New Delhi – Parliament is set to witness the introduction of a significant new legislation that will impose a health security cess on various sin goods. Union Finance Minister Nirmala Sitharaman is scheduled to present the “Health Security se National Security Cess Bill, 2025” in the Lok Sabha, marking a major shift in how the government approaches taxation on products deemed harmful to public health.
Understanding the Health Security Cess Framework
The proposed health security cess legislation aims to generate revenue for meeting expenditure on national security and public health initiatives. Initially, the health security cess will be imposed on pan masala, with provisions to extend it to other sin goods including cigarettes and tobacco products, excluding bidis. The bill strategically empowers the central government to add any item to the list in the future based on public welfare considerations.
According to the proposed framework, the health security cess will be calculated based on the production capacity of specified items. Manufacturers will be required to self-declare the location-wise production capacity of their units, ensuring transparency in the levy system. This approach represents a departure from traditional taxation methods and focuses on production capabilities rather than just sales.
Production-Based Levy Structure
The health security cess structure is designed with a graduated scale based on production capacity and product specifications. For pan masala manufacturers, if a facility has a production capacity of 500 units of 2.5-gram pouches per minute per machine, a cess of approximately ₹100 per month per machine is expected.
The levy increases substantially with higher production speeds and heavier product weights. For machines producing between 1,000 to 1,500 units of 2.5-gram pouches, the health security cess would amount to ₹30.3 lakh per month per machine. When pouches weigh between 2.5 grams and 10 grams, the cess jumps to ₹1,092 lakh per month per machine. For containers exceeding 10 grams, the levy reaches ₹2,547 lakh per month per machine.
Replacing GST Compensation Cess
The introduction of the health security cess bill is expected to replace the Goods and Services Tax compensation cess on tobacco products. The compensation cess was scheduled to cease after the government services remaining principal and interests of back-to-back loans taken during the Covid period to compensate states for revenue losses.
The 56th GST Council meeting in September 2025 decided to remove compensation cess in a phased manner. While the levy ended on most sin goods and luxury items from September 22, it continued on pan masala, gutkha, cigarettes, chewing tobacco products, and unmanufactured tobacco until loan obligations were completely discharged.
Additional Legislative Measures
Alongside the health security cess bill, Parliament will also consider The Insurance Laws (Amendment) Bill, 2025, which proposes raising the foreign direct investment limit in the insurance sector from 74% to 100%. Both bills have been prioritized by the government in the Business Advisory Committee meetings of both houses.
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The Central Excise (Amendment) Bill, 2025 is also scheduled for introduction on the same day, indicating a comprehensive approach to reforming indirect taxation and regulatory frameworks.
Implementation and Regulatory Mechanisms
Once the health security cess bill becomes law, it will come into effect on the date notified by the government in the official gazette. Procedural details, regulatory mechanisms, and operational guidelines will be framed through rules after parliamentary approval.
The government has emphasized that regulatory mechanisms and inspections will incorporate hi-tech solutions with extensive use of digital technologies. This modern approach aims to ensure efficient monitoring and compliance while minimizing bureaucratic procedures.
Historical Context of Compensation Cess
The GST regime initially assured states a 14% annual revenue increase for five years from July 1, 2017, to June 30, 2022. The compensation cess was levied on luxury goods and sin products including liquor, cigarettes, tobacco products, aerated water, automobiles, and coal to make good any revenue shortfalls.
This compensation mechanism was extended until March 31, 2026, specifically to retire debts taken to meet revenue shortfalls during the Covid period. The 56th GST Council limited the compensation cess scope to only tobacco-related items until all loan obligations are discharged, which was estimated to occur by December 2025.
Conclusion
The health security cess represents a strategic policy shift toward targeted taxation of harmful products while generating dedicated funds for national security and public health. As Parliament convenes to discuss this legislation, stakeholders across industries will closely monitor its implications for production, pricing, and public health outcomes. The bill’s passage would mark a significant milestone in India’s indirect taxation framework, replacing the temporary compensation cess with a permanent, purpose-driven levy system.
