New Cesses on Tobacco, Pan Masala to Replace Lapsing GST Compensation Levy
Government to introduce new central levies on tobacco and pan masala as the GST compensation cess is set to expire.
Photo by Kitty Hutchinson
Quick Revision
GST (Compensation to States) Act, 2017 allowed for cess on tobacco and pan masala
GST compensation cess set to lapse on March 31, 2026
New levies will be 'National Calamity Contingent Duty' (NCCD) and 'Health Security Cess'
New levies will amend the Central Excise Act, 1944
Revenue from new cesses will go to the Centre
Key Dates
Visual Insights
Evolution of GST Compensation Cess and New Levies
This timeline illustrates the key milestones related to the Goods and Services Tax (GST) and the evolution of compensation mechanisms for states, leading up to the introduction of new cesses.
The introduction of GST was a landmark reform, but states' fiscal autonomy concerns led to the GST Compensation Cess. Its lapsing necessitates new mechanisms, reflecting ongoing shifts in India's indirect tax regime and Centre-State financial dynamics.
- 2016101st Constitutional Amendment Act passed, paving the way for GST.
- 2017 (July 1)GST implemented across India. GST (Compensation to States) Act, 2017, introduced to compensate states for revenue loss for 5 years.
- 2020 (COVID-19)Revenue shortfall due to COVID-19. Centre borrowed to meet compensation gap, extending cess collection beyond original 5 years.
- 2022 (June)Original 5-year period for GST Compensation Cess ended. Cess collection continued to repay borrowings.
- 2026 (March 31)GST Compensation Cess is set to lapse. This is the trigger for new levies.
- 2024-2026 (Proposed)Central government introduces 'National Calamity Contingent Duty' (NCCD) and 'Health Security Cess' on tobacco/pan masala to ensure continued revenue collection.
GST Compensation Cess vs. New Cesses (NCCD, Health Security Cess)
This table highlights the key differences between the lapsing GST Compensation Cess and the newly proposed cesses, particularly focusing on their purpose and revenue distribution.
| Feature | GST Compensation Cess | New Cesses (NCCD, Health Security Cess) |
|---|---|---|
| Purpose | Compensate states for revenue loss due to GST implementation. | Maintain fiscal stability, ensure continued revenue from 'sin goods', address public health concerns. |
| Levying Act | GST (Compensation to States) Act, 2017 | Central Excise Act, 1944 (via amendments) |
| Revenue Recipient | Collected by Centre, distributed to states as compensation. | Goes directly to the Centre. |
| Shareability with States | Yes, specifically for state compensation. | No, generally not part of the divisible pool shared with states (unless explicitly stated). |
| Products Covered | Specified 'sin goods' (tobacco, pan masala, aerated drinks) and luxury items (motor vehicles). | Tobacco and pan masala products. |
| Lapsing Date | March 31, 2026 | No specific lapsing date mentioned, implies continued collection. |
Exam Angles
Fiscal Federalism and Centre-State Financial Relations (Article 270, 271, 279A)
Taxation powers and constitutional provisions for cesses and surcharges
Role and functions of the GST Council
Public health policy and economic instruments (sin taxes)
Evolution of indirect tax regime in India (pre-GST, GST, post-compensation cess)
Impact on state finances and fiscal autonomy
View Detailed Summary
Summary
The central government is introducing new levies, namely 'National Calamity Contingent Duty' (NCCD) and 'Health Security Cess', on tobacco and pan masala products. This move comes as the existing GST (Compensation to States) Act, 2017, which allowed for a cess on these items, is set to lapse on March 31, 2026. By amending the Central Excise Act, 1944, through new Bills, the government aims to ensure continued revenue collection from these goods, which are often seen as 'sin goods'.
The revenue from these new cesses will go directly to the Centre, unlike the GST compensation cess which was distributed to states. This initiative serves a dual purpose: maintaining fiscal stability by ensuring a steady revenue stream and addressing public health concerns associated with tobacco and pan masala consumption.
Background
The Goods and Services Tax (GST) was introduced in India in 2017, subsuming various central and state indirect taxes. To compensate states for potential revenue losses arising from the transition to GST, the GST (Compensation to States) Act, 2017, was enacted.
