Revenue from cess on pan masala will be shared with states: Nirmala Sitharaman

In a unique move of cooperative federalism, Union finance minister Nirmala Sitharaman on Thursday told the Lok Sabha that the revenue from the proposed capacity-based cess on pan masala will be shared with states to be used in “health-related” activities.

New Delhi

Union Finance Minister Nirmala Sitharaman said a new cess has been proposed as excise could not be levied on pan masala on the basis of capacity. (ANI Video Grab)

In a unique move of cooperative federalism, Union finance minister Nirmala Sitharaman on Thursday told the Lok Sabha that the revenue from the proposed capacity-based cess on pan masala will be shared with states to be used in “health-related” activities.

While introducing the bill in the House, the finance minister explained the reason for bringing two separate legislations for demerit goods -- the Central Excise (Amendment) Bill, 2025 on tobacco and its products, and the Health Security se National Security Cess Bill, 2025 on pan masala. She said a new cess has been proposed as excise could not be levied on pan masala on the basis of capacity.

Speaking about the cess, she said in Hindi: “Aur States ke sath bhi, scheme ke dwara, hum share bhi kar rahe hain. Ye hai is kanoon ka ek unique point. (And, we are also sharing it with states through [a] scheme. This is one of the unique points of this legislation).” As per the Constitution, a cess is imposed for a specific purpose and its revenue is not shared with states as it is not considered part of the divisible pool of taxes.

On Thursday, while the bill related to the cess was moved in the Lower House, the other bill that sought to levy central excise on tobacco and tobacco products, was considered by the Rajya Sabha. After the debate on the excise bill, it was returned to the Lok Sabha, thus completing the Parliamentary process to enact the legislation. The Lok Sabha had passed the excise bill on Wednesday after an intense debate.

Replying to a discussion on the bill on tobacco and tobacco products in the Rajya Sabha, Sitharaman said ,“This is an excise duty, not a cess. This excise duty will join the taxable pool and will be devolved to the states as per the recommendations of the Finance Commission.”

She allayed apprehensions of members that the levy on the demerit item would impact tobacco farmers. “There are several schemes which will take care of the welfare of the tobacco farmers. The Crop Diversification Programme (CDP) under Rashtriya Krishi Vikas Yojana (RKVY) is on and it runs in 10 major tobacco-growing states since 2015-16 under which farmers are encouraged to shift to alternative crops/cropping system,” she said. Over 1.12 lakh acres of land has been shifted from growing tobacco to other crops between 2017-18 and 2021-22, she said. The 10 states are Andhra Pradesh, Bihar, Gujarat, Karnataka, Maharashtra, Odisha, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal.

Reacting to the issues raised by Trinamool Congress MP Sagarika Ghose pertaining to the Mahatma Gandhi National Rural Employment Guarantee Scheme in West Bengal, the finance minister said: “As per the MGNREGA Act, 2005, it is the responsibility of the state government to ensure transparency and accountability in the implementation of the scheme.”

Based on central teams’ inspection reports highlighting implementation issues, the ministry of rural development sent several communications to the state for their rectification. However, no noticeable improvements were observed in the state, she said. “Consequently, funds to West Bengal were stopped since March 2022, under section 27 of the Act due to non-compliance with Central Government directives,” she added.

She informed the House that the present government at the centre had already released ₹54,416 crore between 2014-15 to 2021-22 as against ₹14,985 crore released during the previous government between 2006-07 and 2013-14 to West Bengal under the scheme.

Refuting the charge that West Bengal has been ignored by the centre, she said: “In fact, it is the TMC government that is hurting the growth of the people of West Bengal. West Bengal withdrew from the Ayushman Bharat Scheme in January 2019. Is that good for the people of Bengal?”

She said industries are leaving West Bengal. “From 1 April 2011 to 30 September 2025, 448 listed companies and 6,447 unlisted companies have exited the state. Since 2014, ₹5.94 lakh crore has been given to West Bengal as tax devolution - a 4.4 times increase compared to the ₹1.34 lakh crore provided during 2004-14. Under SASCI [Special Assistance to States for Capital Investment], ₹24,000 crore has been provided as 50-year interest-free loans,” she said.