The shift from GST Compensation Cess to Central Excise Duty on tobacco products raises fundamental questions about India's federal fiscal architecture. Analyse.

Q. The shift from GST Compensation Cess to Central Excise Duty on tobacco products raises fundamental questions about India's federal fiscal architecture. Analyse. (15 marks, 250-350 words)

The Central Excise (Amendment) Act, 2025, operative from 1 February 2026, extinguishes the GST Compensation Cess on tobacco and restores central excise as the principal levy [1]. Framed as a revenue-neutral technical fix, the shift in fact alters how, and to whom, tobacco revenue flows.

Anatomy of the shift - The Fourth Schedule of the Central Excise Act, 1944 was substituted to raise duties across cigarettes, chewing tobacco, hookah and zarda, expressly to hold total tax incidence at existing levels as the cess lapses [1]. - A parallel Health Security se National Security Cess, 2025 was imposed on pan masala production, its proceeds flowing to the Consolidated Fund of India for public health and national security [2]. - Notifications dated 31 December 2025 gave a one-month transition before rollout, with capacity-based machine levies for gutkha and scented tobacco [3].

Federal gains - Excise duty is a Union tax within the divisible pool (Article 270); states now receive a permanent, formula-based share via the Finance Commission, replacing a time-bound compensation entitlement that was extended only to service COVID-era borrowings [4]. - Restoring a periodically revisable specific duty ends the eight-year rate freeze that made cigarettes more affordable in real terms.

Unresolved questions - The cess route bypasses the divisible pool — HSNS cess accrues wholly to the Centre, reviving the long-standing grievance that rising cess-and-surcharge reliance shrinks states' effective share [2]. - Excise rates are set unilaterally by Parliament and executive notification, outside the GST Council's consensus mechanism, thinning the collaborative space that GST created [1]. - Demand elasticity and illicit-trade leakage now transmit directly into states' devolution, shifting revenue risk downward.

The rejig thus trades a temporary, state-dedicated cess for a permanent but Centre-controlled instrument. Its promise will be realised only if the Centre privileges shareable duties over non-shareable cesses and routes rate decisions through Council-style consultation — the cooperative federalism that Article 279A envisages.

(~310 words)

Sources: 1. The Central Excise (Amendment) Bill, 2025 — PRS Legislative Research — Fourth Schedule substitution, revised tobacco duty rates, revenue-neutral replacement of the compensation cess 2. The Health Security se National Security Cess Bill, 2025 — PIB Factsheet — cess on pan masala production; proceeds to the Consolidated Fund of India for national security and public health 3. FAQs on Machine-Based Levy for Chewing Tobacco, Jarda Scented Tobacco and Gutkha — PIB — excise notifications of 31.12.2025 taking effect 1 February 2026 4. Monthly Policy Review, December 2025 — PRS Legislative Research — discontinuation of the GST Compensation Cess and its borrowing-repayment extension