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Informist, Thursday, Jan. 1, 2026

 

By Avishek Rakshit

 

KOLKATA – The government's move to impose an additional excise duty on cigarettes has put the tobacco industry in a dilemma about whether to increase prices to stave off the impact of the additional taxes or maintain current prices to ensure stable sales volume. While cigarette companies are still studying the government order, industry trends strongly indicate that cigarette prices may go up at least 15% on average, depending on length of stick.

 

The finance ministry said in a notification late Wednesday that the government will impose excise duty in the range of INR 2,050-8,500 per thousand sticks based on the length of the cigarette, effective from Feb. 1. This is in addition to the government hiking the goods and services tax rate on cigarettes to 40% from Feb. 1 from the previous 28%. At the same time, the ministry also notified that GST compensation cess levy on tobacco and related products would be discontinued from Feb. 1.

 

While companies are calculating the net tax impact under the new tax regime, around 100 million consumers in the country are already shelling out more money for cigarette purchases, with effective retail prices going up across brands and cities. 

 

EFFECTIVE RETAIL PRICES 

 

Major cigarette distributors have already started charging more money for cigarette sales to retailers even before the new tax structure comes into effect. 

 

"A 20-pack carton of 74 millimetre Wills Navy Cut, which used to get billed at INR 1,940, is now getting billed at INR 2,060 by the distributors," Ananda Roy, who owns a cigarette shop in Kolkata told Informist. A similar carton of the Classic cigarette brand is now sold to retailers at a 12% premium from the regular prices, Roy added. 

 

However, an ITC official, while speaking to Informist, pointed out that charging consumers more than the printed price on the packs is illegal. 

 

Cigarette retailers across Kolkata and Bengaluru said procurement costs have gone up 5-10?pending on the size of the cigarette. The King size, or 84 mm cigarette, saw the highest increase, of around 10%, in retail prices, while lower -length cigarettes saw a 5-8% increase, depending on the brand and city where they are sold. 

 

"The cigarettes trade is entirely based on a cash-and-carry model. Payment needs to be made upfront and in case we decline to pay higher than usual procurement costs, the shipment is declined by the distributor," Dwarakanath D., a cigarette retailer in Bengaluru, said. "Since my costs have risen, I have no other option other than passing it on to consumers."

 

Retailers usually earn a margin of 15-25% on cigarette sales to consumers and distributors earn a 10-20% margin on sales to retailers.

 

Shambhu Pal, a proprietor of Kal Bhairav Traders, a cigarette distributor in south Kolkata dealing in ITC Ltd.'s cigarette brands, said there is a scarcity of cigarettes which is pushing up retail prices higher than the ones printed on the packs.

 

"There are some supply constraints and the reasons are not known. Particularly, brands like Gold Flake, Navy Cut, and Flake are short in supply. Some variants of the Classic brand are also out of stock with the main stockist," Pal said.

 

Other distributors in the city pointed out that the supply shortage may be on account of the cigarette packaging getting delayed. 

 

"Usually, it happens that when taxes go up, new prices have to be printed on the packs and that is when the supply shortage kicks in. Companies need time to ready the new packs with the updated prices and thus there is some shortage in supplies," one of the distributors in Kolkata said. 

 

Distributors said that more clarity on cigarette prices will emerge once the new packs start entering the stores from February, but at least a 15% hike is expected in retail prices. 

 

MINI KINGS TO BEAR THE BRUNT?

 

Historically, cigarette companies have hiked prices of the King sized cigarettes with more than 69 mm stick length, or the Mini Kings size, as the latter is extremely price sensitive. In the last round of price hikes in 2021, ITC reduced the size of the Flake brand of popular cigarettes to 64 mm just to bypass the impact of higher taxes and keep prices stable. However, it increased prices of the Kings portfolio significantly.  

 

The government imposes taxes on cigarettes based on their length and the tax progressively goes up as the length increases. 

 

"The demand elasticity is much less in the Kings category as compared to the regular variants. A price hike of just a rupee per stick is enough for consumers to change their preference and shift over to other brands," an industry official said. 

 

Given the structure of the new excise duty, Pal fears that cigarette companies may not be able to avoid the tax impact on budget consumers entirely and may end up increasing prices.

 

"The regular cigarettes drive volumes higher than the King size in certain parts of the country and if prices of regular cigarettes increase, then consumers are definitely going to look elsewhere for their dose of nicotine," an industry official said. 

 

Although a tax of INR 2,700 per 1,000 sticks translates to INR 2.7 per stick on paper and an INR 8,500 levy implies an increase of INR 8.5 per stick, the final calculation of the actual price hike is quite complex.

 

Industry officials said companies will have the choice to revisit the tobacco cuts and blends, and work around with filter and paper to reduce the cost, and also increase prices of some variants more than others to minimise the impact on sales volumes and revenue.

 

TAX IMPACT OR HIGHER COSTS?

 

Sector analysts pointed out that tobacco costs have been volatile for some time now and cigarette companies have been absorbing the impact of extra procurement costs, which has been impacting their margins. 

 

"Cigarette companies have not increased prices for five years now to stabilise sales volume. But at the same time, leaf tobacco prices have been volatile and companies have been absorbing the impact of higher costs," a sector analyst with a domestic brokerage which tracks ITC said. "But there is a limit for companies to absorb the volatility."

 

The analyst said given the higher taxes from Feb. 1 onwards, companies will be left with two choices. 

 

First, cigarette companies can absorb the impact of taxes to maintain the sales volume growth momentum. As cigarette prices have stabilised over the last few years, ITC, which has over 70% market share in the domestic cigarette market, has been reporting a 4-6% quarterly volume growth for the past several quarters. Godfrey Phillips India Ltd., the second-largest cigarette company in the country, also reported a 4% volume growth in the December quarter and 4.5% volume growth in the September quarter.

 

Second, companies can increase prices at the cost of sacrificing some volume growth, the analyst said. However, if the price increase outpaces the tax impact, cigarette companies may be able to hold on to partial revenue growth in the coming quarters, the analyst said. 

 

"It is a well-known fact that sales volume will fall if prices go up. What needs to be seen is which route the companies opt for," the analyst said. 

 

STOCKS TAKE A HIT

 

Meanwhile, stocks of ITC and Godfrey Phillips tumbled in the opening minutes of trade after the government's tax notification.

 

In early trade, shares of ITC were down nearly 5%, the worst hit among Nifty 50 constituents. Its peer, Godfrey Phillips India, was down 9%. At 1403 IST, shares of ITC were down 8.80% at INR 367.00 and those of Godfrey Philips traded 15.24% down at INR 2,335, on the National Stock Exchange. The stocks fell further, with shares of ITC closing 9.7% lower at INR 363.85 and those of Godfrey Philips ending 17% lower at INR 2,290 on Thursday.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Tanima Banerjee

 

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