New excise bill may lift cigarette prices slightly but analysts see muted impact

New excise bill may lift cigarette prices slightly but analysts see muted impact

Tobacco majors ITC, Godfrey Phillips, and VST Industries are once again in the spotlight after the Centre proposed a major revamp of taxes on cigarettes and other tobacco products. The move replaces the current GST compensation cess with a new health and national security cess, while also raising excise duty across several categories. Analysts broadly see the proposal as a step toward simplifying tobacco taxation once the compensation cess ends. But, for legal cigarette makers, the overall tax burden is still expected to inch higher.

New bill to make up for GST compensation cess expiry

The government’s new bill aims to increase excise duties to make up for the expiry of the GST compensation cess.

Vincent KA, Senior Research Analyst at Geojit Financial Services, said the idea is to align the tax regime for the post-cess era while ensuring revenue neutrality. While the impact will vary across cigarette sizes, he expects moderate tax increases on select stick lengths.

Currently, cigarettes attract 5 percent ad-valorem compensation cess plus a specific cess of Rs 2,076–Rs 3,668 per 1,000 sticks depending on length. Once the cess ends, tobacco products will face a flat 40 percent GST along with the revised excise duty.

Under the new structure, the earlier duty slab of Rs 200–Rs 735 per 1,000 sticks is being replaced with a sharply higher value-based levy of Rs 2,700–Rs 11,000. This varies by stick size and specifications. With GST still applicable, the total tax load on legal cigarettes could rise meaningfully, said Harshal Dasani, business head at INVasset PMS.

The proposed bill hikes excise duty on several manufactured tobacco items: chewing tobacco from 25 percent to 100 percent, hookah or gudaku tobacco from 25 percent to 40 percent, and smoking mixtures for pipes/cigarettes from 60 percent to 325 percent.

These changes tie into the broader transition to GST 2.0 wherein tobacco products were kept out of this shift so that COVID-era compensation loans could be fully repaid. With repayments nearly complete, the GST Council has now given the finance minister the go-ahead to implement the new rates.

What this means for tobacco companies

Manufacturers are expected to pass on most of the duty hike through higher MRPs, particularly in premium and king-size variants, where customers are relatively less price-sensitive.

Dasani of INVasset PMS expects price hikes in the high single-digit to low double-digit range, depending on the SKU and pricing flexibility available to each brand.

For ITC, VST Industries, and Godfrey Phillips, analysts see the impact as manageable rather than structural. While higher prices may temporarily soften volumes and weigh on investor sentiment, the new tax clarity supports better long-term planning. If companies stagger price hikes and carefully manage their product mix, margins and return ratios could stabilise over the next few quarters, added Dasani.

Among the listed players, VST Industries appears the most exposed since nearly 80 percent of its profits come from cigarettes, said Vincent of Geojit Financial. ITC and Godfrey Phillips, with their larger FMCG and diversified tobacco portfolios, are better cushioned.

Performance across tobacco counters has been uneven so far in 2025. Godfrey Phillips shares are up 67 percent, supported by strong traction in premium cigarettes, capsule formats, chewing products and exports, while ITC is down 16 percent, and VST Industries is down 25 percent. The upcoming tax shift may keep these stocks volatile in the near term, but analysts believe the industry now has clearer visibility on policy direction.