India hikes tobacco taxes: Excise duty replaces GST compensation cess

Fresh tobacco taxes from February 2026 trigger a fall in ITC and Godfrey Phillips shares as cigarette costs rise

January 1, 2026

Tobacco stocks fall as Centre imposes fresh excise duty on cigarettes

Compensation cess to be replaced by excise levy

The government has imposed an additional excise duty on tobacco products from 1 February 2026, a move that is set to make cigarettes costlier for an estimated 10 crore smokers across the country.

Late on Wednesday, the finance ministry notified the Chewing Tobacco, Jarda Scented Tobacco and Gutkha Packing Machines (Capacity Determination and Collection of Duty) Rules, 2026, introducing an excise duty ranging from ₹2,050 to ₹8,500 per 1,000 cigarettes, depending on their length.

The announcement triggered a sharp reaction in the stock market, with shares of major cigarette manufacturers coming under pressure. ITC, the country’s largest cigarette maker and producer of brands such as Gold Flake and Classic, fell nearly 2%, while Godfrey Phillips India, which distributes Marlboro cigarettes in India, declined 4.1%. ITC emerged as the biggest loser on the Nifty 50 index and also led losses on the FMCG index, which was trading 0.6% lower.

Higher tax on tobacco

The additional excise duty will be levied over and above the existing 40% Goods and Services Tax (GST) on tobacco products, including cigarettes and pan masala. The move replaces the GST compensation cess, which will be abolished as part of the government’s broader effort to rationalise indirect taxes in the world’s fourth-largest economy.

From 1 February 2026, tobacco products such as pan masala and cigarettes will continue to attract 40% GST, while bidis will be taxed at 18% GST. In addition, a new Health and National Security Cess will be levied on pan masala, and tobacco and related products will be subject to the newly notified excise duty.

Parliament had cleared two bills in December, empowering the government to levy the Health and National Security Cess on pan masala manufacturing and impose excise duty on tobacco products. The government on Wednesday formally notified 1 February 2026 as the implementation date for these measures, after which the existing compensation cess will cease to apply.

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