India's cigarette industry is bracing for one of its toughest years, with leading manufacturers warning that an unprecedented tax hike, rising illicit trade, intense price competition and pressure on margins could weigh on growth in FY27.
The concerns, flagged in the latest annual reports and earnings presentations of ITC, VST Industries and Godfrey Phillips India, come after the government sharply increased the tax incidence on cigarettes from February 1, 2026 by raising GST and excise duty. Cigarettes attract a flat 40% GST (against earlier 28%) combined with an additional excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 sticks, plus a National Calamity Contingent Duty (NCCD).
VST Industries Chairman Naresh Sethi described the increase as unprecedented in known history, warning that its impact could extend well beyond FY27. He said the industry faces "multiple headwinds, including supply chain and margin pressures, intense price competition in all segments and threat of illicit."
Godfrey Phillips echoed the cautious outlook. In its FY26 earnings presentation, the company said the steep increase in taxation in Q4 FY26 will make the next year challenging and that it would adopt calibrated price increases to ensure the impact on consumers is phased rather than immediate. The company also said it expects demand moderation following the tax increase and will rely on pricing and product mix optimisation to protect margins while strengthening brands, improving market execution and enhancing operational efficiencies.
ITC, in its FY26 annual report, said the legal cigarette industry continues to operate under a punitive and discriminatory taxation and regulatory regime. According to the company, the latest GST and excise duty changes have resulted in an unprecedented increase in the tax burden on cigarettes.
All three companies expressed concern that higher taxes could accelerate the shift towards illicit cigarettes. VST Industries Managing Director and CEO Piyush Srivastava said the company remains mindful of heightened consumer price sensitivity and the potential expansion of illicit trade under the new tax regime.
ITC said excessive taxation has encouraged consumers to switch to illicit cigarettes and other lightly taxed tobacco products such as bidis and chewing tobacco. Citing Euromonitor estimates, the company said India is the world's fourth-largest illicit cigarette market, with illegal cigarettes accounting for nearly one-third of the legal cigarette industry, resulting in an estimated annual revenue loss of around Rs 23,000 crore to the exchequer.
The company also pointed out that while legal cigarettes account for only about 10% of India's tobacco consumption compared with a global average of around 90%, they contribute more than four-fifths of the government's tobacco tax revenues. It argued that a more balanced and predictable taxation framework would help curb illicit trade while protecting tax collections.
