The central government has decided to impose additional excise duty on tobacco products, effective February 1, 2025. This decision will make cigarettes and other tobacco products more expensive in the country. This is going to have a direct impact on around 100 million smokers in India, the world's most populous country.

The Ministry of Finance issued the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026 late on Wednesday, December 31, 2025.

Under this, excise duty has been fixed from ₹2,050 to ₹8,500 per 1,000 cigarettes depending on the length of the cigarette, which will be effective from February 1.

The impact on the stock market

The impact of this government decision was clearly visible in the stock market on the first trading day of the new year. Shares of ITC Ltd., the country's largest cigarette manufacturer, fell nearly 2%. Meanwhile, shares of Godfrey Phillips India Ltd., which distributes Marlboro cigarettes in India, fell as much as 4.1%.

Current Cigarette Tax System in India

ITC, which makes popular brands like Gold Flake and Classic, was the biggest loser on the Nifty 50. The FMCG index also saw weakness, trading down about 0.6%.
Current Cigarette Tax System in India

Taxes on tobacco products are already high in India. Cigarettes, pan masala, and other tobacco products are subject to a 40% GST. The new excise duty will be on top of the GST.

This new system will replace the GST Compensation Cess, which the government has decided to eliminate in order to simplify and streamline the tax system. The Compensation Cess, which was levied at different rates on different products, will now be completely eliminated.

Separate rules for bidi and pan masala

Starting February 1st, cigarettes and pan masala will be subject to a 40% GST. Bidis (tobacco wrapped in tendu leaves) will be subject to only an 18% GST. A Health and National Security Cess will be imposed on pan masala. Additional excise duty will apply to tobacco and related products.

Parliament has approved
It is worth noting that Parliament had approved two important bills in December, under which the way was paved for imposing new excise duty on tobacco products and Health and National Security Cess on the manufacture of pan masala. The government has fixed February 1, 2026 as the date for complete implementation of these new tax provisions by issuing a notification on December 31, 2025. From this day onwards, the existing GST Compensation Cess will be completely abolished.

Keeping an eye on both health and revenue

The government believes that raising the prices of tobacco products will discourage people from smoking and ensure revenue collection. However, this decision has proved to be a setback for tobacco companies and investors.

PC:OneIndia