“Shocked and surprised”: Cigarette tax hike shocks industry; Tobacco Institute warns of surge in illicit activities, calls for review

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

In a statement on Thursday, TII said it was “shocked and surprised” by what it described as an unprecedented rise, warning that the increase could cause widespread disruption in 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 highlighted that India already has a significant illicit tobacco problem, with estimates suggesting that one illicit or contraband cigarette is sold for every three legal cigarettes in the country. According to the institute, a sharp increase in legal prices would tilt demand more towards illegal products, thereby depriving the public treasury of revenue and encouraging organized criminal activities.

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 it. The study also highlighted that governments cannot rely solely on enforcement measures to combat illegal trade without addressing the role of taxation and affordability.

The institute points out 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 almost 80% of tobacco tax revenue, highlighting the disproportionate burden borne by the regulated segment. TII added that, as a proportion of GDP per capita, India’s cigarette taxes are among the highest in the world, according to World Health Organization data.

Drawing parallels with international experience, TII cited Australia, where aggressive tax hikes and strict regulation reportedly led to an “explosion of the black market” and increasing criminalization of the tobacco trade. Lawmakers there, according to the institute, are currently debating tax cuts to push consumers back into the legal market.

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

What the new tax structure says

Cigarettes are expected to become more expensive from next month after the government notifies February 1, 2026 as the date from which the revised central excise structure will come into effect. A new National Health and Safety Cess on pan masala will also be implemented from the same date. These changes are part of the ongoing exercise to rationalize the GST rate and will replace the compensatory tax currently levied on certain sin and luxury goods.

Under the new framework, cigarettes, pan masala, tobacco and related products will be subject to 40 per cent GST, while bidis will be taxed at 18 per cent, according to the notification. Officials said the overall tax incidence on tobacco products and pan masala remains largely unchanged. The revised structure will combine a 40% GST, a new central excise duty and the existing National Contingent Disaster Duty (NCCD), thereby bringing the taxation of cigarettes in line with that of other tobacco products.

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

Since the introduction of GST in 2017, the basic excise duty on cigarettes has remained largely stable, making it ineffective as a deterrent. According to World Bank estimates, the incidence of taxes on cigarettes in India is around 53% of the retail price, well below the 75% recommended by the WHO.