ITC share price falls another 5%, Godfrey Phillips down over 3% on tax hike; what are the implications?

ITC shares slipped as much as 5.1% to ₹345.25 in the early session, while Godfrey Phillips India traded over 3% lower at ₹2,230.80.

VST Industries was trading 1.80% lower at ₹250.45 on the NSE.

It must be noted that the government has imposed an additional excise duty on cigarettes and other tobacco products effective February 1, under a revised tax structure that levies the steepest increase on longer, premium cigarettes.

The Finance Ministry has notified amendments to the Central Excise Act imposing an excise duty ranging from ₹2,050 to ₹8,500 per 1,000 sticks based on cigarette length, effective February 1. This duty will be over and above 40% GST.

The ministry has also notified the Health and National Security Cess Act, levying cess on the manufacturing capacity of pan masala-related businesses from February 1.

The total tax incidence on pan masala, after taking into account 40% GST, will be retained at the current level of 88%.

The revised tax structure replaces the existing regime of 28% GST, along with a compensation cess on tobacco and related products.

Cigarette cost under new tax structure

Under the new tax structure, short non-filter cigarettes (up to 65 mm) will attract an additional duty of about ₹2.05 per stick over and above 40% GST, while short filter cigarettes of the same length will be charged around ₹2.10 per stick.

Medium-length cigarettes (65-70 mm) will face an additional duty of roughly ₹3.6-4 per stick, and long, premium cigarettes (70-75 mm) about ₹5.4 per stick.

An "other" category carries a significantly higher duty of ₹8,500 per 1,000 sticks, but this applies only to unusual or non-standard designs.

Most popular cigarette brands do not fall under this slab.

Tax on tobacco, gutkha

Chewing and jarda-scented tobacco and gutkha will attract an excise duty of 82% and 91%, respectively.

From February 1, tobacco products – including pan masala and cigarettes – will attract 40% GST, while biris (rolled tobacco leaves) will be taxed at 18%.

The finance ministry has also notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2025, as per which 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.

Such manufacturers will also have to disclose to the excise authorities the number of machines and their capacities, and can also claim abatement in excise duty in case a machine is non-functional for a minimum of 15 consecutive days. These norms, too, would be effective February 1, PTI reported.

Rationale behind the tax hike

In India, taxes on cigarettes have remained unchanged in the past 7 years since the introduction of GST in July 2017. This is in contrast to global best practices and public health guidance, which emphasise annual increases in duties to ensure that cigarette prices rise faster than incomes.

WHO tax benchmark

According to World Bank estimates, India's total tax incidence on cigarettes is approximately 53% of the retail price, which is substantially lower than the World Health Organisation's recommended benchmark of 75% or more for achieving meaningful reductions in tobacco consumption.

The levy of such a cess on pan masala and excise duty on tobacco was approved by Parliament last month.

From February 1, the GST rate will go up to 40%, plus an excise duty and compensation cess.

GST overhaul in September 2025

The GST Council, in September last year, had decided that the compensation cess would cease to exist after the repayment of loans taken to compensate states for GST revenue loss during the COVID-19 pandemic. The ₹2.69 lakh crore loan will be repaid by January 31, 2026.

At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years till June 30, 2022, to make up for the revenue loss suffered by states on account of GST implementation.

The levy of compensation cess was later extended by 4 years till March 31, 2026, and the collection is being used to repay the ₹2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period.

Excise duty hike to encourage smuggling: Tobacco industry body

The Tobacco Institute of India, the industry body, on Monday said that the overall impact of the proposed hike in excise duty on cigarettes from February 1 will be "revenue neutral", as it will further boost the "illegal and illicit" trade.

Terming it as an "unprecedented increase" in duty, TII, a representative body of leading cigarette makers like ITC, Godfrey Phillips India, and VST Industries, along with farmers, exporters, and ancillaries of the cigarette segment of the tobacco industry in India, said it is "shocked and surprised".

The Tobacco Institute of India (TII) has requested the government to review the computations behind this extremely severe tax increase and reconsider the enormous hike, given the huge implications.

"Such a massive increase will cause immense hardship and loss to millions of farmers, MSMEs, retailers and local value chains nurtured by the industry, besides providing a huge fillip to the illicit industry and damaging national enterprises," said TII in a statement.

What analysts say about ITC

Most analysts believe that the recent tax hike will weigh on ITC’s stock price as well as the company’s volumes and earnings growth.

Analysts at JP Morgan note that while they await clarity on finer aspects of the tax changes, an initial assessment suggests the need for a weighted average price hike of over 25% if the National Calamity Contingent Duty (NCCD) is removed and over 35% if the NCCD remains unchanged in order to keep net realisation per stick stable.

They added that a sharper increase in the KSFT segment raises the risk of consumers downtrading to cheaper variants and could also lead to higher consumption of illicit cigarettes.

JP Morgan expects ITC to largely pass on the tax impact, though the extent may vary across sub-segments. However, they caution that this would likely hurt volume and earnings growth and weigh on valuation multiples, limiting upside potential for the stock over the next 6–9 months.

Echoing similar concerns, UBS said the tax hike is likely to pressure the stock price and create uncertainty around how much of the increase will be passed on immediately versus in a staggered manner. This, in turn, could affect cigarette volumes and EBIT growth in the coming quarters. The firm added that prospects for an earnings growth revival have clearly weakened.

At current levels, the stock appears to be pricing in sustainable cigarette EBIT growth of 2–3% on a ceteris paribus basis. While this assumption seems conservative, given ITC’s history of navigating tax hikes while maintaining steady EBIT growth even during periods of high taxation, it nonetheless reflects near-term caution.

Macquarie noted that the estimated price increase required to maintain EBIT per stick for cigarettes longer than 65 mm, which account for a larger share of industry volumes and profits, would be in the range of 20 to 35%. In contrast, the required hike for sub-65 mm entry-level cigarettes is likely to be lower.