Shares of major tobacco companies came under sharp selling pressure on Thursday after the Union Finance Ministry formally notified February 1, 2026, as the date from which additional excise duties on tobacco products will come into force. The announcement triggered concerns over higher tax incidence and possible price hikes, leading to a decline in tobacco counters on the stock exchanges.
ITC Ltd saw its shares fall by nearly 4.5% during early trade, hitting an intraday low of ₹385 on the BSE. Godfrey Phillips India witnessed a steeper fall, with its stock tumbling up to 8% to ₹2,540.15. Market participants reacted negatively to the prospect of higher taxation on cigarettes and other tobacco products, which could impact demand and profitability.
Details of the New Excise Duty Regime
Late on Wednesday, the Finance Ministry issued a notification imposing a revised excise duty structure on cigarettes, effective February 1. Under the new framework, excise duty on cigarettes will range between ₹2,050 and ₹8,500 per 1,000 sticks, depending on the length of the cigarette.
The newly introduced excise duty will be levied in addition to the Goods and Services Tax (GST) and will replace the existing GST compensation cess currently applicable to tobacco and pan masala products. The compensation cess, which was levied at varying rates as part of the GST regime, will cease to apply from the same date.
GST Rates and Additional Cesses
As per the government notification, cigarettes, pan masala, tobacco, and similar products will attract a GST rate of 40%, while bidis will continue to be taxed at a lower rate of 18% under GST.
In addition to GST, the government has introduced a Health and National Security Cess on pan masala. Tobacco and related products, including cigarettes, will be subject to a separate additional excise duty. These levies are aimed at enhancing revenue while aligning tobacco taxation more closely with public health objectives.
Legislative Backing and Policy Shift
The move follows the approval of the Central Excise (Amendment) Bill, 2025, by Parliament in December. The legislation replaces the earlier temporary levy on cigarettes and tobacco products with a permanent statutory framework for excise duties. An official order issued on Wednesday clarified that excise duty will be imposed on cigarettes over and above the applicable GST rate of 40%.
This marks a significant shift in the taxation structure for “sin goods,” with excise duty once again assuming a central role alongside GST, rather than relying solely on compensation cess mechanisms.
Impact on Industry and Pricing
Industry analysts believe the higher tax burden could compel cigarette manufacturers such as ITC and Godfrey Phillips India to increase retail prices in order to protect margins. However, price hikes could also affect consumption levels, particularly in price-sensitive segments, potentially impacting volumes in the medium term.
India’s Tobacco Tax Levels Still Below Global Benchmark
Despite the latest increase, total taxes on cigarettes in India are estimated to account for around 53% of the retail price. This includes the 28% GST and additional value-based levies linked to cigarette length. The figure remains significantly lower than the World Health Organization’s recommended benchmark of 75%, which is intended to discourage tobacco consumption through higher taxation.
The government’s latest move signals a gradual tightening of the tax regime on tobacco products, balancing revenue considerations with public health objectives, while keeping the sector firmly in focus for investors and policymakers alike.
