Tax Hike on Cigarettes - Business Outrank

Analysts have expressed fears that an immense increase in cigarette taxation may drive India into greater heights of contraband trade. They caution that the action can decrease government revenue instead of increasing it. We witness the increasing anxiety of the policy monitors since the new taxing system came into force on February 1. The finance ministry not only changed the Central Excise Act earlier this week, but also added a new duty on cigarettes called the excise duty. It is between 2,050 and 8500 per 1,000 sticks, depending on the length of the cigarette. This excise will be imposed over the percentage of the Goods and Services tax, which is already at 40 of the value. The overall effect is an increase in tax up to almost 60-70 percent, depending on the size of cigarettes. Currently, we have a total tax burden of 50 to 55 percent closer. Analysts term the transformation as sudden and out of the ordinary steep particularly when replacing GST compensation cess with excise on demerit goods. See Change Forum secretary general Ranganath Tannir opined that high taxation on products whose inelastic demand tends to spur illegal trade. He observed that cigarettes are already the cheapest in the world as per World Health Organization standards. The additional price of the product can be shifted to the smugglers rather than to consumption. The similar risks were echoed in a report by JP Morgan Asia Pacific Equity Research. It indicated that how the taxes on king-size philtre tip cigarettes increase may force consumers to the cheap ones. This change can also increase the number of illicit cigarette users, particularly the price-sensitive groups. Illegal tobacco is already a big menace to India. The country has close to 26 percent of the total tobacco market, consisting of illicit products, thus ranked as the fourth largest in the world as far as the smuggled tobacco market is concerned. Analysts bemoan that increasing the difference between the legal and illegal cigarettes may aggravate this imbalance. Nomura made another research observation claiming that high taxes on cigarettes tend to backfire. Although they are intended to reduce consumption, they may stimulate the rise of non-duty-paid cigarettes and turn people to unregulated and cheaper substitutes, undermining formal tax revenues. Such a request to the Tobacco Institute of India to have them reviewed was cited by the brokerage firm Jefferies. The industry entity also warned that legal price discrepancies will continue to multiply, increasing the survival of the illegal operators at the expense of tax leaks. Experts also cited an example of Australia, which went through tax increases several times, and this gave the illicit trade a huge boost. One of the analysts pointed out that the new excise taxes are unprecedented in scale. There is still time to rethink them since they come into effect as of February 1, 2026. A calculated review is, in our view, the way to stop the rise of organised smuggling networks and safeguard long-term revenue interests.

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