New Delhi: India's new tax regime for tobacco seeks to ensure that any new variants of pan masala—a category the Centre says is highly prone to tax evasion—can be brought under the proposed Health Security Se National Security cess in future, finance minister Nirmala Sitharaman told the Lok Sabha on Friday. The measure aims to check tax evasion, while ensuring a steady funding stream for public health and national defence as the goods and services tax (GST) compensation cess sunsets, the minister added.

Replying to a house debate on the Health Security se National Security Cess Bill 2025, the minister said the government was also seeking Parliament's nod to notify goods that are very similar to pan masala, without having to approach the house for that specific purpose again.

To bypass higher taxes, manufacturers cuold well slip in new pan masala variants by tweaking ingredients, branding or formats. The government is seeking flexibility to quickly bring any such products under the cess as they emerge.

At present, capacity-based taxation—deciding tax liability on disclosed production capacity rather than on actual production—is specified in the Bill only for pan masala, but it leaves the scope for the government to add more items to the list in future. The minister said such a mode of taxation could cover any other product similar to pan masala in the future, if such a need is felt.

"There may be different variants of pan masala which may come up in future due to ingenuity of the industry. Those demerit goods should also be brought within the ambit of the levy. This would be notified by the Central government without the requirement of coming to Parliament every time," the minister said, adding that the scope of such an addition is strictly limited to pan masala type products, not any other items.

Sitharaman said the Centre's collection of cess, excluding the GST compensation cess, which was entirely used for states' requirements, was 6.1% of the gross tax revenue in FY26 as per budget estimates, compared to 7% in the 2010-14 period.

Bill approved

Lok Sabha on Friday approved the Bill, which will now be debated in Rajya Sabha.

Proceeds of the proposed cess, which will replace the existing GST compensation cess by end of this month, will be exclusively used for public health and defence related spending.

Sitharaman said public health is in the domain of states, while national security is in the Central government's domain. Funds provided for public health, clearly a state-subject, obviously goes to the states for discouraging consumption of tobacco, building awareness or supplementing people's medical requirements, the minister said.

Tax incidence on tobacco and products will largely remain the same under the new tobacco taxation regime, as it is now.

Pan masala currently attracts 88% tax, which includes 28% GST and 60% GST compensation cess. In the new tax regime, the 28% GST will rises to 40%, the ceiling allowed under GST. In place of the compensation cess, the proposed health and national security cess will be levied, so that the overall tax liability remains largely the same.

The Central government will use part of the proceeds from the health and national security cess for its defence requirements. "In this day and age, where credible defence capability is absolutely critical for national defence, we need to raise resources to buffer the defence requirement because modern conflicts are dominated by precision weapons, autonomous systems, space assets and cyber operations," said Sitharaman, who had previously served as the defence minister. "They are becoming capital-intensive and unless they are periodically upgraded, they are not ready for modern warfare."

Barring tobacco and related products, all other goods and services have already moved to a simplified tax structure on 22 September.