Industry experts and analysts have raised serious concerns that the steep cigarette tax hike could trigger a surge in illicit trade and lead to significant revenue losses for the government. According to Ranganath Tannir, secretary general of Think Change Forum, "Public finance theory is clear that excessive taxation of inelastic goods fuels illicit trade, not compliance." He noted that cigarettes in India are already among the least affordable globally based on World Health Organization affordability indicators, and making them more expensive is unlikely to curb demand but could push consumers towards illegal and smuggled products. The new excise duty structure implies an overall tax hike of around 60-70% varying by cigarette length, compared with the current overall tax incidence of about 50-55%. As reported by PTI, illicit tobacco already accounts for about 26% of India's total tobacco market, making the country the fourth-largest market globally for smuggled tobacco.
Cigarettes will become significantly more expensive from February 1, 2026, with price increases varying by cigarette length and type. According to the latest government notifications, short non-filter cigarettes (up to 65 mm) will cost approximately ₹2.05 more per stick, while short filter cigarettes of the same length will increase by around ₹2.10 per stick. Medium-length cigarettes (65-70 mm) will face an additional cost of roughly ₹3.6-4 per stick, and long, premium cigarettes (70-75 mm) will see an increase of about ₹5.4 per stick. As reported by Times of India, an "other" category carries a significantly higher duty of ₹8.5 per stick, but this applies only to unusual or non-standard designs that most popular cigarette brands do not fall under. The additional excise duty ranges from ₹2,050 to ₹8,500 per 1,000 sticks, representing a substantial increase that will be levied on top of the 40% GST that will apply to tobacco products from February 1.
Leading brokerages have echoed concerns about the unintended consequences of the tax hike, with several pointing to international precedents. According to JPMorgan's Asia Pacific Equity Research, a higher tax rate for the King Size Filter Tip (KSFT) segment increases the risk of consumers downtrading to cheaper options and may also lead to higher consumption of illicit cigarettes. Nomura noted that while higher taxes are aimed at reducing consumption, they often have unintended consequences, stating "High taxes on cigarettes fuel the growth of illicit cigarettes and push consumers towards cheaper, non-tax paid smuggled cigarettes." Experts pointed to Australia's experience, where repeated tobacco tax hikes between 2012 and 2020 led to illicit tobacco consumption jumping from under 2% to around 14% of the market. Jefferies, citing a report by the Tobacco Institute of India (TII), said the industry body has urged the government to review the proposed excise structure, noting that a wider gap between legal and illegal prices could benefit non-duty-paid cigarettes and result in higher tax leakage.
Tobacco stocks crashed on Thursday with Godfrey Phillips plunging 17.09% to settle at ₹2,289.65 following the government's notification of new excise duties effective February 1, 2026. According to the latest market reports, the stock dropped as much as 19.24% to ₹2,230.15 during intraday trading. Shares of ITC tumbled 10% to hit a 52-week low at ₹362.70 during the day, closing 9.8% down at ₹364, marking a significant decline from Wednesday's levels. As reported by Times of India, the combined market capitalisation loss for these two companies reached nearly ₹56,300 crore compared to Wednesday's closing numbers. VST Industries also dipped 0.60% to ₹255.15 amid the broader selloff in tobacco stocks. According to Vinod Nair, Head of Research at Geojit Investments Limited, "Overall advances were capped as FMCG stocks declined following the newly imposed excise duty on cigarettes." The market had not factored in the new excise duties ranging between ₹2,050-8,500 per 1,000 sticks, which represents a significant increase from the earlier specific cess range of ₹2,076-4,170 per 1,000 sticks.
Industry analysts have called the proposed excise levies "unprecedented" and urged the government to reassess the decision before implementation. As reported by PTI, an analyst warned that "Since they take effect from February 1, 2026, the government has an opportunity to revisit and rectify them before they spawn a much larger problem of uncontrollable illicit networks." The unexpected nature of the tax increase has raised particular concerns about higher smuggling and illegal trade in tobacco products. The move marks a transition from the GST compensation cess to an excise-based regime for demerit goods, with the Finance Ministry having notified amendments to the Central Excise Act earlier this week. The Federation of All India Farmer Associations (FAIFA) has urged the government to roll back the notified excise rates on tobacco products and revise them to revenue-neutral rates to disincentivise smuggling and support domestic agriculture, emphasizing that a stable taxation framework is necessary to sustain farmer incomes, protect employment across the value chain, and align economic policy with long-term public health goals.
From February 1, 2026, all tobacco products will attract 40% GST, replacing the current 28% GST along with compensation cess structure. According to the latest notifications, chewing tobacco and jarda-scented tobacco will face an excise duty of 82% and 91% respectively, while gutkha will attract an excise duty of 91%. As reported by Times of India, the total tax incidence on pan masala, after factoring in GST, will remain unchanged at 88%, while biris will be taxed at 18%. The revised tax structure comes after the GST Council's decision in September to tax these products over and above GST once the compensation cess framework ends. Government sources indicate that the excise duty hike on cigarettes ensures they carry a tax burden proportionate to their severe public health impact and maintains tax incidence closer to international best practices. Taxes on cigarettes in India have remained unchanged for the past seven years since GST introduction in July 2017, with India's total tax incidence on cigarettes at around 53% of retail price, substantially lower than WHO's recommended benchmark of 75% or more.
The government has implemented an elaborate system to check evasion, mandating manufacturers of chewing tobacco, gutkha and similar products to install CCTVs covering all packing machines and preserve the footage for at least 24 months. According to the latest notifications, the Finance Ministry has introduced a dual tax framework combining Goods and Services Tax (GST) with a machine-capacity-based cess on pan masala manufacturing to create a comprehensive system for detecting tax evasion and protecting revenue. As reported by sources, this triangulation of value and capacity data significantly reduces evasion scope in sectors historically prone to under-reporting, valuation disputes, and clandestine production. The combined framework enables authorities to identify discrepancies through systematic comparison of production capacity versus declared sales, with additional verification measures including surprise verification visits, chartered engineer-certified machine parameters, and risk-based analytics systems. Such manufacturers will also have to disclose to the excise authorities the number of machines and their capacities, and can also claim abatement in excise duty in case a machine is non-functional for a minimum of 15 consecutive days.
