Demerit Goods to Face Health, Security Cess: Nirmala Sitharaman

New Delhi: Union finance minister Nirmala Sitharaman on Thursday said that proposed health and national security cess will be levied only on demerit goods, like pan masala, and not on essential commodities, and revenue from the levy will be shared with states for spending on health schemes. “The ‘Health Security se National Security Cess Bill, 2025,’ is to create a dedicated and predictable resource stream for two domains of national importance — health and national security,” Sitharaman said in her opening address while moving the bill in Lok Sabha. Sitharaman is expected to reply on Friday in the House as Lok Sabha was adjourned for the next day ahead of the arrival of Russian President Vladimir Putin in the capital.

The proposed law of the government, however, seeks to impose a cess on the production of certain goods, including pan masala, to generate dedicated funds for enhancing public health programs and national security efforts. “This cess will not be placed on any essential commodities but only on demerit goods, which are associated with significant health risks. We wish to impose such a cost, so that it is a deterrent, so people tend not to use it,” she said, citing an example of pan masala.

The finance minister also said that pan masala will be taxed at the maximum 40 per cent rate under goods and services tax (GST) based on its consumption, and there will be no impact of this cess on GST revenues. The proposed cess, which will be over and above the GST, will be levied on the production capacity of machines in pan masala manufacturing factories. The cess liability will be different for every factory, depending on their production capacity,” she said.

According to the Bill, the cess will be levied monthly on persons owning or controlling machines or processes that produce the specified goods. The cess amount will be calculated based on the production capacity of machines or manual units, with taxpayers required to self-assess and file returns. Interest will be charged on any late payments. However, the cess rates for machine-based production vary significantly.

For instance, a machine operating up to 500 pouches per minute, each weighing up to 2.5 grams, will attract a cess of Rs 1.01 crore per month. This increases substantially to Rs 25.47 crore monthly for machines with speeds between 1,001 and 1,500 pouches per minute and pouch weights exceeding 10 grams. For wholly-manual production, a fixed monthly cess of Rs 11 lakh per factory will apply. The government retains the authority to raise these rates to twice the specified amounts if deemed necessary in the public interest.

Since the GST is levied at the consumption stage, and excise duty cannot be levied on pan masala, this cess is being sought to be levied on the production capacity of pan masala units, which is a demerit good. “Part of the revenue from this cess will be shared with states through health awareness or other health-related schemes/activities,” Sitharaman pointed out.

Currently, pan masala, tobacco and related products attract 28 per cent GST plus a compensation cess at a varied rate. With the end of the compensation cess levy, the GST rate will go up to 40 per cent. Additionally, the excise duty will be levied on tobacco, and the health and national security cess on pan masala. This new cess bill aims to create a stable revenue stream to support vital public health and national security objectives, reflecting the government’s commitment to safeguarding the nation’s well-being on multiple fronts.