January 6, 2026
NEW DELHI – Brokerage houses have raised concerns that the government’s sharp increase in cigarette taxation could trigger a significant rise in illicit cigarette trade, undermining both public revenues and the legal tobacco industry.
The concerns follow an unprecedented 40–50 per cent increase in cigarette taxes, driven by a hike in GST from 28 per cent to 40 per cent and the introduction of a new excise duty structure on tobacco products. Analysts warn that the steep increase marks a departure from the calibrated tax approach followed over the past eight years.
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Kotak Institutional Equities described the move as “two steps back,” noting that gradual tax increases in recent years had helped stabilise volumes and enabled the legal cigarette industry to regain share from illicit trade. “The sharp hike is likely to drive volume shifts to illicit trade and lead to product mix deterioration,” the brokerage said, adding that a price increase of over 35 per cent could significantly erode affordability and weigh on long-term growth prospects of the legal tobacco industry.
Brokerage reports highlight that large price differentials tend to exploit consumer price sensitivity, particularly among lower-income smokers, making non-duty-paid cigarettes an attractive alternative.
Jefferies, citing the Tobacco Institute of India (TII), warned that a widening gap between legal and illicit cigarette prices could result in higher tax leakage. Legal cigarettes account for just 10 per cent of tobacco consumption in India but contribute nearly 80 per cent of total tobacco tax revenues, it noted, cautioning that any shift away from legal products could have serious fiscal implications.
Nomura echoed similar concerns, pointing to historical trends. During FY13–FY18, periods of aggressive tax hikes saw government revenues remain largely flat due to declining legal volumes, while illicit cigarette consumption increased. “Post FY18, a stable tax regime helped contain illicit trade penetration. We believe the current sharp increase could once again fuel illicit volumes,” Nomura said.
Analysts also drew parallels with international experience. In Australia, repeated tobacco tax hikes between 2012 and 2020 sharply increased cigarette prices, resulting in illicit tobacco’s market share rising from under 2 per cent to around 14 per cent. Australian authorities have since acknowledged the rapid expansion of organised crime in illegal tobacco distribution.
In India, illicit tobacco already accounts for about 26 per cent of the total tobacco market, making it the fourth-largest market globally for smuggled tobacco. Data from the WHO Global Health Observatory (2024) shows that cigarettes in India are among the least affordable globally when measured as a percentage of GDP per capita.
A global study by Alvarez & Marsal, covering 71 countries over 17 years, found that once illicit trade becomes entrenched, it is difficult to reverse through enforcement alone. The study underscored the critical role of taxation and affordability in curbing illegal markets.
A brokerage expert, speaking on condition of anonymity, said the new excise levies, set to take effect from February 1, 2026, should be reconsidered. “There is still time to revisit these measures before they fuel uncontrollable illicit networks. The expectation was that the tax changes would be revenue-neutral,” the expert said.
JP Morgan and Nuvama Institutional Equities have also cautioned that higher taxes, particularly on premium segments, could encourage downtrading to cheaper or smuggled cigarette variants.