'Shocked and surprised': Cigarette tax hike shocks industry; Tobacco Institute warns of illicit surge, urges review

The Tobacco Institute of India (TII) has expressed strong concern over the sharp increase in excise duty on cigarettes announced on December 31, 2025, saying the move contradicts repeated government assurances that the transition to the new tax structure would be revenue-neutral.

In a statement issued on Thursday, TII said it was “shocked and surprised” by what it described as an unprecedented hike, warning that the increase could cause widespread disruption across the tobacco value chain. The industry body said the move would impose severe hardship on millions of farmers, MSMEs, retailers and local supply networks, while simultaneously strengthening the illicit cigarette market.

TII pointed out that India already has a significant illicit tobacco problem, with estimates suggesting that one illicit or smuggled cigarette is sold for every three legal cigarettes in the country. According to the institute, a steep rise in legal prices would further tilt demand towards illegal products, depriving the exchequer of revenue and encouraging organised criminal activity.

Citing a global study covering 71 countries over 17 years (2005–2022), TII noted that once illicit trade becomes entrenched, it is extremely difficult to reverse. The study also highlighted that governments cannot rely solely on enforcement measures to curb illegal trade without addressing the role of taxation and affordability.

The institute stressed that cigarettes are already among the most heavily taxed consumer products in India. While legal cigarettes account for only about 10% of total tobacco consumption, they contribute nearly 80% of tobacco tax revenues, underscoring the disproportionate burden borne by the regulated segment. TII added that, as a share of per capita GDP, cigarette taxes in India rank among the highest globally, according to World Health Organization data.

Drawing parallels with international experience, TII cited Australia, where aggressive tax hikes and strict regulation have reportedly led to an “exploding black market” and rising criminalisation of tobacco trade. Lawmakers there, the institute said, are now debating tax rollbacks to push consumers back into the legal market.

TII has urged the government to review the tax calculations underlying the increase and reconsider the scale of the hike. It warned that the current move could deliver a “crippling blow” to legitimate Indian industry while fueling illicit trade, with long-term consequences for revenue, livelihoods and enforcement.

What the new tax structure say

Cigarettes are likely to become more expensive from next month after the government notified February 1, 2026, as the date from which the revised central excise duty structure will come into force. A new Health and National Security Cess on pan masala will also be implemented from the same date. These changes are part of the ongoing GST rate rationalisation exercise and will replace the compensation cess currently levied on select sin and luxury goods.

Under the new framework, cigarettes, pan masala, tobacco and allied products will attract 40% GST, while bidis will be taxed at 18%, according to the notification. Officials said the overall tax incidence on tobacco products and pan masala remains broadly unchanged. The revised structure will combine 40% GST, a new central excise duty, and the existing National Calamity Contingent Duty (NCCD), bringing cigarette taxation in line with other tobacco products.

Despite this, industry estimates suggest cigarette prices could rise by 20–30%, though experts caution that the final impact will depend on retail pricing strategies and product categories. Excise duty will now vary based on cigarette length and whether they are filtered, ranging from ₹2,050 per 1,000 sticks for short unfiltered cigarettes to as high as ₹8,500 per 1,000 sticks for longer filtered variants.

Since GST was introduced in 2017, the basic excise duty on cigarettes had remained largely static, making it ineffective as a deterrent. According to World Bank estimates, India’s cigarette tax incidence is about 53% of retail price, well below the WHO-recommended 75%.