Up to ₹8.50 per stick: Cigarette prices set to rise as excise duty kicks in from Feb 1

An additional excise duty on cigarettes and tobacco products and a new health and national security cess on pan masala will come into effect from Sunday, February 1, replacing the existing goods and services tax (GST) compensation cess regime for so-called “sin goods”.

The new levies will apply over and above the highest 40% GST rate.

The new tax structure was approved by Parliament in December, following a decision by the GST Council in September to impose excise duties and cess once the compensation cess mechanism ended.

The council had agreed that the compensation cess would lapse after repayment of the ₹2.69 lakh crore loan raised to cover states’ GST revenue shortfalls during the pandemic. That loan is set to be fully repaid by January 31, 2026.

Finance Minister Nirmala Sitharaman said in December that the health cess would create a “dedicated and predictable revenue stream” to support expenditure on public health and national security.

Under the revised framework, tobacco products will move to an MRP-based valuation system, under which GST will be calculated on the retail sale price declared on the package.

The new system will apply to chewing tobacco, filter khaini, jarda scented tobacco and gutkha from February 1.

Excise Duty based on cigarette length

The Central Excise Act has been amended to impose excise duty ranging from ₹2.05-₹8.50 per stick based on cigarette length.

Short non-filter cigarettes up to 65 mm will attract an additional duty of about ₹2.05 per stick, while short filter cigarettes of the same length will be charged around ₹2.10. Medium-length cigarettes of 65–70 mm will face duties of about ₹3.6–₹4 per stick, and longer premium cigarettes of 70–75 mm about ₹5.4.

The highest rate of ₹8.50 per stick applies only to non-standard cigarette designs. Most of the popular brands do not fall under this slab.

Chewing tobacco and jarda scented tobacco will attract an excise duty of 82%, while gutkha will be taxed at 91%.

Pan masala manufacturers need to apply for a new registration under the health and national security cess law from February 1. Manufacturers of such products will have to install a functional CCTV system covering all packing machines and preserve the footage for at least 24 months.

They will also also have to disclose the number and capacity of packing machines to excise authorities.

The cess on pan masala will be levied based on manufacturing capacity, while the overall tax incidence on pan masala, including GST, will remain unchanged at about 88%, the government said.

Proceeds from the pan masala cess will be channelled to states through health awareness and other health-related schemes.

India has not raised cigarette taxes since the rollout of GST in July 2017.

According to World Bank estimates, India’s total tax incidence on cigarettes is about 53% of the retail price, well below the World Health Organization benchmark of at least 75% to significantly reduce tobacco consumption.

Impact on cigarette volume

Ratings agency Crisil Ratings said in a recent report that the domestic cigarette industry is likely to see a 6–8% contraction in volumes in the next fiscal year following the duty increase.

Although the duty hike is lower for the mass segment, the report suggests that the manufacturers are expected to partially absorb the increase due to the high price sensitivity of consumers in this category.

“While the mid to premium segment will see higher duty hikes, amounting to ~25% of current maximum retail price (MRP), manufacturers are expected to pass on the impact majorly to the end users as consumers in this segment exhibit higher loyalty to specialised offerings,” said Shounak Chakravarty, Director at Crisil Ratings.

“On the other hand, duty hikes in the price sensitive mass segment will be lower at ~15% of current MRP, and manufacturers are likely to partially absorb the same to minimize volume de-growth,” he added.