The Centre has raised the tax incidence on cigarettes by 40%, causing the stocks of major tobacco manufactures to tumble. ITC plunged nearly 10%, marking its steepest fall in almost six years, while Godfrey Phillips India tanked 17%.
Under the new tax framework notified by the government late Wednesday, come February 1, cigarettes will attract the maximum 40% goods and services tax (GST), a newly notified central excise duty, and the existing national calamity contingent duty (NCCD). The NCCD is a surcharge levied on select goods such as tobacco, imposed either as an ad valorem duty or at specific rates, and continues to form a key component of the overall tax burden.
In effect the combined incidence of these taxes on cigarettes will rise to 77% of retail sale value, up from 55% earlier, sources said. It is for the companies to decide whether and how much of the additional taxes are to be passed on to consumers. Tobacco products are highly price inelastic, yet the manufacturers may have to face some squeeze in margins.
The discontinuation of GST compensation cess, which as per another notification will take place on February 1, necessitated a restructuring of levies on tobacco products.
Sharp Pivot
The government has said the revised tax structure for cigarettes is designed to align tobacco taxation more closely with World Health Organization (WHO) standards that call for taxes to fully reflect the negative health and social externalities associated with smoking.
The Tobacco Institute of India (TII) said it was “shocked and surprised” by the “unprecedented increase” in duty announced. It noted that the government on more than one occasion had said the overall impact of the transition (necessitated by GST cess removal) would be revenue neutral.
“Such a massive increase will cause immense hardship and loss to millions of farmers, MSMEs, retailers and local value chains nurtured by the industry, besides providing a huge fillip to the illicit industry and damaging national enterprises,” TII said in a statement, calling for a review of the computations behind this extremely severe tax increase.
The Finance Ministry has notified an excise duty on cigarettes, ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks depending on cigarette length, effective February 1. This duty will be levied over and above the 40% GST. At present, cigarettes attract 28% GST along with a compensation cess at varying rates. Importantly, taxes on cigarettes had remained unchanged for nearly seven years following the introduction of GST in July 2017, making the latest revision a sharp break from recent policy.
The market reaction to the higher tax incidence was swift and severe. Trading volumes in both ITC and Godfrey Phillips India stocks surged to more than 20 times their three-month average. ITC, which sells popular cigarette brands such as Classic and Gold Flake, derives over 40% of its revenue from cigarettes, while Godfrey Phillips markets Marlboro and Four Square in India.
Analysts warned that the tax hike could weigh heavily on cigarette volumes and profitability. According to a note by Jefferies analysts led by Vivek Maheshwari, cited by Bloomberg, the move is “a clear negative” as higher prices are likely to dent consumption, while also reviving concerns over a shift towards illicit trade. To offset the impact, ITC may need to raise cigarette prices by at least 15%, or possibly more, to fully pass on the higher tax burden to consumers.
Sources said India’s seven-year freeze on basic excise duty and cess rates had increasingly stood out as an international anomaly. In the absence of periodic revisions, the effectiveness of tobacco taxation as a public health tool diminishes, allowing cigarettes to become more affordable over time as incomes rise. The latest increase, they said, is intended to ensure that cigarettes continue to carry a tax burden proportionate to their health risks, while also maintaining revenue stability.
According to World Bank estimates, India’s earlier tax incidence on cigarettes was about 53% of the retail price, well below the WHO-recommended benchmark of at least 75%. In contrast, countries such as the UK and Australia impose tax burdens exceeding 80-85%, while France, New Zealand and several European Union members maintain levels above 75-80%. Even middle-income economies like Turkey, South Africa, the Philippines and Chile have moved closer to or beyond the WHO threshold.
Enforcement and Compliance
Alongside cigarettes, the government has tightened compliance measures for chewing tobacco, gutkha and similar products packed in pouches. Manufacturers will be required to install functional CCTV systems covering all packing machines and preserve footage for a minimum of 24 months, while also disclosing machine numbers, capacities and retail prices to excise authorities. Officials said these measures are aimed at strengthening monitoring, curbing evasion and reinforcing public health objectives across the tobacco sector.