This Act allowed for the levy of a GST compensation cess on certain 'sin goods' and luxury items for a period of five years, which was later extended to March 31, 2026. This mechanism ensured fiscal stability for states during the initial years of GST implementation.
Latest Developments
With the GST compensation cess regime set to lapse on March 31, 2026, the central government is introducing new cesses, namely 'National Calamity Contingent Duty' (NCCD) and 'Health Security Cess', specifically on tobacco and pan masala products. These new levies will be implemented by amending the Central Excise Act, 1944, through new Bills.
Crucially, the revenue generated from these new cesses will accrue directly to the Central government, unlike the GST compensation cess which was distributed to states. This move aims to ensure continued revenue collection from 'sin goods' and address public health concerns.
Practice Questions (MCQs)
1. Consider the following statements regarding the new cesses proposed by the central government: 1. The 'National Calamity Contingent Duty' (NCCD) and 'Health Security Cess' are being introduced to replace the lapsing GST Compensation Cess. 2. The revenue collected from these new cesses will be entirely retained by the Central government. 3. These cesses are proposed to be levied by amending the Goods and Services Tax (Compensation to States) Act, 2017. Which of the statements given above is/are correct?
- A.1 only
- B.1 and 2 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is correct. The new cesses are indeed being introduced to replace the lapsing GST Compensation Cess. Statement 2 is correct. The news explicitly states that the revenue from these new cesses will go directly to the Centre, unlike the GST compensation cess. Statement 3 is incorrect. The new cesses are proposed to be levied by amending the Central Excise Act, 1944, not the GST (Compensation to States) Act, 2017.
2. With reference to 'Cess' and 'Surcharge' in India, consider the following statements: 1. A cess is levied for a specific purpose and its proceeds must be used only for that purpose, while a surcharge is an additional levy on an existing tax. 2. The proceeds of a cess are mandatorily shared with the states as per the recommendations of the Finance Commission. 3. A surcharge is levied under Article 271 of the Constitution, allowing the Centre to retain its entire proceeds without sharing with states. Which of the statements given above is/are correct?
- A.1 only
- B.1 and 3 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is correct. A cess is indeed levied for a specific purpose (e.g., education cess, health cess) and its proceeds are earmarked for that purpose. A surcharge is an additional levy on an existing tax (e.g., income tax surcharge). Statement 2 is incorrect. Unlike taxes, the proceeds of a cess are generally not shared with the states as part of the divisible pool, unless specifically mandated by law or constitutional provision. They are typically retained by the Centre for the specified purpose. Statement 3 is correct. Article 271 of the Constitution allows Parliament to increase any duties or taxes referred to in Articles 269 and 270 by a surcharge for the purposes of the Union, and the entire proceeds of such surcharge go to the Centre.
3. Which of the following statements correctly describes the current scope of the Central Excise Act, 1944, after the introduction of GST? A) The Act has been entirely repealed and replaced by the GST laws for all goods and services. B) It continues to govern the levy of excise duty on all goods, including petroleum products and alcoholic liquor for human consumption. C) It primarily governs the levy of excise duty on a few specified products like petroleum crude, high-speed diesel, motor spirit, natural gas, aviation turbine fuel, and tobacco and tobacco products. D) The Act is now only applicable to goods manufactured in Special Economic Zones (SEZs) for domestic consumption.
- A.The Act has been entirely repealed and replaced by the GST laws for all goods and services.
- B.It continues to govern the levy of excise duty on all goods, including petroleum products and alcoholic liquor for human consumption.
- C.It primarily governs the levy of excise duty on a few specified products like petroleum crude, high-speed diesel, motor spirit, natural gas, aviation turbine fuel, and tobacco and tobacco products.
- D.The Act is now only applicable to goods manufactured in Special Economic Zones (SEZs) for domestic consumption.
Show Answer
Answer: C
Option C is correct. After the introduction of GST, most goods and services came under the GST regime. However, certain products were kept outside the ambit of GST, and excise duty on them continues to be levied under the Central Excise Act, 1944. These include petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel, and tobacco and tobacco products. Alcoholic liquor for human consumption is also outside GST, but it is subject to state excise duties, not central excise duty under this Act. Options A, B, and D are incorrect as they misrepresent the current, limited scope of the Act.