Shares of leading tobacco companies rallied on Thursday after the government approved a new Goods and Services Tax (GST) structure that imposes a flat 40 percent rate on cigarettes, paan masala, gutka, and other tobacco-based products.
Finance Minister Nirmala Sitharaman, speaking at the 56th GST Council meeting on September 3, said, “The special rate of 40 percent has been approved and will exclusively apply to paan masala, cigarettes, gutka, chewing tobacco, zarda, unmanufactured tobacco, and beedis.”
The announcement initially raised concerns over higher taxation. However, analysts believe the change could turn out to be neutral or even favorable for tobacco companies. Currently, these products attract 28 percent GST plus a cess, with the total tax burden adding up to nearly 50–55 percent of the maximum retail price (MRP).
By 10 a.m., shares of ITC, VST Industries, and Godfrey Phillips India were up between 1 and 4 percent on the NSE.
Why the Market is Cheering
According to Jefferies, the move effectively eliminates the need for a compensation cess, though there is still uncertainty around the continuation of the National Calamity Contingent Duty (NCCD). If no new levies are imposed, the effective tax rate could actually drop by around 5 percent on cigarettes. This reduction would allow companies to cut prices, making legal products more competitive against illicit tobacco and potentially boosting sales volumes.
Emkay Global echoed similar sentiments, noting that stable taxation in recent years has slowed the growth of the illegal market while benefiting government revenue. The brokerage expects that the government may continue relying on NCCD to balance overall tax incidence, but does not anticipate aggressive new levies in the near term.
ITC Under Pressure Despite Policy Relief
Despite Thursday’s rally, ITC shares have struggled over the past year, sliding 16 percent amid fears of steeper taxation and intensifying competition. Godfrey Phillips India, in particular, has captured nearly 300 basis points of market share from ITC. Rising input costs, especially tobacco leaf inflation, have also weighed on ITC’s operating margins.
Analysts suggest that if the revised GST rate stabilizes and no fresh duties are imposed, tobacco companies could benefit from improved pricing flexibility, a stronger position against illicit products, and steady demand recovery.
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