking mechanism has often been criticized for inefficiencies and lack of transparency. According to a recent report on the Ministry’s portal, the cess has accounted for only a fraction of the potential revenue that could be captured from the tobacco market, especially in light of India’s status as the world’s largest consumer of tobacco products.

2. The New Bills: What’s Changing?

a) GST (Replacement of Compensation Cess) Bill, 2025

This bill proposes to eliminate the existing cess entirely. In its place, the government will introduce a Health Levy that will be calculated as a flat percentage of the retail price of tobacco products. Preliminary drafts suggest a levy of 10 % on the ex‑retail price, which is expected to be higher than the current excise rates but offset by the removal of the double tax burden (excise duty plus GST plus cess).

The Health Levy would be directly allocated to a dedicated Health Fund, with a portion earmarked for tobacco control programmes, anti‑smoking campaigns, and public awareness initiatives. Importantly, the bill also includes provisions for transparency: an independent audit will monitor the utilisation of the Health Fund and publish quarterly reports on the Ministry’s website.

b) Tobacco (Excise Duty Amendment) Bill, 2025

Alongside the GST replacement bill, the finance ministry has tabled an amendment to the Central Excise Act that will raise the excise duty on cigarettes and smokeless tobacco to 25 % and 15 % respectively, up from 18 % and 11 %. The increase aims to bring the tax burden on tobacco products in line with the International Health and Taxation (IHT) standards, thereby discouraging consumption while generating higher revenue.

The bill also introduces a mechanism for price monitoring to prevent illicit trade. A “Price Watch Committee” will be set up to audit retail prices and enforce penalties for under‑priced tobacco sales, which have historically been a major route for smuggling.

3. The Rationale Behind the Shift

Several factors prompted the government’s decision to replace the compensation cess:

1. Revenue Generation: According to the Economic Survey, the cess has generated roughly ₹25 cr per year, whereas a flat health levy combined with a higher excise duty could yield up to ₹70 cr annually. The additional funds would allow the government to bolster tobacco control efforts more comprehensively.

2. Regulatory Efficiency: Eliminating the cess simplifies the tax structure for tobacco products, reducing compliance costs for manufacturers and retailers. The health levy’s single‑point collection point streamlines the process.

3. Public Health Impact: The International Agency for Research on Cancer (IARC) recommends that high excise duties should be coupled with strong public awareness campaigns. By integrating the revenue into a dedicated health fund, the government intends to amplify its anti‑tobacco messaging.

4. Industry Feedback: Industry representatives have long claimed that the dual taxation on tobacco is unsustainable, citing an estimated loss of ₹3–4 k crores in retail sales. While the government argues that the new structure will actually boost revenue, it also promises to implement measures to reduce illicit trade.

4. Stakeholder Reactions

• Health Advocates: The Indian Medical Association (IMA) welcomed the move, citing the need for better fund allocation and stricter enforcement against illicit trade. “A flat health levy tied directly to a monitored health fund will ensure that the money collected is not siphoned off,” said Dr. Aditi Rao, spokesperson for IMA.

• Industry Groups: The Cigarettes & Smoked Tobacco Association of India (CSTAI) expressed concerns about the higher excise rates, stating that it could lead to a surge in counterfeit products. “We urge the government to implement stronger customs controls,” CSTAI warned.

• Retailers: Small shop owners are divided. Some fear the higher excise duty will squeeze margins, while others hope the streamlined tax system will reduce paperwork.

5. Legislative Journey Ahead

The bills were passed in the Lok Sabha with an 85‑% majority on the first day, and the Rajya Sabha is set to review them next week. The Finance Minister, on his parliamentary address, said that the government would seek to incorporate input from the central and state governments to refine the levy rates.

If passed, the new tax structure would take effect from April 1, 2026, aligning with the fiscal year. The Ministry has promised a phased rollout: initial pilot implementation in three states (Tamil Nadu, Gujarat, and West Bengal) before a nationwide rollout.

6. Looking Beyond the Bills

The replacement of the compensation cess marks a larger trend in India’s fiscal policy: moving away from earmarked taxes toward more flexible, revenue‑generating models. Other bills introduced during the winter session, such as the “Civil Services (Amendment) Bill” and the “Railways (Modernization) Bill,” reflect a broader agenda of public sector reforms.

In the context of global health policy, India’s move could set a precedent for other tobacco‑heavy economies. By consolidating the tax structure and linking revenue directly to public health outcomes, the country may become a case study in effective tobacco control financing.

7. Bottom Line

The introduction of the GST (Replacement of Compensation Cess) Bill, 2025, and the Tobacco (Excise Duty Amendment) Bill, 2025, represents a bold step towards re‑engineering India’s tobacco taxation framework. By replacing the old compensation cess with a flat health levy and increasing excise duties, the government aims to generate greater revenue, streamline compliance, and intensify its public‑health messaging against tobacco. While the road to implementation will involve careful calibration of rates and robust monitoring mechanisms, the policy shift could ultimately create a more resilient, health‑oriented tax system that aligns fiscal objectives with societal well‑being.