A recent report has cautioned that higher taxes on cigarettes introduced from February 1, 2026 could lead to a surge in illicit cigarette consumption and weaken overall tax collections.
The report, titled “New tax regime on cigarettes and its impact”, warns that the economic and social consequences of the latest tax changes could be substantial and difficult to reverse.
Rising Tax Burden and Price Impact
From February 1, 2026 an additional excise duty on cigarettes and tobacco products, along with a health cess on pan masala, has been imposed over and above the existing 40 percent GST rate.
Following the tax increase, cigarette prices have risen by ₹22 to ₹25 per pack of 10 sticks, according to the report.
Expansion of Illicit Cigarette Market
The report warns that higher prices are likely to push consumers toward illicit cigarette products, which already benefit from significant tax arbitrage.
It estimates that demand for illegal tobacco products could increase by nearly 39 percent, raising total illicit cigarette consumption to over 46 billion sticks.
This shift would undermine the legal cigarette market and reduce the effectiveness of tax enforcement.
Impact on FCV Tobacco Farming and Employment
The report estimates that tobacco taxation at current levels could reduce the offtake of Flue‑Cured Virginia (FCV) tobacco by almost 20 percent.
Such a contraction could result in the loss of around 2.6 million man‑days of employment across farming and allied activities, affecting cultivators, agricultural labourers including women, and workers linked to warehousing, auctioning, transportation, and related services.
The report notes that this comes at a time when rural employment conditions are already under strain.
Long‑Term Structural Stress in FCV Sector
The FCV tobacco sector has been facing mounting structural stress even before the latest tax increase. Products made from FCV leaf are taxed 30 to 50 times higher per kilogram than non‑FCV tobacco used in bidis and chewing products.
This long‑standing tax imbalance has contributed to a decline in FCV acreage and the number of growers between 2011‑12 and 2023‑24, the report said.
The latest excise hike is expected to accelerate the shift toward informal and lower‑taxed tobacco products.
Revenue Concerns Outweigh Short‑Term Gains
From a fiscal perspective, the report cautioned that any immediate increase in tax collections may be offset by broader economic losses.
Reduced farm incomes, employment losses, and the expansion of illicit markets could collectively weaken the formal tobacco industry and erode the tax base over time.
The study was prepared in association with the Federation of All India Farmer Associations (FAIFA).
Conclusion
The report raises legitimate concerns about the risk of illicit trade and livelihood stress from higher cigarette taxes, but its conclusions are weakened by limited transparency and balance. It assumes a direct causal link between tax hikes and illicit consumption without clearly explaining the methodology, data sources, or assumptions behind its projections on illegal trade growth, employment losses, and revenue impact. The analysis focuses largely on sector‑specific economic costs while giving little consideration to public health objectives, long‑term healthcare savings, or the role of enforcement in curbing illicit markets. In addition, the absence of a clear conflict‑of‑interest disclosure, despite being prepared in association with a farmers’ body, and the lack of context on timeframes and net employment effects suggest the report functions more as a stakeholder position paper than a comprehensive, neutral policy impact assessment.
Source: Adapted from Deccan Chronicle