Why Cigarette Prices Are Increasing in India: New Tax Rules Explained

Discussion around cigarette pricing has intensified following reports of a major tax increase. The change stems from a long-standing policy shift dating back to 2017, when the Goods and Services Tax (GST) was introduced. At that time, a significant portion of the excise duty on cigarettes was rolled back and replaced with a compensation cess. This reduced the overall tax burden on cigarettes compared to earlier years.

That framework is now being altered. The government has decided to reintroduce a heavy central excise duty on cigarettes, leading to an inevitable rise in retail prices. The increase is not uniform and varies depending on the type, length, and filtration of the cigarette. Recent reports confirm that cigarette and pan masala prices are set to rise from 1 February 2026, marking the end of a seven-year freeze on excise duties.

Under the new policy, GST remains unchanged at 40%, while the compensation cess has been moderated. The major change lies in the revival of central excise duty, which has been imposed at significantly higher, specific rates rather than moderate, slab-based taxes. This represents a decisive move toward a stricter taxation regime.

Earlier, the cess functioned as a tax on the tax amount rather than on the product price itself. For example, if a cigarette carried a tax of ₹10 and a cess of 50%, the cess amounted to ₹5, making the total tax ₹15. This system limited the effective tax burden. The new framework reverses that approach by directly increasing excise duty per cigarette stick.

Excise duty will now be calculated based on specific physical characteristics. The first distinction is between filtered and non-filtered cigarettes, with non-filtered variants taxed lower but still considered more harmful. The second and more significant criterion is length. Longer cigarettes attract higher excise duty, reflecting their premium positioning and higher consumption risk.

The excise duty now ranges from ₹50 to ₹8,500 per 1,000 cigarette sticks. Small non-filter cigarettes up to 65 mm in length will attract a duty of approximately ₹0.25 per stick. Filtered cigarettes of the same length will face a much steeper duty of about ₹2.10 per stick. Medium-length cigarettes between 65 mm and 70 mm will be taxed at around ₹4 per stick, while longer premium cigarettes measuring 70–75 mm will face duties close to ₹5.5 per stick. Ultra-premium cigarettes exceeding these dimensions will attract the highest levy of ₹8.5 per stick.

These duties are imposed at the manufacturing level, but the impact will be reflected in retail prices. A cigarette currently priced at ₹18 per stick could rise to ₹21–22, while longer premium cigarettes priced at ₹20 may increase to around ₹25–26. Overall, price increases are expected to fall in the 15–20% range, depending on category.

Manufacturers are unlikely to pass the entire tax burden to consumers immediately. Sudden price jumps risk sharp declines in sales, prompting companies to adopt gradual price adjustments. Market reactions suggest investor concerns over reduced consumption, indicating that the industry anticipates demand sensitivity.

The rationale behind this policy is twofold. Public health remains a primary concern. India has an estimated 10 crore cigarette smokers, with tobacco-related illnesses contributing to nearly 13 lakh deaths annually. Price increases are globally recognized as one of the most effective tools to curb tobacco consumption, particularly among youth and first-time users.

Revenue considerations also play a role. Tobacco products generate over ₹7,000 crore annually for the government. Higher excise duties provide short-term fiscal gains, especially at a time when GST collections in other sectors are under pressure. This revenue can be redirected toward healthcare spending and anti-tobacco initiatives.

There is also a strong policy signal involved. India is a signatory to the World Health Organization’s Framework Convention on Tobacco Control (FCTC), which recommends that taxes on tobacco products should account for at least 75% of the retail price. Even after the new excise structure, India’s total tax incidence on cigarettes will stand at approximately 53%, still below global benchmarks.

Whether higher prices will significantly reduce smoking remains uncertain. Economic estimates place the price elasticity of cigarette demand in India between 0.4 and 0.6, meaning a 10% price increase could reduce consumption by 4–6%. This reduction may occur through fewer smokers or reduced daily consumption per smoker.

The policy also carries risks. Higher cigarette prices may drive users toward cheaper alternatives such as bidis or loose cigarettes, which are often more harmful. There is also the potential for increased smuggling, counterfeit products, and tax evasion. Additionally, the tax burden can be regressive, disproportionately affecting low-income smokers who continue consumption at the expense of essential household spending.

Beyond cigarettes, other tobacco products will also be affected. The taxation mechanism for pan masala, chewing tobacco, and similar products is being restructured. Instead of taxing actual production, the government will now levy tax based on installed production capacity. This means companies will be taxed for maximum potential output, regardless of actual production levels, leading to higher prices across these categories as well.

Taken together, the new excise duty framework marks a significant shift in India’s tobacco taxation policy. It reflects a stronger alignment with public health goals, international commitments, and revenue priorities—while also introducing economic and social trade-offs that will unfold over time.

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Disclaimer:

This content is intended solely for informational and educational purposes. It does not promote, endorse, or encourage the use of cigarettes, tobacco, or any smoking-related products in any form. Smoking and the consumption of tobacco products are harmful to health and are associated with serious diseases and premature death. Readers are strongly advised to avoid smoking and tobacco use. Any references to tobacco products in this article are made strictly in the context of public policy, taxation, and health awareness.