India’s Cigarette Tax Hike Tests How Addicted Profits Are

Tax hikes are rarely loved, but some protests are more revealing than others. The Tobacco Institute of India calling the latest cigarette excise increase “shocking and surprising” tells you less about the law and more about the industry’s long‑running playbook of tax, tar and tall tales.

India’s Parliament has passed the Central Excise (Amendment) Act, 2025, sharply raising duties on cigarettes and other tobacco products. Under the old structure, excise on cigarettes ranged from ₹200 to ₹735 per 1,000 sticks. The amended law lifts that band to roughly ₹2,700–₹11,000, depending on length and type. Duties on chewing tobacco, cigars, hookah mixes and smoking mixtures have also jumped sharply.

Even after the increase, analysts place India’s total tax incidence on cigarettes below the 75% of retail price benchmark the World Health Organisation recommends for effective tobacco control. The intent is to prevent tobacco from getting cheaper in the post-GST compensation cess era, and to use price as a tool to suppress consumption.

The Tobacco Institute statement flips that narrative on its head. It calls the hike a breach of “revenue-neutral” assurances, warns of hardship for 40 million farmers, MSMEs and retailers in the legal cigarette chain, and raises the familiar spectre of smuggling. India, it argues, already sees one in three cigarettes sold illicitly, and higher taxes will only enrich traffickers while draining the exchequer.

To drive the point home, the tobacco trade body cites Australia as an example. The country, it says, jacked up cigarette taxes and tightened regulations, only to spark an “exploding black market” and greater criminalisation of trade. 

Illicit Myths 
Public‑health economists and the World Health Organization tell a more nuanced story. Higher tobacco taxes, sustained over time and coupled with enforcement, reduce consumption, raise revenue and cut the macro cost of smoking. The industry’s illicit-trade argument is a recurring tactic, supported by commissioned studies that often inflate smuggling estimates. It has been widely observed that the main drivers of illicit flows are weak customs, corrupt supply chains and lax tracking systems, not tax rates in isolation.

India is no stranger to this debate. Tobacco‑industry‑backed estimates have long claimed that steep tax increases pushed the country into the ranks of the world’s largest illicit cigarette markets. Independent research based on tax‑gap analysis and consumption data has repeatedly placed the illicit share in single digits for much of the past decade. India has also ratified the Protocol to Eliminate Illicit Trade in Tobacco Products, which aims to choke smuggling with track‑and‑trace, licensing and border control rather than tax policy.

That does not mean the current structure is perfect. Legal cigarettes account for a minority of tobacco consumption but a majority of tobacco tax revenue, while bidis and many smokeless products remain lightly taxed or poorly enforced. Successive governments have chosen the visible, compliant cigarette segment over the fragmented bidi universe. The result is a skewed sin‑tax regime where a narrow slice bears most of the fiscal burden and therefore becomes the loudest voice in the room.

If there is an imbalance worth worrying about, it lies here, not in the latest excise number itself. A coherent tobacco control strategy would broaden the base, bring bidis and smokeless forms into a more comparable tax corridor. Small farmers moving out of tobacco cultivation can be given transition support, and a portion of the tax hike could be invested in enforcement tools such as track‑and‑trace stamps and smarter port risk‑scoring.

Markets, of course, live in the near term. Listed cigarette companies such as ITC, VST Industries and Godfrey Phillips have already felt the sting, with analysts reworking their models to see how much pricing power remains.

Investors in tobacco companies have to decide whether this marks a structural reset for the industry. If the exchequer is signalling that cigarette duties will stay high even after the cess era, valuations must move from “when will taxes normalise” to “how resilient is this franchise when taxes never do”. That will mean tracking the extent of price pass‑through, the evidence of genuine illicit growth via seizure, inclusion of bidis and other smokeless products in same tax bracket, and dividend sustainability in the face of persistently compressed post-tax margins.

The tobacco lobby wants this to be a morality play about farmers versus smugglers. The real story is of a state trying, belatedly, to tax a deadly product closer to its true social cost, and an industry using familiar fear, fog and figures to keep cigarettes cheap enough to sell.