GST tax hike could choke ITC, tobacco peers

Street is weighing if GST 2.0 will mean relief or a fresh squeeze for cigarette majors

Cigarette makers could face another round of volume pressure if the government raises GST on “sin goods” to 40 percent without adjusting existing cess, analysts warned. At present, tobacco products are taxed at a base 28 percent GST, but with the addition of compensation cess, specific levies, basic excise duty and NCCD, the total tax incidence already balloons to as much as 55 percent of retail prices.

A 40 percent slab, if applied on top of current cess rates, could lift the effective tax burden on ITC by 9–10 percent, according to ICICI Securities estimates. Analysts say such a rise could test even the resilience of the sector leader, and would inevitably weigh harder on smaller rivals. Ajay Thakur, FMCG analyst at Anand Rathi, cautioned that cigarette volumes typically hold up under low-to-mid single-digit hikes, but “a double-digit increase in incidence could lead to a 4–5 percent hit to consumption.”

When tax hikes hurt before

The risk isn’t new. When GST was first rolled out in 2017 with a 28 percent rate on tobacco products, ITC’s cigarette volumes dipped into negative territory for three straight quarters before gradually recovering. A similar blow was seen during the Covid-19 lockdowns, when consumption collapsed on health concerns and restricted mobility, before demand eventually normalised.

ITC today looks healthier, with 6 percent volume growth in Q1 FY26, but analysts cautioned that history shows how quickly demand can wobble when taxes rise sharply.

Complex structure clouds outlook

Currently, cigarettes are taxed via multiple layers: 28 percent GST plus a variable cess of 5–36 percent, making up 15–26 percent of MRP.

On top of this, a specific levy of Rs 2.1–Rs 4.2 per stick adds another 25–30 percent, while basic excise duty and NCCD contribute 5–7 percent. Reports suggested the Centre could move to a flat 40 percent GST slab, merging cess with excise. On paper, that could bring effective incidence closer to 26 percent of MRP versus today’s 48–55 percent. But most analysts expect a neutral-to-slightly higher outcome, not relief, given cigarettes’ “sin” classification.

Winners and losers

Among listed peers, VST Industries looks the most vulnerable, given already fragile sales in the June quarter, weak pricing power and slow portfolio premiumisation. ITC and Godfrey Phillips appear better cushioned, thanks to steadier volumes and broader product mixes.

So far this year, performance has diverged sharply. Godfrey has more than doubled as volumes surged 25 percent in Q1, aided by strength in premium cigarettes, capsule formats, chewing products and exports. ITC shares have slipped 2 percent on muted cigarette growth, stake sales by top shareholder British American Tobacco, and softer FMCG trends. VST has dropped 18 percent, leaving it as the least favoured play.

Until the government clarifies how the GST 2.0 structure will be applied, analysts expect tobacco stocks to stay volatile. “If the incidence only rises modestly, ITC and Godfrey can absorb it. But if it’s a double-digit jump, volumes will suffer,” Thakur said. That could mean a long spell of slow growth and stock performances, analysts warn.

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