Cigarette Tax Increase: Experts Caution Against Rise in Illicit Trade and Potential Revenue Losses for Government
A significant increase in taxes on cigarettes, coupled with a new excise duty structure for tobacco products, has raised alarms among experts who warn of a potential rise in illicit trade and substantial revenue losses for the government. The finance ministry recently announced amendments to the Central Excise Act, introducing a new excise duty that ranges from Rs 2,050 to Rs 8,500 per 1,000 cigarette sticks, depending on their length. This change, effective from February 1, will be in addition to the existing 40 percent Goods and Services Tax (GST), resulting in an overall tax hike of approximately 60 to 70 percent.
Impact of the New Tax Structure
The newly introduced excise duty represents a shift from the GST compensation cess to an excise-based regime for demerit goods. This unexpected tax increase has raised concerns about the potential for increased smuggling and illegal trade in tobacco products. Ranganath Tannir, secretary general of the Think Change Forum, emphasized that excessive taxation on inelastic goods like cigarettes often leads to illicit trade rather than compliance. He noted that cigarettes in India are already among the least affordable globally, according to World Health Organization indicators. Making them more expensive may not reduce demand but could drive consumers toward illegal and smuggled products, ultimately undermining tax collections.
Concerns from Financial Analysts
Brokerage reports have echoed these concerns, with JPMorgan’s Asia Pacific Equity Research warning that the higher tax rate on King Size Filter Tip (KSFT) cigarettes could lead consumers to opt for cheaper alternatives and increase the consumption of illicit cigarettes. Currently, illicit tobacco accounts for about 26 percent of India’s total tobacco market, positioning the country as the fourth-largest market globally for smuggled tobacco. Nomura’s research highlighted that while the intention behind higher taxes is to reduce consumption, they often have unintended consequences, such as promoting the growth of illicit cigarettes.
International Comparisons and Warnings
Experts have pointed to international examples to illustrate the risks associated with high tobacco taxes. For instance, Australia experienced a significant rise in illicit tobacco consumption following repeated tax hikes between 2012 and 2020, with illegal tobacco rising from under 2 percent to around 14 percent of the market. Analysts have called the proposed excise levies “unprecedented” and suggest that the government has an opportunity to reassess the decision before it takes effect. With the new tax structure set to be implemented on February 1, 2026, there is a pressing need for a review to prevent the emergence of larger issues related to uncontrollable illicit networks.
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