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The Lok Sabha on December 5, 2025 passed a Bill to impose a special cess on pan masala, with the proceeds earmarked for public health initiatives and national security.
Cess Currently Limited To Pan Masala
As of now, the proposed cess is intended to apply only to pan masala. However, the Bill contains an enabling provision allowing the Centre to extend the cess to ‘any other goods’ by notification.
“This means that while tobacco products are not covered today, they can be brought into the ambit at any time without having to go back to Parliament for further legislative changes. The government appears to be creating a unified public-health–driven levy on products with high social and healthcare externalities,” says SR Patnaik, partner (head - taxation), Cyril Amarchand Mangaldas.
However, it appears that the government wants to introduce taxes on tobacco products separately, as a new bill has been introduced to amend the Central Excise Act, 1944, incorporating excise duty on various tobacco products.
“Hence, while the health and security cess shall apply to pan masala, the tobacco products shall be covered under the Central Excise Act, 1944,” says Patnaik.
New Capacity-Based Tax May Hurt Smaller Factories Significantly
The shift from an output-based tax to a machine capacity-linked cess fundamentally alters the tax base. Instead of taxing the sale or output, the tax is levied on the capacity.
“This creates a difficult challenge for the industry as the tax cost for them becomes fixed as soon as they set up a production unit. This structure unfairly rewards those with bigger units and punishes smaller units who may have difficulty in absorbing the cost during seasonal cycles,” says Ankit Jain, partner, Ved Jain and Associates.
Further, we can also expect under-reporting from manufacturers who may use hidden or dark sites for the purpose of production to avoid the payment of such production-linked sites. Measurement of capacity is a technical and subjective issue that will be prone to litigation and possibly corruption.
“Also, capacity-based assessment parameters, although historically linked to pan masala, could become contentious if applied to tobacco units without clear statutory guidance, especially in determining production capacity, treatment of idle or enhanced machinery, and applicability to job work or smaller manufacturers,” says Alay Razvi, managing partner, Accord Juris.
