Cess on pan masala to fetch Rs 14k cr in FY27

The levy of compensation cess was later extended by 4 years till March 31, 2026, and the collection is being used to repay the Rs 2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period.

The government expects to garner Rs 14,000 crore from health and national security cess levied on pan masala manufacturing in the next fiscal. Starting February 1, health and national security cess is levied on pan masala, over and above the highest 40 per cent GST rate. The Health and National Security Cess Act levies cess on the manufacturing capacity of pan masala units. The total tax incidence on pan masala, after taking into account 40 per cent GST, will be retained at the current level of 88 per cent. According to the Budget documents, the government hopes to garner Rs 2,330 crore from the health and national security cess in the remaining two months of the current fiscal (February and March), and Rs 14,000 crore in 2026-27. The proceeds from the cess levied on the production capacity of pan masala manufacturing units will be shared with states through health awareness or other health-related schemes/activities. The purpose of this health cess is to create a ''dedicated and predictable resource stream'' for two domains of national importance -- health and national security, Finance Minister Nirmala Sitharaman had said in Parliament in December 2025. The levy of such a cess on pan masala and excise duty on tobacco was approved by Parliament in December. The GST Council, comprising finance ministers from the Centre and states, had in September 2025 decided on the mechanism to levy cess and excise duty on such products over and above GST once the compensation cess mechanism ended after repayment of loans. The GST Council had decided that the compensation cess will cease to exist after the repayment of loans taken to compensate states for GST revenue loss during the COVID-19 pandemic. The Rs 2.69 lakh crore loan will be repaid by January 31, 2026. At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation. The levy of compensation cess was later extended by 4 years till March 31, 2026, and the collection is being used to repay the Rs 2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period.

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