In a major blow to the tobacco industry, shares of leading cigarette manufacturers witnessed a dramatic fall on Thursday. This sharp sell-off was triggered by the finance ministry's formal notification, dated February 1, imposing an additional excise duty on tobacco products and a new health cess on pan masala.
Market Plunge Following Government Notification
The market reaction was swift and severe. Godfrey Phillips India shares crashed by as much as 16% during the trading session, hitting a low of Rs 2,295 on the BSE. Industry giant ITC was not spared either, tumbling over 8% to trade around Rs 368 in the afternoon. The notification effectively sets fresh excise duty rates for cigarettes, which now range from Rs 2,050 to Rs 8,500 for every 1,000 sticks, with the exact amount determined by the cigarette's length.
New Tax Framework: GST Plus Additional Levies
This new fiscal framework introduces significant changes. The additional duties on tobacco and pan masala will be charged over and above the existing Goods and Services Tax (GST). They will replace the current GST compensation cess applied to so-called 'sin goods.' According to the detailed notification, products like pan masala, cigarettes, and tobacco will attract a GST rate of 40%, while bidis will be taxed at 18%.
On top of this GST, the government will now impose a Health and National Security Cess on pan masala. Similarly, tobacco and related products will face an extra excise duty. An order issued late on Wednesday clarified that this excise duty is in addition to the 40% GST, marking a substantial increase in the tax burden.
Impact on Prices and Public Health Goals
The immediate consequence of this move will be higher retail prices for cigarettes, forcing companies like ITC and Godfrey Phillips India to pass on the cost to consumers. This aligns with broader public health objectives. Currently, taxes constitute about 53% of the retail price of cigarettes in India, which includes a 28% GST and a value-based levy. This figure remains significantly lower than the World Health Organization's recommended benchmark of 75% taxation, which is aimed at discouraging tobacco consumption.
This policy shift follows the government's approval of the Central Excise (Amendment) Bill, 2025 in December, which replaces a temporary levy. In a separate but related move, the finance ministry also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026, on Wednesday, indicating a comprehensive crackdown on the sector.
