India’s cigarette industry is expected to witness a 6–8 per cent contraction in volumes in the next financial year following the government’s decision to impose additional excise duty and raise the effective GST rate from February 1, according to Crisil Ratings.

At present, cigarettes attract a 28 per cent Goods and Services Tax (GST) along with a compensation cess. From February, the compensation cess will be removed, but a fresh excise duty—ranging between Rs 2.05 and Rs 8.5 per cigarette stick—will be levied depending on the length of the cigarette. The GST on the final retail price will also rise to 40 per cent.

Crisil said cigarettes longer than 65 mm, largely comprising the mid to premium segment, will attract an excise duty of Rs 3.6 to Rs 8.5 per stick. In contrast, mass-segment cigarettes (below 65 mm) will face a lower duty of Rs 2.05–2.1 per stick. Although duty hikes are relatively lower in the mass segment—which accounts for nearly 40–45 per cent of total volumes—manufacturers are expected to absorb part of the increase due to the high price sensitivity of consumers. This is likely to result in a 200–300 basis point decline in EBIT margins, though margins are still projected to remain strong at over 58 per cent.

Crisil Ratings Director Shounak Chakravarty said mid and premium cigarettes will face duty hikes of nearly 25 per cent of the current maximum retail price (MRP). However, companies are expected to pass on most of the increase to consumers, as demand in this segment is relatively inelastic due to brand loyalty and specialised offerings.