New tobacco excise hike draws farmer ire as FAIFA warns of demand hit, smuggling
The farmers' body said the new excise rates — ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks depending on cigarette length, effective February 1 — undermine the government’s stated commitment to a revenue-neutral transition from the Compensation Cess regime.
- Jan 2, 2026,
- Updated Jan 2, 2026 1:08 PM IST
A sharp increase in excise duty on tobacco products notified after the Central Excise (Amendment) Bill, 2025, has triggered strong opposition from farmer groups, who warn of falling demand, rising illicit trade and fresh stress on already struggling growers. The Federation of All India Farmer Associations (FAIFA) said the new excise rates — ranging from ₹2,050 to ₹8,500 per 1,000 sticks depending on cigarette length, effective February 1 — undermine the government’s stated commitment to a revenue-neutral transition from the Compensation Cess regime.
The Centre has increased the overall tax burden on cigarettes by about 40%, triggering a sharp sell-off in tobacco stocks. ITC slid nearly 10%, its steepest single-day decline in almost six years, while Godfrey Phillips India plunged 17%.
Under the revised tax structure notified late Wednesday, cigarettes will, from February 1, attract the peak 40% goods and services tax (GST), a newly imposed central excise duty, in addition to the existing National Calamity Contingent Duty (NCCD). The NCCD, a surcharge levied on select goods such as tobacco, is charged either on an ad valorem basis or at specific rates and remains a key component of the total tax incidence on cigarettes.
FAIFA said higher taxes will inevitably force manufacturers to raise prices, leading to a drop in legal sales and a knock-on impact on farm demand. “This will likely create a glut in the tobacco crop market in the near term, directly hurting farmers,” the organisation said in a statement.
The farmers’ body flagged what it called “deep fiscal discrimination” against flue-cured Virginia (FCV) tobacco growers, mainly in Andhra Pradesh and Karnataka. According to FAIFA, cigarettes made from FCV tobacco face a per-kilogram tax burden more than 50 times higher than bidis and over 30 times higher than chewing tobacco. On a per-dose basis, FCV tobacco attracts over ₹6 in tax, compared with less than one paisa for other forms.
“This extreme disparity punishes the most regulated and compliant farmers,” FAIFA said, adding that the latest hike further widens the gap and risks distorting the entire tobacco economy.
FAIFA president Murali Babu said the farming community had relied on the government’s assurance, given during the GST 2.0 announcement in September 2025, that tobacco would be taxed at 40% of retail price while keeping the overall tax incidence unchanged. “That promise of revenue neutrality has not been kept, and farmers are paying the price,” he said.
The association warned that higher prices would accelerate a shift towards smuggled and illegal products. Citing industry and market estimates, FAIFA said illicit cigarettes already account for about 26% of total consumption, making India the world’s fourth-largest illicit cigarette market.
The sector has faced prolonged stress, with auctioned FCV volumes falling from 315.95 million kg in 2013–14 to 304.21 million kg in 2023–24, while cultivation area shrank sharply over the past decade. At the same time, input costs have climbed, with fertiliser prices rising and labour wages increasing around 7% year-on-year.
FAIFA urged the government to roll back the notified excise rates and reissue revenue-neutral duties, warning that an abrupt tax shock would destabilise farmers, workers and small retailers, while fuelling smuggling and eroding tax revenues.
New tobacco tax regime
At present, the overall duty burden comprises four components: a basic excise duty of Rs 5–10 per 1,000 sticks; a National Calamity Contingent Duty (NCCD) of Rs 230–850 per 1,000 sticks; goods and services tax (GST) at 28%; and a compensation cess.
The compensation cess itself has two elements — an ad valorem levy of 5–36% and a specific levy of Rs 2,076–4,170 per 1,000 sticks. In general, cigarettes with filters and longer lengths attract higher duties, while cigars, cheroots and cigarillos are taxed at the highest rates.
From February 1, the compensation cess will be withdrawn. However, this removal is more than offset by a sharp increase in other levies, including a higher GST rate of 40% and a newly notified excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks. The NCCD will continue unchanged.
Finance Ministry sources said cigarette affordability has either remained flat or improved over the past decade, indicating that cigarettes have not become more expensive relative to consumers’ purchasing power — a trend at odds with global public health recommendations.
The government has maintained that the revised structure aims to bring India’s tobacco taxation closer to World Health Organization (WHO) guidelines, which call for taxes to adequately reflect the health and social costs of smoking.
