Godfrey Phillips Plunges 17% After New Tobacco Tax Notified

Tobacco Stocks Under Pressure

Shares of major tobacco companies, including Godfrey Phillips India Ltd. and ITC Ltd., faced intense selling pressure on Thursday after the government formally notified a new tax structure for tobacco and pan masala products. Godfrey Phillips, a key player in the Indian cigarette market, saw its stock plummet by over 17%. Similarly, shares of the diversified conglomerate ITC Ltd. fell by nearly 10%, hitting a 52-week low. The market downturn was a direct reaction to the government's confirmation that an additional excise duty on tobacco products will be implemented from February 1, 2026, raising significant concerns about future profitability and sales volumes in the sector.

Details of the New Tax Regime

The sharp decline in tobacco stocks was triggered by a Finance Ministry notification that established a clear timeline for the new tax regime. This move is part of a broader overhaul of how 'sin goods' are taxed as the existing Goods and Services Tax (GST) compensation cess period concludes. The notification confirms that from February 1, 2026, the current GST compensation cess will be replaced by an additional central excise duty on tobacco products. Additionally, a new 'Health and National Security Cess' will be levied on pan masala. While these changes were anticipated following the passage of the Central Excise (Amendment) Bill, 2025, the official notification removed all uncertainty regarding the implementation date, prompting an immediate and decisive reaction from investors.

Immediate Market Reaction

The market response highlighted widespread investor anxiety over the impending tax changes. The stock of Godfrey Phillips India tanked 17.09% to settle at ₹2,289.65 on the BSE. During the day, it dropped as much as 19.24% to an intra-day low of ₹2,230.15. Shares of ITC tumbled 9.69% to end the session at ₹363.95, after touching a 52-week low of ₹362.70. Other companies in the sector also felt the impact, with VST Industries dipping by 0.60%.

Why Investors Are Concerned

The primary concern for investors is how this increased tax burden will affect the financial performance of tobacco companies. Manufacturers face a difficult choice: absorb the higher costs, which would squeeze profit margins, or pass them on to consumers through price hikes. Raising prices carries the risk of dampening demand, potentially leading to lower sales volumes. Historically, significant tax increases on tobacco have sometimes resulted in consumers shifting to cheaper, often illicit, cigarette brands, which hurts the organized sector. Vinod Nair, Head of Research at Geojit Investments Limited, noted, "Overall advances were capped as FMCG stocks declined following the newly imposed excise duty on cigarettes."

Government's Rationale and Tax Structure

The government's objective is to maintain a high tax burden on products deemed harmful to public health, ensuring revenue continuity after the GST compensation cess expires. Under the new framework, the base GST rates will remain unchanged, with cigarettes and similar tobacco products continuing to attract a 40% GST, while bidis will be taxed at 18%. The key change is the introduction of a new layer of excise duty. According to the notification, cigarettes, depending on their length and filter, will be taxed in a range of ₹2,050 to ₹8,500 per 1,000 sticks. Furthermore, an additional excise duty of 91% on gutkha and 82% on chewing tobacco will be levied.

Financial Snapshot of Godfrey Phillips

Godfrey Phillips India, incorporated in 1936, is a mid-cap company and a significant player in the tobacco sector. The company is known for manufacturing and distributing popular brands like Marlboro in India. The recent stock correction has brought its valuation metrics into sharp focus for investors.

Looking Ahead for the Tobacco Sector

With the implementation date now set, investors are recalibrating their earnings expectations for tobacco companies. The immediate sell-off indicates a reassessment of the sector's risk profile. The focus will now shift to how companies like ITC and Godfrey Phillips strategize their pricing and product mix to mitigate the impact. Investors will be closely monitoring sales data, margin reports, and any further regulatory clarifications in the months leading up to February 2026 to gauge the long-term effects of this new tax regime.

Conclusion

The government's notification formalizing a new excise duty on tobacco has sent ripples through the stock market, leading to a sharp correction in the shares of Godfrey Phillips and ITC. The move underscores the persistent regulatory and tax-related risks associated with the tobacco industry. As companies prepare to adapt to the new tax landscape, their key challenge will be to balance profitability with market demand in a price-sensitive environment. The coming months will be crucial in determining how effectively the industry can absorb this significant policy shift.