SDG 3: Good Health and Well-being | SDG 16: Peace, Justice and Strong Institutions
Ministry of Finance | Central Board of Indirect Taxes and Customs (CBIC)
The Health Security se National Security Cess Bill, 2025 (Bill No. 142 of 2025), was introduced in the Lok Sabha on December 1, 2025, with the primary objective of augmenting dedicated resources for national security and public health expenditures.
Core Mechanism and Tax Policy Shift:
Levy and Purpose: The Bill proposes to levy a new cess, distinct from excise duty, to augment resources for national security and public health.
Targeted Product: The cess is specifically aimed at replacing the revenue lost from the GST Compensation Cess, which is set to expire for certain demerit goods. The primary products targeted are pan masala and any other goods that the Central Government may notify.
Shift to Production-Based Levy: The new cess is levied on machines installed or processes undertaken in the manufacture of the specified goods, rather than the quantity actually produced or sold.
This “machine-based” levy is designed to overcome issues like underreporting and evasion in the pan masala sector, where traditional GST-linked excise mechanisms are difficult to apply.
Key Provisions for Compliance and Enforcement:
Taxable Person: The cess is payable by any person who owns, possesses, operates, or controls the machines or processes used to manufacture the specified goods.
Computation and Declaration: Taxable persons must self-declare all machines or processes for each factory. The cess is calculated based on the maximum rated speed of the machine (e.g., in pouches per minute) and the weight of the goods packed.
Penalties and Offences: The Bill establishes a stringent framework for enforcement, including:
Civil Penalty: Penalties (e.g., up to ₹1 Crore for operating a machine without declaration).
Criminal Prosecution: Imprisonment between one and five years for offences involving fraud, wilful misstatement, or evasion exceeding ₹1 crore.
Enforcement Powers: Empowers officers to inspect, search, and seize goods, machines, and documents where evasion is suspected, and includes arrest powers.
Policy Relevance
This Bill marks a critical pivot in India’s indirect tax policy, ensuring that the necessary high taxation on demerit goods for public health reasons is maintained despite the expiry of the GST Compensation Cess. More significantly, the shift to a machine/capacity-based cess is a major regulatory innovation designed to plug fundamental tax evasion loopholes in the production-based value chain of pan masala, thereby securing a predictable source of funding for national security and public health expenditure.
What is GST Compensation Cess? The Compensation Cess was an additional levy introduced alongside the Goods and Services Tax (GST) system in 2017 to compensate States for revenue losses for five years. While it was extended to repay COVID-era loans, the cess is now set to discontinue, necessitating this new levy to maintain high taxation on demerit goods like pan masala and tobacco.
Relevant Question for Policy Stakeholders: What monitoring and enforcement protocols will the CBIC establish to ensure uniform self-declaration of machine capacity by manufacturers, preventing the migration of pan masala production to wholly manual or undeclared processes?
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