January 29, 2026
NEW DELHI – India’s domestic cigarette industry is likely to see a 6–8% contraction in volumes in the next financial year following higher indirect taxes coming into effect from February 1, according to Crisil Ratings.
The rating agency, however, expects limited impact on profitability and credit profiles, supported by strong margins, robust liquidity, and negligible debt levels.
Under the revised tax structure, cigarettes will continue to attract a 28 per cent goods and services tax (GST), but the compensation cess will be withdrawn and replaced with an additional excise duty ranging from Rs 2.05 to Rs 8.5 per stick, depending on cigarette length. GST on the final retail price will also rise to 40 per cent.
Mid to premium cigarettes, those longer than 65 mm will face excise duty of Rs 3.6–Rs 8.5 per stick, while mass-segment cigarettes (below 65 mm) will be taxed at Rs 2.05–Rs 2.1 per stick.
Although the duty hike is lower in the mass segment, which accounts for about 40–45 per cent of industry volumes, manufacturers are expected to absorb part of the increase due to the high price sensitivity of consumers in this category, Crisil said.
As a result, industry earnings before interest and taxes (EBIT) margins are expected to decline by 200–300 basis points, though they are still projected to remain strong at over 58 per cent next fiscal.
Players with a higher exposure to the mass segment are likely to face greater margin pressure.
In contrast, companies are expected to largely pass on higher duties in the mid to premium segment, where consumers typically show stronger brand loyalty.
Crisil noted that earlier duty hikes between fiscals 2014 and 2018 led to a cumulative 40–50 per cent increase in cigarette prices and a nearly 20 per cent drop in volumes, which took three to four years to recover.
Despite near-term volume pressures, Crisil said cigarette manufacturers are well placed to withstand the impact, supported by debt-free balance sheets and a cash surplus exceeding Rs 20,000 crore, which also provides headroom for continued product innovation.
However, the agency cautioned that sharper-than-expected volume declines or further tax hikes remain key risks to watch.