ITC, Godfrey Phillips slide as Centre imposes excise duty on cigarettes from Feb 1

Mumbai | January 1

The Centre has reintroduced excise duty on cigarettes under the Central Excise (Amendment) framework approved in December. The move replaces the earlier temporary levy mechanism and the GST compensation cess currently applicable on tobacco products.

The excise duty will come into effect from February 1, 2026, and will be levied over and above GST. The duty structure is linked to cigarette length, as specified in the notification.

GST rates and tax structure post-notification

According to the notification, from February 1:

• Cigarettes, pan masala, and other tobacco products will attract a total GST of 40%, while Biris will attract 18% GST
• Excise duty will apply in addition to GST, with rates linked to cigarette length, as specified in the notification
• The excise duty has been fixed in a range of ₹2,050 to ₹8,500 per 1,000 sticks, depending on the length of the cigarette. Shorter cigarettes attract lower duties, while longer variants face the highest levy.

Currently, cigarettes in India attract a 28% GST along with an additional compensation cess, taking the effective GST burden to around 40%.

With the reintroduction of excise duty, the total tax component on cigarettes now stands at about 53% of the retail price.

This remains lower than the World Health Organization’s recommended benchmark of 75%, which is aimed at discouraging tobacco consumption through higher taxation.

Tobacco stocks slide

Shares of cigarette manufacturers declined sharply, ITC was down over 4%, while Godfrey Phillips India tumbled over 8%. Other tobacco-linked stocks like VST industries also traded lower due to margin concerns.

What investors will track next

Investors will track company announcements on price revisions and early demand trends once the levy comes into force in February.

PL Capital View

As per the excise notification, the increase in duty is significantly higher for regular size filter tipped cigarettes (RSFT) and longer formats, while the hike is relatively lower for smaller-length cigarettes.

PL Capital expects meaningful near-term impact on sales volumes and profitability for ITC as these categories account for nearly 55% of total cigarette volumes, making them more sensitive to price hikes.

Given the scale of the duty increase in these segments, near-term demand moderation cannot be ruled out, even as companies evaluate calibrated price actions.

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