Centre Introduces Targeted Cess on Demerit Goods for Health & Security Funding

Why in News ?

The Union Finance Minister has tabled the Health Security Se National Security Cess Bill, 2025 in Parliament, clarifying that the new cess will be imposed only on demerit goods such as pan masala, without affecting essential household commodities.

Health and National Security Cess: An Overview

The proposed cess introduces a new fiscal tool aimed at generating ring-fenced revenue for two priority sectors: national security and public health.

• It will apply exclusively to demerit goods—products linked to major public health risks such as pan masala.
• The Finance Minister stated that these goods impose significant health costs on society.
• The cess aims to both discourage harmful consumption and mobilize funds for essential public programmes.
• The government assured that essential commodities remain exempt, ensuring no inflationary effect on daily-use items.

Key Features of the Proposed Cess

1. Cess Applicable Only to Demerit Goods

• Levied on select goods associated with lifestyle and health hazards, such as pan masala.
• Unlike typical taxes, this cess is capacity-based, not consumption-based.
• Liability will depend on installed machinery and production capacity, not actual sales.
• The aim is to curb tax evasion and improve transparency in industries historically prone to underreporting.

2. Revenue Sharing with States

• A portion of the cess revenue will be shared with states, earmarked for health awareness programmes and healthcare schemes.
• This is a departure from the usual design of central cesses, which are non-shareable—an issue often debated under fiscal federalism.
• The provision is intended to strengthen cooperative fiscal federalism.

3. No Interference with the GST Framework

• The Finance Minister clarified that the proposed cess will not disrupt GST revenue flows.
• Example:
  • Pan masala currently attracts 28% GST + compensation cess.
  • The new cess is separate, linked to production capacity, not the GST structure.
• This preserves the integrity of the GST compensation mechanism.

Objectives Behind the Cess

1. Dedicated Funding for National Priorities

The Bill seeks to provide a stable revenue stream for national security and public health, both of which require rising levels of expenditure.

2. Discouraging Harmful Consumption

The cess functions as a targeted deterrent, similar to sin taxes.By raising the effective tax burden on hazardous products, the government aims to reduce their usage over time.

Concerns and Criticisms Raised in Parliament

1. Possible Burden on MSMEs

• Opposition members warned that capacity-based taxation could disproportionately impact small manufacturing units.
• MSMEs might struggle to meet compliance standards or modernize machinery.

2. Risk of Reintroducing ‘Inspector Raj’

• Critics argued that machine-linked assessments could create space for excessive inspection and regulatory overreach.
• Concerns include harassment, rent-seeking, and operational delays.

3. Debate on Alternatives

• Some MPs argued that outright bans—as implemented in states like Bihar—may be more effective against harmful products.
• Others accused the government of encouraging a trend of “cessification of governance,” reducing states’ fiscal space.

Government’s Defence and Rationale

The Treasury benches countered criticism by highlighting:

• Greater transparency in how revenue will be used—this is among the first legislations mandating clear tracking of funds collected from demerit goods.
• National interest, stating that health and security funding should be politically non-partisan.
• Lower tax evasion, particularly in sectors like pan masala manufacturing, through the use of capacity- and machine-based assessment systems.