A notable increase in taxes on cigarettes, along with a new excise duty structure for tobacco products, has raised concerns among experts about a potential surge in illicit trade and significant revenue losses for the government. The finance ministry recently made amendments to the Central Excise Act, introducing a new excise duty that varies from Rs 2,050 to Rs 8,500 per 1,000 cigarette sticks, depending on their length. This change, effective from February 1, will add to the existing 40 percent Goods and Services Tax (GST), leading to an overall tax increase of approximately 60 to 70 percent.
Impact of the New Tax Structure
The newly introduced excise duty marks a transition from the GST compensation cess to an excise-based regime for demerit goods. This unexpected tax hike has raised alarms regarding a potential increase in smuggling and illegal trade in tobacco products. Ranganath Tannir, secretary general of the Think Change Forum, stressed that excessive taxation on inelastic goods like cigarettes typically leads to illicit trade rather than compliance. He pointed out that cigarettes in India are already among the least affordable on a global scale, according to World Health Organization indicators. Making them more expensive may not lessen demand but could drive consumers towards illegal and smuggled products, ultimately undermining tax collections.
Concerns from Financial Analysts
Brokerage reports have highlighted these worries, with JPMorgan’s Asia Pacific Equity Research warning that the elevated tax rate on King Size Filter Tip (KSFT) cigarettes might push consumers toward cheaper alternatives, thereby increasing the consumption of illicit cigarettes. Presently, illicit tobacco makes up about 26 percent of India’s total tobacco market, positioning the country as the fourth-largest market globally for smuggled tobacco. Nomura’s research underscored that while the rationale behind higher taxes is to curb consumption, such measures often lead to unintended consequences, notably fostering the growth of illicit cigarette markets.
International Comparisons and Warnings
Experts have drawn comparisons with international cases to highlight the dangers linked to elevated tobacco taxes. For example, Australia saw a notable rise in illicit tobacco consumption following multiple tax increases between 2012 and 2020, with illegal tobacco climbing from under 2 percent to around 14 percent of the market. Analysts have labeled the proposed excise levies as “unprecedented” and suggest that the government should reconsider this decision before implementation. With the new tax structure scheduled to take effect on February 1, 2026, there is an urgent need for a review to avert more significant issues related to rampant illicit networks.
Disclaimer: Digihunt is not a financial advisor and this is not investment advice.