Cigarette Prices to Rise Significantly
Cigarette prices are set to increase substantially starting February 1, following a government decision to impose an additional excise duty as part of a revised tax structure. The finance ministry has announced amendments to the Central Excise Act, which will see the excise duty rise between Rs 2,050 and Rs 8,500 per 1,000 sticks, depending on the length of the cigarettes. This new tax will be added on top of the existing 40% Goods and Services Tax (GST) on tobacco products, making cigarettes noticeably more expensive for consumers.
Details of the Price Increase
The price hike will vary based on the category and length of the cigarettes. For short non-filter cigarettes measuring up to 65 mm, the additional excise duty will be approximately Rs 2.05 per stick. Short filter cigarettes of the same length will see a slightly higher increase at around Rs 2.10 per stick. Medium-length cigarettes, which range from 65 to 70 mm, will incur an excise duty of Rs 3.6 to Rs 4 per stick. Long or premium cigarettes, measuring between 70 and 75 mm, will face an increase of Rs 5.4 per stick. Notably, the “other” category, which includes non-standard designs, will see the highest increase at Rs 8.5 per stick, although most popular brands do not fall into this category.
This structured increase in excise duty is expected to lead to a significant rise in retail prices, particularly for medium and long cigarettes. As consumers prepare for these changes, the impact on sales and smoking habits remains to be seen.
Impact on Other Tobacco Products
In addition to cigarettes, the revised tax structure will also affect other tobacco products. From February 1, all tobacco items, including pan masala, will be subject to a 40% GST, while biris will be taxed at 18%. Chewing tobacco and jarda scented tobacco will face an excise duty of 82%, while gutkha will incur a hefty excise duty of 91%. Despite these changes, the total tax burden on pan masala will remain unchanged at 88%.
This new tax regime replaces the previous structure, which included a 28% GST alongside a compensation cess on tobacco products. The adjustments were approved by Parliament last month, following a decision by the GST Council in September to impose additional taxes on these products after the cessation of the compensation cess framework.
Understanding the Changes
Currently, tobacco products are taxed at a 28% GST, supplemented by a varied compensation cess. Starting February 1, this will shift to a 40% GST, alongside the newly introduced excise duty. The GST Council had previously determined that the compensation cess would end once the loans taken to compensate states for revenue losses during the COVID-19 pandemic are fully repaid. This repayment is scheduled to be completed by January 31, 2026.
The reason behind the increase in excise duty on cigarettes is to ensure that the tax burden reflects the significant public health risks associated with smoking. The new tax structure aims to align India’s tax incidence on cigarettes with international best practices. Currently, the total tax incidence on cigarettes in India is estimated at around 53% of the retail price, which is considerably lower than the World Health Organization’s recommended benchmark of at least 75%. In contrast, countries like the United Kingdom and Australia impose taxes exceeding 80% of the retail price.
Additionally, new regulations will require manufacturers of chewing tobacco, jarda scented tobacco, and gutkha to install functional CCTV systems that monitor all packing machines and retain footage for a minimum of 24 months. Manufacturers must also report the number and capacity of their machines to excise authorities and may claim a reduction in excise duty if a machine is non-functional for at least 15 consecutive days.
Digihunt is not a financial advisor and this is not investment advice.