Cigarettes set to get costlier from Feb 1 as excise duty hiked

The government has imposed new excise duties on cigarettes, raising costs significantly for smokers and impacting tobacco company shares.

The government has imposed a new excise duty on cigarettes ranging from ₹2,050 to ₹8,500 per 1,000 sticks, a move that sent tobacco company shares plummeting on Thursday and is expected to significantly raise prices for the country’s approximately 100 million smokers.

Representational image.

ITC, the market leader and maker of Gold Flake cigarettes, fell 9.69%, while Godfrey Phillips India, which distributes Marlboro, tanked 17.09%.

The excise duty, notified late on Wednesday, will take effect from February 1 in addition to a 40% Goods and Services Tax (GST) on tobacco products and cigarettes. The duty varies according to cigarette length and replaces the compensation cess being scrapped as part of a broader GST restructuring announced in September.

The new levies will result in a 22% to 28% increase in overall costs for 75-85mm cigarettes, according to ICICI Securities analysts. Cigarettes longer than 75mm, which account for roughly 16% of ITC’s volumes, are likely to see price increases of ₹2-3 per stick, the analysts said.

Jefferies Financial Group called the move “a clear negative,” saying volumes will be impacted and concerns would re-emerge about losing share to the illicit industry. The brokerage estimated the new charges imply nearly 30% higher taxes if the National Calamity Contingent Duty continues to be levied.

The finance ministry also notified additional excise duties on other tobacco products: 91% on gutkha, 82% on chewing tobacco and 82% on jarda scented tobacco. A health and national security cess will be levied on the production capacity of pan masala manufacturing units, while bidis will face the new levies on top of an 18% GST rate.

A new maximum retail price-based valuation mechanism has been introduced for tobacco products including chewing tobacco, filter khaini, jarda scented tobacco and gutkha, whereby GST value shall be determined based on the retail sale price declared on the package. The ministry also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026.

The government, in an FAQ it released separately, explained it has introduced a novel capacity-based levy system for manufacturers of chewing tobacco, jarda scented tobacco and gutkha, marking a significant shift from traditional production-based taxation. Under the new rules notified on Dec 31, duty will be calculated based on the maximum rated capacity of packing machines rather than actual output, making it impossible for manufacturers to underreport production.

The finance ministry has mandated stringent surveillance requirements to enforce the new levy. All manufacturers operating packing machines must install functional CCTV systems covering all packing machine areas and preserve footage for a minimum of 24 months. Any installed packing machine will be deemed to be operating unless it is physically sealed by department officials.

A taxation framework that keeps cigarettes “sufficiently expensive” is one of the most effective tools to “discourage tobacco use and limit its impact,” the finance ministry said in a statement on Thursday. The government has introduced measures including larger warning labels and periodic tax adjustments to curb consumption, viewing health issues tied to smoking as a major drain on India’s resources.

The proceeds from excise duty will be redistributed among states in accordance with the Finance Commission’s recommendations. The Centre’s tax revenues form part of a divisible pool, with 41% shared among states. Part of the revenue from the health cess will be shared with states through health awareness or other health-related schemes.

The levy of such the health cess on pan masala and excise duty on tobacco was approved by Parliament last month. Finance minister Nirmala Sitharaman told Parliament that the purpose of such a cess is to create a “dedicated and predictable resource stream” for two domains of national importance: health and national security.

The All-India Tobacco Growers’ Association demanded that part of the new levies be utilised for farmer welfare.

The new duties replace the compensation cess, which will cease to exist from February 1 after the repayment of a ₹2.69 trillion loan taken by the Centre to compensate states for GST revenue loss during Covid. The loan will be repaid by January 31.

Currently, a 28% GST and a compensation cess at varying rates are levied on all tobacco products. From February 1, the GST rate will increase to 40%, plus the excise duty.

At the time of GST’s introduction on July 1, 2017, a compensation cess mechanism was put in place for five years, till June 30, 2022, to compensate for revenue loss suffered by states due to GST implementation. The levy was later extended by four years till March 31, 2026, and the collection is being used to repay the ₹2.69 trillion loan.