Experts have cautioned that the government’s steep and sudden increase in taxes on cigarettes could lead to a surge in illicit tobacco trade and cause significant revenue losses, instead of curbing consumption.

Earlier this week, the finance ministry notified amendments to the Central Excise Act, introducing a new excise duty on cigarettes ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on length, effective February 1, 2026. This excise duty will be levied in addition to 40 per cent GST, resulting in an overall tax burden of nearly 60–70 per cent. At present, the total tax incidence is around 50–55 per cent.

Experts said the sharp hike, coming alongside the transition from the GST compensation cess to a new excise structure on demerit goods, has raised serious concerns. Think Change Forum Secretary General Ranganath Tannir said excessive taxation on inelastic goods such as cigarettes often encourages smuggling rather than compliance. He noted that cigarettes in India are already among the least affordable globally as per WHO indicators, and further price increases may push consumers towards illegal products.

According to a J P Morgan Asia Pacific Equity Research report, higher taxes on the King Size Filter Tip segment could lead to downtrading to cheaper variants and increased consumption of illicit cigarettes. India already accounts for one of the world’s largest illicit tobacco markets, with illegal products estimated at about 26 per cent of total tobacco consumption.

Nomura, in a separate research note, said high cigarette taxes frequently have unintended consequences, including the growth of non-tax-paid smuggled cigarettes. Jefferies, citing the Tobacco Institute of India, said a wider price gap between legal and illegal products could result in substantial tax leakage.

Experts also pointed to Australia’s experience, where repeated tax hikes between 2012 and 2020 pushed illicit tobacco’s market share from under 2 per cent to around 14 per cent. Analysts said the government still has time to review the new excise levies before they trigger a larger illicit trade problem.