Cigarette Prices Likely to Rise Slightly Under New Excise Bill, Analysts Predict Muted Impact

Cigarette Prices May Edge Higher Under New Excise Bill, but Analysts Expect Only Mild Impact on Tobacco Majors

A fresh wave of attention has turned toward India’s listed tobacco companies after the Centre proposed a sweeping overhaul of taxes on cigarettes and other tobacco products. The new excise bill, designed to replace the existing GST compensation cess, is expected to lift cigarette prices slightly. However, analysts believe the impact on legal manufacturers such as ITC, Godfrey Phillips, and VST Industries will be muted and manageable, with most companies likely to pass on higher taxes through incremental price hikes.

The proposal, which introduces a new health cess and national security cess, marks a structural shift in tobacco taxation as India transitions into a post-compensation era. While the overall tax burden is set to increase, the measured nature of the revision has led market experts to view the impact as evolutionary rather than disruptive.

Government Targets Post-GST Cess Alignment Through Higher Excise Duty

The introduction of the new excise bill is largely aimed at offsetting revenue loss expected once the GST compensation cess expires. For several years, the cess helped states manage compensation claims arising from GST implementation. With repayments now nearing completion, a revised tobacco tax structure has become necessary.

According to Vincent K A, Senior Research Analyst at Geojit Financial Services, the government’s intention is to create a revenue-neutral and simplified regime as India enters the post-cess landscape. “The idea is to align the tax system while ensuring that the shift does not create abrupt revenue disruption,” he said.

Currently, cigarettes attract:

• 40% GST,

• 5% ad-valorem compensation cess, and

• specific cess of ₹2,076–₹3,668 per 1,000 sticks, depending on length.

The compensation cess will be replaced by the new cesses, alongside a revised excise duty structure.

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Steeper Value-Based Duty Expected, but Overall Burden Still Absorbable

The proposed duty structure dramatically revises the slabs. The earlier excise range of ₹200–₹735 per 1,000 sticks will be replaced by a value-based levy between ₹2,700 and ₹11,000, varying by stick size and specification. This effectively increases the central tax component and narrows the differential between categories.

Beyond cigarettes, several other tobacco products also face steep hikes:

• Chewing tobacco: excise raised from 25% to 100%

• Hookah and gudaku tobacco: increased from 25% to 40%

• Smoking mixtures (for pipes/cigarettes): raised from 60% to 325%

These adjustments align with the broader roadmap for GST 2.0, a restructuring sequence in which tobacco was intentionally kept out until COVID-era compensation loans were repaid. With the transition nearly complete, the Finance Ministry has now been authorized to push forward with the new rates.

Tobacco Companies Expected to Offset Higher Duties Through Strategic Price Hikes

Most listed tobacco players are expected to offset the tax impact through calibrated price increases. Premium variants and king-size formats—where customer price sensitivity is lower—are likely to lead the adjustments.

According to Harshal Dasani, Business Head at INVasset PMS, the expected price hikes may range from high single digits to low double digits, depending on product category and margin flexibility. He added that companies will likely stagger price adjustments to avoid volume shock while preserving profitability.

Analysts remain confident that the impact will be operational, not structural. With clear policy direction now emerging, tobacco majors can engage in long-term pricing and supply-chain planning—something that has been difficult during years of frequent cess adjustments.

ITC, VST Industries, and Godfrey Phillips Face Varying Levels of Exposure

Among the listed players, vulnerability to the tax hike differs notably.

• VST Industries appears the most exposed due to its high dependency on cigarettes, which contribute nearly 80% of its profits.

• ITC, despite being the largest cigarette manufacturer, is relatively insulated thanks to its diversified FMCG, hotels, agribusiness, and paperboards portfolio.

• Godfrey Phillips benefits from strong premium cigarette traction, export momentum, and a broader chewable tobacco portfolio.

So far in 2025, stock performance across the tobacco sector has been uneven:

• Godfrey Phillips: up 67%, driven by strong demand for premium formats and capsules

• ITC: down 16%, after broader FMCG re-rating pressures

• VST Industries: down 25%, amid concerns regarding volume sensitivity and higher exposure to tax hikes

Analysts expect short-term volatility to continue, but the clearer tax roadmap may support improved sentiment as companies absorb the changes.

Muted Market Impact Expected as Industry Gains Clarity on Tax Regime

While cigarette prices may inch higher, experts emphasise that the new excise framework does not fundamentally alter the industry’s operating environment. Legal cigarette makers have historically passed on tax hikes without significant erosion in margins. The latest revisions, though sizeable on paper, are expected to be manageable through a combination of MRP increases, product mix adjustments, and operating discipline.

For investors, the biggest takeaway is the policy stability the new bill introduces. By defining a tax regime for the post-cess era, the government has reduced uncertainty—an important factor for long-term investment decisions in the tobacco sector.

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