Stocks of major cigarette manufacturers such as ITC and Godfrey Phillips saw a massive slump on Thursday after the government decided to impose additional taxes on cigarettes and various tobacco products.
As analysts termed the magnitude of the tax impact worse than anticipated initially, share price of ITC, the country’s largest cigarette maker, fell 9.7 per cent to end at ₹363.90 on Thursday on the BSE. Among Nifty50 constituents, ITC emerged as the biggest loser.
Shares of Godfrey Phillips India, the distributor of Marlboro in the country, crashed 17 per cent to ₹2,289.65.
According to analysts, the proposed new tax increase on cigarettes looks quite large. The current tax structure of 28 per cent GST and ad valorem cess between 5 per cent and 36 per cent is being replaced by a 40 per cent GST and a rise in excise duty.
Volume to be impacted
The cigarette makers may have to increase prices by 15-20 per cent to pass on some of the new tax impacts to consumers. It would lead to a volume decrease.
Commenting on the impact of the additional tax on ITC, Jefferies analysts called it “a clear negative,” as cigarette volume would be impacted and concerns would also re-emerge on risk of losing some volumes to illicit industry.
“The government has notified a sharp rise in excise duty for cigarettes as the period of compensation cess is about to end. While we are unsure if this is the final taxation, it appears so to us. There are still a lot of unknowns, but our calculation suggests tax hike could be over 30 per cent if NCCD continues; in the event NCCD is subsumed, the impact should still be well over 20 per cent,” said the Jefferies analysts.
“We also note that the revised GST rate on tobacco was recently raised to 40 per cent, which will also have a cascading impact as ITC takes up cigarette price hikes. Basis our understanding, ITC may need to take up prices by at least 15 per cent to pass on the overall impact to consumers, if not higher,” they observed.
Domestic brokerage firm Nuvama Institutional Equities said while it expected a sharp tax hike on cigarettes, the magnitude seemed higher than anticipated, likely prompting consensus downgrades to ITC’s cigarette volume and EBITDA estimates as well as multiples. “Pending clarity, we reckon a more than 20 per cent price hike and a more than 30 per cent tax hike, which is meaningfully sharp,” Nuvama said.
“Overall, we are cutting EBITDA by 7 per cent each for FY27E/28E. Downgrade to ‘Hold’ from ‘Buy’, cutting our Tobacco PE valuation to 17x (earlier 23x)…,” it added.
The Finance Ministry, on Wednesday, notified February 1 as the appointed date for implementation of the Health Security se National Security Cess Act and the Central Excise (Amendment) Act.
The Health Security se National Security Cess Act aims to levy a cess on pan masala. The Central Excise (Amendment) Act intends to impose an additional levy on cigarettes and various tobacco products.
The Central Excise (Amendment) Act provides for a new central excise duty on tobacco products, including cigarettes, chewing tobacco, cigars, hookahs, zarda and scented tobacco, replacing the existing compensation cess. The Act seeks to levy excise duty on cigars/cheroots/cigarettes at ₹5,000-11,000 per 1,000 sticks, depending on length.
Also, it proposes a levy of 60-70 per cent on unmanufactured tobacco and 100 per cent on nicotine and inhalation products. These two Acts will ensure that the tax incidence on sin goods such as tobacco and pan masala remains unchanged after the discontinuation of the compensation cess.
Fillip to illegal activities
The Tobacco Institute of India (TII) said it was “shocked and surprised” to note the “unprecedented increase” in duty announced on December 31, 2025, given the statements made by the government on more than one occasion, that the overall impact of the transition of taxes will 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 illicit industry and damaging national enterprises,” TII said in a media release.
“It is well known that for every three legal cigarettes, one smuggled/illicit cigarette is sold in the country, and this high tax increase will further boost illegal and illicit activity depriving the national exchequer besides promoting anti-social activity,” it said.
Cigarette taxes in India as a percentage of per capita GDP are amongst the highest in the World, as per WHO data.