The Government of India has approved a new taxation system for tobacco products. According to an official notification issued by the Finance Ministry, new excise duty rates will apply to pan masala and other tobacco items. This change marks the end of the Goods and Services Tax (GST) compensation cess and the beginning of a new, permanent tax structure.
This move by the government aims not only to keep revenue stable but also to discourage tobacco consumption, keeping public health in mind. It is being viewed as a ‘revenue-neutral’ transition. Let’s understand how this might impact companies linked to the tobacco sector.
What’s Happening?
To understand this entire scenario, we need to look at the GST background. From February 1, 2026, the GST compensation cess, which was until now levied on ‘sin goods’, will come to an end. As a replacement, the Central Government has decided to impose an additional ‘Basic Excise Duty’ on tobacco products and a new ‘Health and National Security Cess’ on pan masala.
Under the new regime, a GST rate of 40% will apply to cigarettes, pan masala, and tobacco products, while this rate will be 18% for beedis. Parliament had already passed two important bills related to this, the Central Excise (Amendment) Bill, 2025, and the Finance Bill, in December 2025. Additionally, the ‘Packing Machine Rules, 2026’ have been notified for pan masala and gutkha manufacturers, so that tax can be collected based on production capacity and tax evasion can be prevented.
New Excise Duty on Cigarettes
Until now, tax on cigarettes was primarily levied through GST and value-based levies, but a specific excise duty has now been implemented. This duty has been fixed on a per 1,000 cigarette sticks basis and will vary according to the length and filter of the cigarette.
- Short, Non-filter Cigarettes (less than 65 mm): A duty of Rs 2.05 per stick will be levied on these.
- Short, Filter Cigarettes (less than 65 mm): A duty of Rs 2.10 per stick will be levied on these.
- Medium Cigarettes (65–70 mm): For this category, the duty will be in the range of Rs 3.6 to Rs 4 per stick.
- Premium/Long Cigarettes (more than 75 mm): Duty of up to Rs 5.4 per stick can be charged on these.
Apart from this, there is an ‘Other’ category, where a significantly high duty of Rs 8,500 per 1,000 sticks has been imposed. However, this slab applies only to cigarettes with unusual or non-standard designs, and most popular brands do not fall into this category. Overall, the new excise duty has made the tax structure clearer, but its direct impact on cigarette prices is considered certain.
Impact on GST and Total Tax Burden
The new excise duty has been implemented in addition to GST. Under the revised arrangement, GST on cigarettes will now be 18% or 40%, depending on the product category. Along with this, the government has removed the GST compensation cess levied on tobacco products. Despite all these changes, the total tax on cigarettes in India still amounts to approximately 53% of the retail price, which is lower than the 75% level suggested by the World Health Organisation (WHO) to discourage smoking.
According to the Finance Ministry, the objective of this step is to curb tax evasion in the tobacco sector, increase government revenue, and bring India’s tobacco taxation closer to global public health recommendations. Officials also say that rising treatment costs of tobacco-related diseases, especially cancer, made the decision to hike duty necessary.
What Does This Mean for Investors?
Following the official notification of the excise duty and health cess on pan masala, heavy selling was witnessed in tobacco stocks. On Thursday, January 1, 2025, Godfrey Phillips India shares crashed by over 17%, while ITC registered a sharp decline of nearly 10%. This clearly signals that the market is taking a very negative view of the impact of increased taxes.
This issue is more sensitive for ITC, as in the September quarter, approximately 48% of its total topline came from the cigarette business. After the tax hike, companies like ITC and Godfrey Phillips may be forced to increase prices, which could weigh on demand and share performance in the short term.
What’s Next?
The road ahead will depend on the extent and speed at which tobacco companies are able to pass on the increased tax burden to consumers. In the short term, this could be a challenging phase for the industry. Companies may have to adjust their pricing strategies and supply chains in line with the new tax regime. Measures like the Packing Machine Rules could be positive for the organised sector in the long term, as they increase pressure on unorganised and illegal players. However, for now, investors remain cautious and appear to be in a ‘wait and watch’ mode.
According to Reuters, analysts at Jefferies have termed this move as ‘a clear negative’. They believe it could impact sales volumes and that concerns around the illicit cigarette market may resurface.
*The companies mentioned in the article are for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
