Strategic Tax Shift: Centre targets harmful industries to fund defence & health sectors

New Delhi: Union Finance Minister Nirmala Sitharaman on Monday moved two crucial fiscal legislations in the Lok Sabha to impose excise duty on tobacco and tobacco products as well as to impose a new cess on the manufacture of pan masala and other notified goods, contending that such steps were necessary to create assured resources for national security and public health at a time when India was confronted with complex internal and external challenges.

The Health Security to National Security Cess Bill, 2025, was pitched by the government as a strategic fiscal instrument to build a permanent, predictable funding stream for two of the most critical priorities of the country: defence preparedness and public health resilience. Officials said that the move reflects a broader shift in policy thinking on recognising health emergencies as threats to national security, lessons drawn most sharply from the COVID-19 pandemic.

Under the proposed law, the cess is not to be imposed on declared output but based on manufacturing capacity, mainly speed and packing capacity of high-speed machines used to manufacture pan masala and similar products.

The government’s reasoning has its roots in a perpetual concern about tax evasion and under-reporting in such industries. By shifting the tax base to machine capacity, the central government expects to plug revenue leakages and ensure a steady flow of funds regardless of fluctuations in production figures.

Top officials in the finance ministry explained that the proceeds of the cess, which would be credited to the Consolidated Fund of India and subsequently appropriated by the Parliament, are to be used to strengthen public health systems, disease surveillance, emergency medical infrastructure and pandemic preparedness, as well as to finance defence modernisation, border security and internal security apparatus.

They claimed that the further Bill empowers the centre to notify specific schemes and programmes to be financed through this revenue stream.

The government has also justified the stringent compliance and enforcement-related provisions in the Bill, such as registration of manufacturers mandatorily, machine calibration, monthly self-assessment, audits, search and seizure powers, and criminal penalties for large-scale evasion.

According to official sources, such steps are required to put in place regulations on a sector that essentially operated opaquely in the past and to ensure that the cess serves the larger national purpose without dilution.

From the government’s perspective, there is also a strong public-interest dimension to the Bill. By targeting industries linked with serious health concerns, including oral cancers and high addiction potential, the levy is being projected as a dual-impact policy aimed at discouraging harmful consumption while simultaneously funding the healthcare system that bears the burden of such consumption.

“This is about making those who profit from public health risks contribute directly to national health and security,” a senior official said.

The Opposition, however, launched a sharp attack on the timing, intent and design of the legislation. Several Opposition leaders alleged that the Centre is using the language of national security and public health to justify what is essentially a revenue-raising exercise without adequate parliamentary consultation.

They argued that the government has not placed in the public domain any clear roadmap on how the cess proceeds will be transparently allocated between the defence and health sectors.

The opposition parties also voiced apprehension over the accumulation of discretionary powers with the executive, more so the provisions that enable the Centre to increase the cess rates for “special circumstances” and notify additional goods under its ambit.

Congress and other opposition leaders cautioned that such powers would pave the way for overreach in regulation and press small and medium manufacturers hard, though the government had maintained that the levy primarily targeted high-capacity operations.

There were also objections related to the punitive powers of the enforcement clauses, with arrest provisions and severe penalties. Opposition MPs contended that these powers reflect some of the most controversial powers of recent indirect tax laws and have the potential to be misused against businesses. Certain parties demanded that the Bill be sent to a parliamentary standing committee for detailed scrutiny before passage.

Politically, the introduction of the Bill comes at a time when the government is trying to balance rising defence expenditure, post-pandemic healthcare investments and fiscal consolidation.

With traditional revenue sources under pressure and welfare spending continuing at elevated levels, the Centre seems keen to carve out a ring-fenced funding channel for strategic sectors without adding to the general tax burden on the wider population. The opposition may cry foul, but the government remains steadfast that the Bill constitutes a necessary instrument to secure the long-term security and health interests of India.

As national security challenges become increasingly multidimensional, and public health is accepted as a core component of national resilience, the outcome of the legislative debate will reveal how far Parliament is prepared to underwrite this novel connection between selective taxation and strategic state capability.