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Picture Courtesy: The Hindu

Context:

The Health Security se National Security Cess Bill, 2025 seeks to impose a cess on machines used in manufacturing pan masala and tobacco products. It is framed as a money bill, needing only Lok Sabha approval.

What is cess?

A cess is an extra charge added to existing taxes by the Central Government, meant to raise money for a particular objective.
Unlike regular taxes that go into the general pool, a cess is earmarked for a special programme or priority area.

For instance, money collected through the Swachh Bharat cess was used to support cleanliness drives, while the Education cess helped finance efforts to improve schooling and literacy.

Rationale behind this Cess:

Health Security Argument

• High tobacco burden: India has widespread tobacco use, with 42% of men and 14% of women using tobacco, accounting for nearly 70% of global smokeless tobacco users and leading the world in male cancer deaths.
• Heavy public health cost: The economic burden of tobacco-related diseases reached ₹1.77 lakh crore in 2016–17, far exceeding government revenues from tobacco.
• Behavioural taxation tool: The cess acts as a deterrent by increasing the cost of harmful products, aligning with the WHO’s recommendation of taxing tobacco at 75% of retail value — a benchmark India has yet to meet. 

National Security Argument

• Health as a security determinant: Poor health outcomes reduce productivity, alter demographic balance, and strain fiscal resources, ultimately affecting national capabilities.
• Fiscal stabilisation mechanism: With the compensation cess discontinued, this levy provides a non-GST revenue stream to support Central programmes.
• Linking addiction to security: By treating addiction as a threat to human capital and workforce resilience, the policy reflects a growing global recognition of health risks as national security challenges. 

Why government taxes machines and not the tobacco output?

Machines are easier to track: Counting and registering machines is simpler than tracking millions of small, scattered production units.

Highly informal tobacco industry: Over 90% of beedi production occurs in unorganised sectors, often through home-based women workers, making output verification difficult.

Smokeless tobacco supply chains are dispersed: Pan masala and gutkha units often operate in small clusters with cash-based, poorly documented transactions, limiting monitoring capacity.

Administrative convenience and presumptive taxation: Machine-based tax allows the government to estimate revenue based on installed capacity, similar to composition schemes for informal sectors. 

What are the broader implications?

• Formalisation push: By focusing on machines, the policy nudges pan masala and tobacco units toward formal registration, similar to earlier efforts under GST. Example: Under the 2019 pan masala packaging machine capacity rules, dozens of units got registered because machine data was traceable — a sign that regulatory visibility improves when capacity-based models are used.
• Revenue stability but behavioural evasion: Machine-based cess offers predictable monthly revenue, regardless of actual production, supporting fiscal planning in a sector known for under-reporting.

• Risk of strengthening Illicit supply chains: India already suffers from 5–10% illegal tobacco market share, according to industry surveys and customs data. Higher taxes on machines may incentivise producers to relocate to unregistered clusters or use manual labour, fuelling the grey economy.
• Labour displacement and informal sector spillover: Machine-based taxation could drive small producers to shut mechanised units and outsource to informal labour, hurting workers without regulating them.
• Limited public health gains without demand-side reform: While taxing machines may raise prices, tobacco affordability remains high. WHO notes that Indian cigarettes remain among the cheapest globally when adjusted for income. Without regulating single-stick sales, proxy advertising, or behavioural counselling, supply-side taxation alone may not materially reduce addiction.

Conclusion:

Taxing machines offers administrative ease and predictable revenue, but by itself it cannot curb tobacco consumption or regulate India’s largely informal production networks. Without complementary measures such as strict enforcement, behavioural regulation, support for affected workers, and demand-side interventions, the cess risks becoming more of a fiscal tool than a public health solution.

Source: The Hindu