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Jairam Ramesh Questions the Government as New Taxes Shake the Tobacco Industry

  • Writer: Anjali Regmi
    Anjali Regmi
  • Jan 1
  • 4 min read


​The start of 2026 has brought a massive shift for the Indian tobacco industry. On January 1, the stock market witnessed a sharp decline in the share prices of major cigarette manufacturers like ITC and Godfrey Phillips. This sell-off was triggered by a late-night government notification on New Year's Eve, announcing a substantial new excise duty and a revised tax structure for tobacco products.

​The new rules, effective from February 1, 2026, replace the old system of compensation cess with a permanent excise duty. For years, the tobacco sector has been a reliable source of revenue for the government and a steady performer for investors. However, this sudden change has left many wondering about the long-term impact on cigarette consumption and corporate profitability.



​The New Math of Cigarette Taxes

​The new tax regime is complex but carries a heavy impact. The government has introduced an additional excise duty ranging from 2,050 to 8,500 rupees per 1,000 cigarette sticks, depending on their length. This is not a small adjustment; it is a fundamental restructuring.

​In addition to this specific excise duty, cigarettes and related tobacco products will now attract a GST rate of 40 percent. This replaces the previous 28 percent GST plus compensation cess. While the government claims this move "rationalizes" the tax structure, the market views it as a significant hike that will force companies to increase retail prices. For a consumer, this could mean a noticeable jump in the price of a single pack.

​Jairam Ramesh Raises Critical Questions

​Senior Congress leader and former Environment Minister Jairam Ramesh has stepped into the debate, questioning the government's approach. While the government frames this as a health and revenue measure, Ramesh has raised concerns about the timing and the potential for these new taxes to cause unintended consequences in the broader economy.

​Ramesh has historically been vocal about "sin goods" and environmental health. He recently criticized the government for its "shocking insensitivity" regarding public health data. In the context of tobacco, his questioning revolves around whether these tax hikes are truly aimed at reducing consumption or if they are simply a way to plug fiscal gaps as the old compensation cess mechanism ends. He argues that without a comprehensive public health strategy, high taxes alone might just drive consumers toward cheaper, unregulated, and more harmful tobacco products.

​Fragmentation of the Market and Illegal Trade

​One of the biggest fears in the industry is the "fragmentation" of the market. India already has a massive illegal cigarette market. When legal, tax-paid cigarettes become too expensive, a segment of smokers often switches to smuggled brands that do not carry health warnings or pay any taxes.

​Jairam Ramesh has often pointed out that policy changes should not be made in isolation. If the gap between legal and illegal cigarettes widens too much, it undermines the very health goals the government claims to pursue. The "fragmentation" here isn't just about land—as discussed in the Aravalli debates—but about the market itself breaking into pieces that the government can no longer monitor or control.

​Why Investors are Panicking

​The stock market reaction was swift. Shares of ITC, which relies on cigarettes for nearly half of its revenue, hit a 21-month low. Investors hate uncertainty, and the new "Health and National Security Cess" on products like pan masala has added another layer of unpredictability.

​Analysts are worried about "volume growth." In the tobacco business, companies usually have the power to pass on small tax hikes to customers. But when a hike is this steep, it hits the volume of sales. If people smoke less because they cannot afford it, the total revenue for the company falls, even if the price per stick is higher. This is the "squeeze" that triggered the massive sell-off on the first day of the year.

​The Health vs Revenue Debate

​There is always a tug-of-war between public health and government revenue. The World Health Organization (WHO) recommends that taxes should account for at least 75 percent of the retail price of tobacco to effectively discourage smoking. Currently, India’s tax incidence is around 53 percent.

​The government argues that the new 40 percent GST plus excise duty brings India closer to global standards. However, critics like Ramesh suggest that the government is addicted to tobacco revenue. In the last financial year, tobacco products generated over 72,000 crore rupees for the treasury. This creates a strange situation where the government needs people to keep smoking to meet its budget targets, even while it raises taxes in the name of health.

​The Impact on 100 Million Smokers

​India is home to an estimated 100 million smokers. For many in lower-income groups, cigarettes and bidis are a significant daily expense. While the new GST for bidis is lower at 18 percent, the overall trend is clear: tobacco is becoming a luxury.

​Economic studies show that for every 10 percent increase in price, consumption drops by about 2 to 3 percent. While this is good for lungs, it is a challenge for the economy in the short term. The new "Health Security se National Security" plan suggests that the money collected from these taxes will be used for national welfare, but people remain skeptical about where the funds actually go.

​Looking Ahead to February 1st

​As we approach the February 1st deadline, tobacco companies are likely preparing for a major round of price revisions. We might see a change in packaging sizes or the introduction of newer, shorter filter sticks to fit into lower tax slabs.

​Jairam Ramesh’s persistent questioning serves as a reminder that tax policy is not just about numbers on a spreadsheet; it affects the habits and pockets of millions. Whether this move leads to a healthier India or just a more expensive one remains to be seen. The coming months will be a test for both the tobacco industry’s resilience and the government’s ability to manage a major policy shift without breaking the market.


 
 
 

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