ABP Live Deep Dive: India’s tobacco taxation framework is set for a major reset from February 1, 2026, with the Centre formally notifying a new excise-based levy structure for cigarettes, pan masala and other tobacco products.
The overhaul replaces the existing GST compensation cess with a fresh excise duty and cess under the central excise framework, marking one of the most significant changes to tobacco taxation in recent years.
While the government has framed the move as a restructuring rather than an outright tax hike, early calculations suggest that the new regime will push up the overall tax burden sharply across categories, with longer cigarettes facing the steepest increase in absolute terms.
What exactly has changed in tobacco taxation
Under the new notification, the Centre has done away with the GST compensation cess that was earlier levied on tobacco products. In its place, a new excise duty and cess will be imposed under the excise law, effective February 1, 2026.
The government clarified that while the compensation cess will no longer apply, all other statutory duties will continue unless specifically amended. Importantly, the National Calamity Contingent Duty (NCCD), a key component of tobacco taxation, remains untouched and will continue at existing rates.
This means the overall tax structure is being reconfigured, not simplified.
The earlier tax structure: A layered levy
Until now, cigarettes and other tobacco products were taxed under a multi-layered regime combining GST and several additional levies.
Cigarettes attracted a GST rate of 28 per cent, along with a GST compensation cess that had two components. A specific cess ranged between Rs 2,076 and Rs 4,170 per 1,000 sticks, while an ad valorem cess, charged as a percentage of value, varied between 5 per cent and 36 per cent, depending largely on cigarette length and retail price.
In addition, NCCD ranging from Rs 510 to Rs 850 per 1,000 sticks was levied. Put together, this translated into an effective tax incidence of roughly 50 per cent to 60 per cent of the maximum retail price (MRP).
Longer cigarettes typically bore a higher absolute tax burden but also enjoyed better pricing power, allowing manufacturers to absorb or pass on increases more easily. The government had signalled its intent to raise cigarette taxation as early as September 2025.
What the new tax framework looks like
From February 2026, cigarettes will face a three-part levy: GST at 40 per cent, a new excise duty ranging from Rs 2,150 to Rs 8,500 per 1,000 sticks, and NCCD continuing at existing rates.
Although the Centre has described this as a replacement of the compensation cess, the upper end of the new excise duty exceeds the earlier combined cess burden, particularly for longer cigarette categories.
Why cigarette length matters even more now
Cigarette length has always been a crucial determinant of taxation in India, and the new structure sharpens this distinction further.
Longer cigarettes, which were already subject to higher ad valorem cess earlier, will now attract significantly higher absolute excise duties per 1,000 sticks. Shorter cigarettes, while taxed less in absolute terms, will see a sharper proportional increase because the higher 40 per cent GST applies uniformly across categories.
In effect, the pressure tightens across the board, but longer cigarettes are likely to face the steepest increase in rupee terms.
Old versus new: What the numbers indicate
Based on the notified ranges, estimates suggest a substantial rise in the overall tax incidence:
- GST rate increases from 28 per cent to 40 per cent
- Fixed levy per 1,000 sticks rises from roughly Rs 2,586-Rs 5,020 (including cess and NCCD) to around Rs 2,660-Rs 9,350
- Tax as a percentage of MRP could climb from about 50-60 per cent to nearly 65-80 per cent
- The tax burden per stick may increase by approximately 20-40 per cent
These figures will vary depending on cigarette length, pricing band and how companies choose to restructure prices.
How much more consumers may pay
Initial assessments indicate that the tax per stick could rise by 20-40 per cent. To pass on this increase fully, manufacturers may need to raise retail prices by around 18-35 per cent.
A brokerage assessment cited by CNBC TV18 said that ITC alone may need to increase prices by at least 15 per cent, if not more, to absorb the higher tax burden.
To illustrate, a cigarette pack priced at Rs 100 containing 10 regular-size sticks (68-70 mm) could see an estimated price increase of Rs 15-Rs 25 per pack under the new structure. This would take the revised MRP to roughly Rs 115-Rs 125, translating into a per-stick increase of about Rs 1.5-Rs 2.5 at a minimum.
The final impact will depend on how much of the tax hike companies choose to pass on to consumers.
What this means for volumes and companies
Brokerages have cautioned that even shorter cigarettes may require a minimum 15 per cent price hike, with steeper increases for longer sticks. If companies choose not to raise prices adequately, earnings before interest and taxes could fall by more than 40 per cent.
On the other hand, sharp price hikes risk pressuring volumes, particularly in the mass and price-sensitive segments of the market. The coming months are likely to see companies recalibrating pack sizes, pricing strategies and product mixes as they prepare for the new regime.
