Shares of major tobacco companies came under heavy selling pressure on January 1 after the government moved to impose a new excise duty on cigarettes. The decision triggered a sharp reaction across tobacco stocks and dragged down the broader FMCG index.
ITC shares fell more than 10 percent during the session to around Rs 369 per share, emerging as one of the top losers on the Nifty 50 index. The sharp decline in ITC also pushed the Nifty FMCG index down by over 3 percent.
Godfrey Phillips India shares witnessed even steeper losses, tumbling nearly 19 percent to around Rs 2,230 per share. VST Industries was also hit, with its stock falling more than 7 percent during the day.
What is the Central Excise Amendment Bill 2025?
In December, Parliament approved the Central Excise Amendment Bill 2025, replacing the temporary levy that was earlier imposed on cigarettes and other tobacco products. The new law clears the way for a permanent increase in excise duties on tobacco items.
Under the new structure, excise duty will be imposed on cigarettes over and above the existing goods and services tax. This marks a significant shift in the tax framework for the tobacco sector.
How much is the new excise duty?
According to a notification issued by the finance ministry late on Wednesday, excise duty on cigarettes will range between Rs 2,050 and Rs 8,500 per 1,000 sticks, depending on the length of the cigarette. The new rates will come into effect from February 1.
This excise duty will be applied in addition to the current 40 percent GST on cigarettes. At present, total taxes on cigarettes account for roughly 53 percent of the retail price.
How does this compare globally?
India’s total tax incidence on cigarettes is still below the World Health Organization benchmark of 75 percent, which is aimed at discouraging tobacco consumption. The current tax structure includes a 28 percent GST along with a value based levy linked to cigarette length and size.
The latest excise increase is seen as a step towards narrowing this gap, although it has had an immediate impact on market sentiment toward tobacco companies.
What does this mean for ITC and other tobacco firms?
Analysts estimate that the new excise duty could lead to a 22 to 28 percent increase in overall costs for cigarettes in the 75 to 85 mm category. According to ICICI Securities, cigarettes longer than 75 mm account for roughly 16 percent of ITC’s total volumes.
As a result, these products could see price hikes of around Rs 2 to Rs 3 per stick to pass on the higher tax burden. How much of this cost is absorbed by companies versus passed on to consumers will be closely watched.
How have tobacco stocks performed recently?
The selloff adds to the recent underperformance of tobacco stocks.
• ITC shares are down nearly 10 percent over the past five trading sessions and about 12 percent over the last six months. • The stock currently trades at a price to earnings ratio of around 25 and has a market capitalisation of approximately Rs 4.59 lakh crore. • Godfrey Phillips India shares have fallen about 16 percent in the last five days and close to 20 percent over the past six months. • Godfrey Phillips trades at a higher valuation, with a price to earnings ratio of around 43 and a market capitalisation of about Rs 36,787 crore.
What should investors watch next?
Going ahead, investors will track how tobacco companies respond to the higher excise duty. Key factors include pricing actions, volume impact, margin resilience and the possibility of further tax changes.
While tobacco businesses have historically managed tax hikes through price increases, the sharp market reaction suggests near term uncertainty around volumes and profitability. The broader impact on FMCG indices and defensive portfolios will also remain in focus as the new excise regime comes into effect from February 1.