Centre will share part of collection from health, national security cess: Sitharaman

Finance Minister Nirmala Sitharaman stated on Thursday that the central government will share a portion of the collection from the proposed ‘Health Security se National Security Cess’ with states. This approach is a departure from the standard fiscal arrangement, where cess collections typically remain outside the divisible pool of taxes. Sitharaman outlined that the revenue, intended as a general welfare measure, will be distributed to states to support their health schemes.

The government introduced two bills to replace the compensation cess under the Goods and Services Tax (GST) regime. The GST compensation cess, implemented in 2017, aimed to incentivise states to join the GST structure by promising 14 per cent annual revenue growth for five years, funded through a cess on luxury and sin goods.

The compensation cess, initially set to expire in June 2022, was extended until March 2026 to service Rs 2.69 lakh crore in loans taken during the COVID-19 pandemic to cover revenue shortfalls for states.

Sitharaman emphasised that the new cess on pan masala production is designed to discourage consumption of such demerit products while ensuring essential goods remain unaffected.

She also clarified that since the cess will be imposed over and above the 40 per cent GST rate, it will not affect GST collections, especially as the compensation cess will be discontinued. This measure is intended to keep GST revenues stable while focusing the tax burden on specific non-essential items.

To implement the new taxation regime, the Central Excise Act, 1944, will be amended, introducing excise duties ranging from Rs 2,700 to Rs 11,000 per 1,000 sticks for different categories of cigarettes. The bill also provides for a levy of 60-70 per cent per kilogram on various tobacco products and 100 per cent on chewing tobacco. The new cess will be calculated based on machinery installed or the production capacity of units, not on end-use products.

Sitharaman clarified that the cess bill is not meant to impose additional tax on end-use products but on the machinery and production capacity of units. The cess will be determined per machine installed or per unit of manual production, reflecting a shift towards production-based taxation for targeted sectors.

For machine-based production, the cess rate will depend on the maximum rated speed of each machine and the product's packaging weight.

In her remarks in the Lok Sabha, Sitharaman noted that pan masala production was not excise-able, which is why it was not covered under The Central Excise (Amendment) Bill, 2025, passed on Wednesday. She added that excise duty collections are shared with states and confirmed that the same principle will apply to the new cess, providing states with a new source of funding for health-related expenditures.