New Delhi: An unprecedented tax hike, coupled with a new excise duty structure on tobacco, could lead to a surge in illicit trade of cigarettes and result in significant tax revenue losses for the country, experts said.
Earlier this week, the finance ministry notified amendments to the Central Excise Act, imposing an excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks based on cigarette length, effective February 1. This duty will be over and above 40 per cent GST.
This would imply the overall tax hike of 60-70 per cent, varying across lengths. Currently, the overall tax of about 50-55 per cent, depending on the length.
The unexpected tax hikes proposed in the transition from the GST compensation cess to excise on demerit goods have triggered concern of increased smuggling of tobacco products and cigarettes, Think Change Forum Secretary General Ranganath Tannir said.
"Public finance theory is clear that excessive taxation of inelastic goods fuels illicit trade, not compliance. This risk is amplified in India, where cigarettes are already among the most unaffordable globally, as measured by the WHO's affordability indicators. Making them even more expensive will not suppress demand, but redirect it-- most likely towards smuggled and illegal products -- undermining revenue," he said.
According to global financial firm J P Morgan's Asia Pacific Equity Research report, a higher rate for the King Size Filter Tip (KSFT) segment implies increased risk of consumer downtrading to cheaper variants, and may also induce an increase in the offtake of illicit cigarettes.
In India, illicit tobacco already accounts for about 26 per cent of the total tobacco market, making it the fourth-largest market for smuggled tobacco globally.
Another brokerage house, Nomura, in its research report said, "high taxes on cigarettes, while aimed at reducing consumption, have unintended consequences of fuelling growth of illicit cigarettes and pushing consumers towards cheaper, non-tax paid smuggled cigarettes".
Citing a report by the Tobacco Institute of India (TII), Jefferies said the industry body has requested the government for a review, as a wider legal price gap could help non-duty-paid cigarettes, which will also result in tax leakage.
International experience from Australia demonstrates how overly aggressive tobacco taxation can backfire by fuelling organised crime. Repeated tax hikes between 2012 and 2020 drove cigarette prices sharply higher, triggering a surge in illicit tobacco from under 2 per cent to around 14 per cent of the market.
"The new excise levies are unprecedented. Since they come into effect from February 1, 2026, there is still time to revisit and rectify them before they spawn a much larger problem of uncontrollable illicit networks," an analyst said.
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