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A sharp increase in taxes on cigarettes, along with a new excise duty structure on tobacco products, could trigger a surge in illicit trade and lead to significant revenue losses for the government, experts have warned.Earlier this week, the finance ministry notified amendments to the Central Excise Act, introducing a fresh excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 cigarette sticks, depending on their length. The new excise duty, which comes into effect from February 1, will be levied in addition to the existing 40 per cent Goods and Services Tax (GST).This change implies an overall tax hike of around 60–70 per cent, varying by cigarette length, compared with the current overall tax incidence of about 50–55 per cent. The move marks a transition from the GST compensation cess to an excise-based regime for demerit goods.The unexpected nature of the tax increase has raised concerns about higher smuggling and illegal trade in tobacco products. According to news agency PTI, Ranganath Tannir, secretary general of Think Change Forum, said the steep rise could prove counterproductive. “Public finance theory is clear that excessive taxation of inelastic goods fuels illicit trade, not compliance,” he said, adding that cigarettes in India are already among the least affordable globally based on World Health Organization affordability indicators.

Making them more expensive is unlikely to curb demand, but could push consumers towards illegal and smuggled products, undermining tax collections, he noted.Brokerage reports have echoed similar concerns. According to JPMorgan’s Asia Pacific Equity Research, a higher tax rate for the King Size Filter Tip (KSFT) segment increases the risk of consumers downtrading to cheaper options and may also lead to higher consumption of illicit cigarettes.Illicit tobacco already accounts for about 26 per cent of India’s total tobacco market, making the country the fourth-largest market globally for smuggled tobacco, PTI reported.Nomura, in its research note, said that while higher taxes are aimed at reducing consumption, they often have unintended consequences. “High taxes on cigarettes… fuel the growth of illicit cigarettes and push consumers towards cheaper, non-tax paid smuggled cigarettes,” the brokerage said.Jefferies, citing a report by the Tobacco Institute of India (TII), said the industry body has urged the government to review the proposed excise structure. A wider gap between legal and illegal prices could benefit non-duty-paid cigarettes and result in higher tax leakage, the report noted.Experts also pointed to international experience to underline the risks. Australia’s repeated tobacco tax hikes between 2012 and 2020 led to a sharp rise in cigarette prices and were followed by a jump in illicit tobacco consumption from under 2 per cent to around 14 per cent of the market.Calling the proposed excise levies “unprecedented”, an analyst said there is still time to reassess the decision before it comes into force. “Since they take effect from February 1, 2026, the government has an opportunity to revisit and rectify them before they spawn a much larger problem of uncontrollable illicit networks,” the analyst warned, as per PTI.