ITC, Godfrey Phillips Plunge 21% on New 2026 Cigarette Tax Hike

Introduction

Cigarette manufacturers ITC Ltd. and Godfrey Phillips India Ltd. faced a sharp sell-off in the initial trading sessions of 2026 after the government announced a substantial revision to the excise duty structure on tobacco products. Effective February 1, 2026, the new policy introduces a higher tax burden that surpassed market expectations, leading to a two-day fall of 21% for both stocks. The move has triggered concerns across the industry regarding its impact on sales volumes, profitability, and the potential resurgence of the illicit cigarette trade.

The New Tax Structure Explained

The central government's notification outlines a significant overhaul of the taxation framework for cigarettes. The base Goods and Services Tax (GST) rate on tobacco products will increase from 28% to 40%. More importantly, the new policy introduces a new basic excise duty ranging from ₹2,050 to ₹8,500 per 1,000 sticks, depending on the length of the cigarette. This new excise duty replaces the previous GST compensation cess. The National Calamity Contingent Duty (NCCD) is expected to remain unchanged, adding another layer to the overall tax incidence. This structure is a departure from the tax-neutral transition that many analysts and investors had anticipated.

Immediate Market Reaction

The market's response to the announcement was swift and severe. Shares of ITC Ltd. dropped 5.11% on Friday to close at ₹345.35, extending a nearly 10% fall from the previous day. The decline pushed its market capitalization below the ₹4.35 lakh crore mark and represented a 27% fall from its 52-week high, wiping out approximately ₹1.57 lakh crore in investor wealth over the year. Godfrey Phillips India, which distributes the Marlboro brand, plunged by 17% on Thursday, marking its most significant intraday decline since 2016. The sell-off reflected widespread investor anxiety about the financial implications of the tax hike.

Financial Impact on Tobacco Firms

The revised duty structure presents a significant challenge for tobacco companies. Analysts project that the total tax per stick could rise by 20% to 40%. To maintain profitability, companies may need to implement weighted average price hikes of over 25%, and potentially more than 35% if the NCCD remains. This translates to a potential price increase of ₹2-3 per stick for popular segments like the 75-85 mm cigarettes, which account for about 16% of ITC's volumes. Failure to pass on the cost could result in a severe impact on Earnings Before Interest and Taxes (EBIT), with some estimates suggesting a decline of over 40%. This leaves companies in a difficult position, as significant price increases risk a sharp drop in demand.

A Closer Look at the Tax Changes

The new tax regime fundamentally alters the cost structure for cigarette manufacturers. The table below summarizes the key differences between the old and new systems.

Analysts' Concerns and Projections

Brokerage firms have uniformly described the new policy as a significant negative for the sector. JM Financial highlighted that the sharp duty hike will negatively impact volumes and meaningfully affect cigarette EBIT. Jefferies noted that the move was a 'meaningful negative surprise' and warned of a substantial hit to volumes and earnings in the near term. The consensus among analysts is that the industry is facing near-term margin and volume pressure. The uncertainty around the final implementation and the companies' strategic responses has led to a cautious outlook, with firms like JP Morgan suggesting that the stock's upside potential may be limited for the next six to nine months.

The Risk of Illicit Trade

A major concern stemming from the tax hike is the potential for a revival of the illicit cigarette market. Steep price increases for legal, tax-paid cigarettes widen the price gap with smuggled or counterfeit products. This could encourage consumers to shift to the unorganised segment, a trend that had moderated in recent years due to stable taxation. A rise in illicit trade would not only erode the market share of organised players like ITC and Godfrey Phillips but also lead to revenue loss for the government.

Broader Industry Context

The government's decision comes after a seven-year period of relatively stable taxation on cigarettes since the implementation of GST in 2017. Public health advocates have long argued for higher taxes, pointing to World Health Organisation (WHO) recommendations that total tax incidence should be at least 75% of the retail price to discourage consumption. India's current tax incidence is estimated to be around 53%. The government's move aligns with global public health guidance and aims to ensure that tobacco products do not become more affordable as incomes rise.

Conclusion

The new excise duty structure marks a significant policy shift for India's tobacco industry, creating substantial headwinds for major players like ITC and Godfrey Phillips. The immediate market reaction reflects deep concerns about the impact on volumes, margins, and the potential for down-trading to illicit products. While the long-term resilience of these companies is noted by some analysts, the near-term outlook remains clouded by uncertainty. The market will now closely watch for clarity on the final tax quantum and the pricing strategies that companies adopt to navigate this challenging new regulatory landscape.