Financial experts and industry analysts have raised a red flag, warning that a significant and unexpected increase in taxes on cigarettes could backfire by boosting the illegal tobacco market and leading to substantial losses in government revenue.
Details of the New Excise Duty Structure
The Ministry of Finance recently notified amendments to the Central Excise Act, introducing a fresh excise duty on cigarettes. The new levy, which will be effective from February 1, 2026, ranges from Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on their length. This duty will be imposed in addition to the existing 40% Goods and Services Tax (GST).
This policy shift marks a transition from the GST compensation cess to an excise-based system for demerit goods like tobacco. The change implies an overall tax increase of approximately 60–70%, varying by cigarette length. This is a jump from the current overall tax incidence of about 50–55%.
Risks of Increased Smuggling and Illicit Trade
The steep and sudden nature of the hike has sparked concerns about its unintended consequences. Ranganath Tannir, Secretary General of the Think Change Forum, stated that excessive taxation of inelastic goods like cigarettes often fuels illicit trade rather than improving compliance. He noted that Indian cigarettes are already among the least affordable globally, according to WHO indicators. Making them more expensive may not curb demand but could push consumers toward illegal, smuggled alternatives, ultimately undermining tax collections.
This concern is echoed by major brokerages. JPMorgan's Asia Pacific Equity Research warned that higher taxes in the King Size Filter Tip segment risk consumers switching to cheaper options or illicit cigarettes. Nomura highlighted in a research note that high taxes often push consumers towards cheaper, non-tax-paid smuggled cigarettes, inadvertently growing the illegal market.
Currently, illicit tobacco accounts for roughly 26% of India's total tobacco market, making the country the fourth-largest market globally for smuggled tobacco.
Calls for Review and International Precedents
The Tobacco Institute of India (TII) has urged the government to review the proposed excise structure, a point cited by Jefferies. A report warned that a widening price gap between legal and illegal cigarettes could benefit non-duty-paid products and result in higher tax leakage.
Experts point to international examples to underline the risk. In Australia, repeated tobacco tax hikes between 2012 and 2020 led to a sharp rise in prices. This was followed by a jump in illicit tobacco consumption from under 2% to around 14% of the market.
An analyst, calling the proposed levies "unprecedented," noted that since they take effect in 2026, the government has an opportunity to reassess the decision. The warning is clear: rectifying the policy now could prevent the spawning of much larger, uncontrollable illicit networks in the future.
