Cigarettes Likely To Get Costlier As New Taxes Kick In From February 1

India’s cigarette industry is bracing for a challenging year ahead as higher taxes are set to come into force from February 1, 2026. According to CRISIL Ratings, the new tax structure could lead to a drop in cigarette sales volumes by 6–8 per cent in the next financial year. While prices are expected to rise across segments, the overall financial health of the industry is likely to remain stable.

What Has Changed In Cigarette Taxation

Under the new framework, the government will remove the compensation cess currently levied on cigarettes. In its place, an additional excise duty will be introduced. This duty will range from ₹2.05 to ₹8.5 per cigarette stick, depending on the length of the cigarette.

At the same time, the GST rate on cigarettes will increase to 40 per cent. Together, these changes will raise the final retail price of cigarettes, making them more expensive for consumers across categories.

Impact On Different Cigarette Segments

The impact of the tax hike will vary by segment. Cigarettes longer than 65 mm, which largely fall into the mid and premium categories, will attract higher excise duties ranging from ₹3.6 to ₹8.5 per stick. These products are expected to see sharper price increases.

On the other hand, mass-market cigarettes, typically shorter than 65 mm, will face a lower duty of around ₹2.05 to ₹2.1 per stick. This segment accounts for about 40–45 per cent of total industry volumes and caters to price-sensitive consumers.

Why Premium Cigarettes May See Steeper Price Hikes

Mid and premium cigarettes are likely to witness larger price increases because the duty hike in this segment works out to nearly 25 per cent of the current maximum retail price. Companies are expected to pass on most of this cost to consumers, as demand in this segment is relatively less sensitive to price changes.

In contrast, manufacturers may absorb part of the tax burden in the mass segment, where the tax increase is closer to 15 per cent of the current MRP. This approach could help limit the fall in volumes among price-conscious buyers.

Industry Financials Expected To Stay Resilient

Despite the expected decline in sales volumes, CRISIL believes the industry’s financial position will remain strong. Operating margins may fall by 200–300 basis points but are still expected to stay above 58 per cent next year.

Leading cigarette companies continue to maintain strong cash reserves, low debt levels, and healthy liquidity. The organised cigarette industry, which accounts for about 10 per cent of total tobacco consumption in India, currently holds cash surpluses exceeding ₹20,000 crore.

Read more: India–EU Free Trade Agreement: Cars, Chocolates and Medical Goods Will Get Cheaper?

Conclusion

Higher taxes are likely to make cigarettes more expensive and reduce consumption in the coming year. However, strong balance sheets and pricing strategies are expected to help the industry absorb the impact without major financial stress.

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