The Tobacco Institute of India (TII) said it was “shocked and surprised” by what it described as an “unprecedented increase” in duties. It pointed out that the government had repeatedly assured stakeholders that the transition following the removal of the GST compensation cess would be revenue neutral.
A sharp increase in excise duty on tobacco products notified after the Central Excise (Amendment) Bill, 2025, has triggered strong opposition from farmer groups, who warn of falling demand, rising illicit trade and fresh stress on already struggling growers. The Federation of All India Farmer Associations (FAIFA) said the new excise rates — ranging from ₹2,050 to ₹8,500 per 1,000 sticks depending on cigarette length, effective February 1 — undermine the government’s stated commitment to a revenue-neutral transition from the Compensation Cess regime.
The Centre has increased the overall tax burden on cigarettes by about 40%, triggering a sharp sell-off in tobacco stocks. ITC slid nearly 10%, its steepest single-day decline in almost six years, while Godfrey Phillips India plunged 17%.
Under the revised tax structure notified late Wednesday, cigarettes will, from February 1, attract the peak 40% goods and services tax (GST), a newly imposed central excise duty, in addition to the existing National Calamity Contingent Duty (NCCD). The NCCD, a surcharge levied on select goods such as tobacco, is charged either on an ad valorem basis or at specific rates and remains a key component of the total tax incidence on cigarettes.
FAIFA said higher taxes will inevitably force manufacturers to raise prices, leading to a drop in legal sales and a knock-on impact on farm demand. “This will likely create a glut in the tobacco crop market in the near term, directly hurting farmers,” the organisation said in a statement.
The farmers’ body flagged what it called “deep fiscal discrimination” against flue-cured Virginia (FCV) tobacco growers, mainly in Andhra Pradesh and Karnataka. According to FAIFA, cigarettes made from FCV tobacco face a per-kilogram tax burden more than 50 times higher than bidis and over 30 times higher than chewing tobacco. On a per-dose basis, FCV tobacco attracts over ₹6 in tax, compared with less than one paisa for other forms.
“This extreme disparity punishes the most regulated and compliant farmers,” FAIFA said, adding that the latest hike further widens the gap and risks distorting the entire tobacco economy.
FAIFA president Murali Babu said the farming community had relied on the government’s assurance, given during the GST 2.0 announcement in September 2025, that tobacco would be taxed at 40% of retail price while keeping the overall tax incidence unchanged. “That promise of revenue neutrality has not been kept, and farmers are paying the price,” he said.
The association warned that higher prices would accelerate a shift towards smuggled and illegal products. Citing industry and market estimates, FAIFA said illicit cigarettes already account for about 26% of total consumption, making India the world’s fourth-largest illicit cigarette market.
The sector has faced prolonged stress, with auctioned FCV volumes falling from 315.95 million kg in 2013–14 to 304.21 million kg in 2023–24, while cultivation area shrank sharply over the past decade. At the same time, input costs have climbed, with fertiliser prices rising and labour wages increasing around 7% year-on-year.
FAIFA urged the government to roll back the notified excise rates and reissue revenue-neutral duties, warning that an abrupt tax shock would destabilise farmers, workers and small retailers, while fuelling smuggling and eroding tax revenues.
New tobacco tax regime
At present, the overall duty burden comprises four components: a basic excise duty of Rs 5–10 per 1,000 sticks; a National Calamity Contingent Duty (NCCD) of Rs 230–850 per 1,000 sticks; goods and services tax (GST) at 28%; and a compensation cess.
The compensation cess itself has two elements — an ad valorem levy of 5–36% and a specific levy of Rs 2,076–4,170 per 1,000 sticks. In general, cigarettes with filters and longer lengths attract higher duties, while cigars, cheroots and cigarillos are taxed at the highest rates.
From February 1, the compensation cess will be withdrawn. However, this removal is more than offset by a sharp increase in other levies, including a higher GST rate of 40% and a newly notified excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks. The NCCD will continue unchanged.
Finance Ministry sources said cigarette affordability has either remained flat or improved over the past decade, indicating that cigarettes have not become more expensive relative to consumers’ purchasing power — a trend at odds with global public health recommendations.
The government has maintained that the revised structure aims to bring India’s tobacco taxation closer to World Health Organization (WHO) guidelines, which call for taxes to adequately reflect the health and social costs of smoking.
The Tobacco Institute of India (TII) said it was “shocked and surprised” by what it described as an “unprecedented increase” in duties. It pointed out that the government had repeatedly assured stakeholders that the transition following the removal of the GST compensation cess would be revenue neutral.