New tax regime on Pan Masala and Gutkha introduced to fund Defence and Public Health

Finance Minister Nirmala Sitharaman introduced the ‘Healthy Security se National Security Cess Bill, 2025’ in the Lok Sabha on Monday, proposing a rigorous new tax regime for manufacturers of pan masala and gutkha. This move, following a ‘sin tax’ on tobacco-related items during the GST rationalization, aims to fund critical defence and public health expenditures.

Linking Production Capacity to Public Funding

The core feature of the Bill is the levy of a special cess not based on the volume of goods actually produced, but on the machines installed or processes undertaken for their manufacture.

• Taxable Base: The cess will be levied on the production capacity of the machines, machine speed, capacity, or process parameters declared by manufacturers, whether the production is manual or through hybrid processes.
• Irrespective of Volume: Liability for the cess is payable irrespective of the actual production volume of the specified goods (pan masala and gutkha).

Utilization of Funds

Funds collected through this new cess will be credited to the Consolidated Fund of India and utilized, with Parliamentary approval, for activities and schemes connected to:

1. National Security
2. Public Health

The Bill also empowers the Centre to increase the cess up to twice the scheduled amount in special circumstances and allows for exemptions in public interest.

Compliance and Enforcement

The legislation lays out an extensive and strict framework for compliance:

• Mandatory Registration: Taxable persons—defined as those who own, possess, operate, or control the production machines must register.
• Returns and Audit: The law provides for mandatory monthly returns and strict audit and assessment mechanisms.
• Penalties: A wide-ranging penalty structure is introduced for non-compliance, including imprisonment for serious offences such as fraud, evasion, or falsification of records.

The Finance Minister stated that this new regime is designed to ensure a steady, reliable funding source for crucial government sectors while ensuring a fair and difficult-to-evade tax structure for the specified goods.