Up in smoke: India levies brutal new taxes on tobacco products

NEW DELHI: India’s 100 million cigarette smokers are about to get a painful reminder that their habit is taxing—literally. From 1 February, the government has slapped on a punishing new excise duty that will make lighting up considerably more expensive, replacing the old compensation cess with a regime that’s anything but compensating.

The finance ministry’s late-night notification on Wednesday laid out the damage: excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on cigarette length. That’s on top of a whopping 40 per cent GST. Call it a two-pronged attack on the nation’s tobacco consumers.

The market reaction was swift and brutal. ITC, the maker of Gold Flake and Classic cigarettes and the country’s market leader, saw its shares drop 2 per cent. Godfrey Phillips India—Marlboro’s local distributor—fared worse, tumbling 4.1 per cent. At one point during trading, both stocks were down as much as 8 per cent. ITC led the Nifty 50’s losers and dragged down the FMCG index, which slid 0.6 per cent.

The new regime draws a curious distinction: whilst cigarettes, pan masala and tobacco products face the full 40 per cent GST assault, bidis (rolled tobacco leaves, the poor man’s smoke) get off relatively lightly at 18 per cent. Social engineering or political calculation? You decide.

The changes represent more than just a tax shuffle. Parliament approved two bills in December creating a health and national security cess on pan masala manufacturing and additional excise duties on tobacco. The finance ministry’s Wednesday notification made 1 February the D-day for implementation, simultaneously killing off the GST compensation cess that has lingered like stale smoke.

That compensation cess has quite the backstory. Born with the GST regime in 2017, it promised states a 14 per cent annual revenue bump for five years. When covid-19 hammered collections in 2020-21, the government took out back-to-back loans to plug the gap, extending the cess until March 2026 to service the debt.

But the 56th GST Council, meeting on 3 September, decided to snuff out the cess early—at least for most products. The council limited its scope to tobacco items only, until the pandemic loans were fully repaid. With Wednesday’s notification, that limited exemption has now expired, replaced by the new excise and cess regime.
The finance ministry also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026—a mouthful of bureaucracy to match the mouthful of carcinogens these products represent.

For India’s tobacco industry and its vast consumer base, the message is clear as cigarette smoke in a closed room: this habit will cost you. The government has decided that if it can’t stamp out smoking entirely, it might as well profit handsomely from those who persist. One suspects the only thing going up faster than the taxes will be the black market.