India’s cigarette industry is expected to see a 6–8% contraction in volumes in the next fiscal, following the imposition of additional excise duties and a higher effective goods and services tax (GST) rate from February 1, Crisil Ratings said on Wednesday, as per a PTI report.
Currently, cigarettes attract a 28% GST along with a compensation cess. From February 1, the cess will be removed and replaced with an additional excise duty ranging from Rs 2.05 to Rs 8.5 per stick, depending on cigarette length. The GST on the final retail price will rise to 40%.
Higher impact on mid-to-premium segment
According to Crisil, mid-to-premium cigarettes, those longer than 65 mm, will attract excise duty of Rs 3.6–Rs 8.5 per stick, while cigarettes in the mass segment (below 65 mm) will be levied Rs 2.05–Rs 2.1 per stick.
The mid-to-premium segment is expected to see sharper price hikes, amounting to about 25% of the current maximum retail price (MRP). Manufacturers are likely to pass on most of this increase to consumers, given stronger brand loyalty and preference for specialised offerings such as low-nicotine variants and flavoured cigarettes, PTI added.
Mass segment players likely to absorb costs
In contrast, duty hikes in the mass segment, accounting for 40–45% of industry volumes, are lower, at around 15% of the current MRP. However, given the price-sensitive nature of this category, manufacturers are expected to partially absorb the higher tax burden to limit volume loss, the report added.
As a result, Crisil expects the industry’s earnings before interest and taxes (EBIT) margins to decline by 200–300 basis points, though margins are still projected to remain strong.
Financial strength to cushion impact
Crisil said cigarette companies remain financially resilient, supported by robust liquidity, negligible debt, and cash reserves exceeding Rs 20,000 crore. The analysis covered three major cigarette manufacturers accounting for over 95% of the organised industry’s volumes, PTI added.
“Overall segment volumes might get impacted by 6–8% next fiscal, in line with the impact seen during earlier duty hikes,” Shounak Chakravarty, director at Crisil Ratings, said, as per PTI.
Past hikes offer a cautionary signal
Crisil noted that between FY2014 and FY2018, successive duty hikes had led to a 40–50% cumulative increase in cigarette MRPs, resulting in a 20% decline in volumes. Manufacturers took three to four years to recover lost volumes, as per the report.
Learning from that period, companies are expected to adopt a more measured pricing strategy this time, particularly in the mass segment, to avoid sharper demand erosion. Despite the expected margin pressure, EBIT margins are projected to remain above 58% next fiscal, giving companies room for continued product innovation and business stability, Crisil added.