Kamal Ghorui
In India, approximately 100 million adults smoke cigarettes as of recent estimates, representing about 10-12% prevalence among men aged 15 and older, while female rates remain low at under 2%. Smoking cigarettes is harmful to health, as are many other behaviors and exposures, such as, living in polluted cities, smoking bidis, chewing tobacco, or consuming alcohol. Once people start consuming these products, they often find it hard to quit due to their addictive nature. So what happens if the government increases taxes on one product – in this case, cigarettes – without raising taxes on alternatives?
It is to be noted that on January 1, 2026, the government introduced a sharp increase in cigarette taxes, sparking widespread anxiety across the industry. Cigarette taxes are likely to rise by 38%-50%, depending on cigarette length, with longer king-sized cigarettes bearing a larger burden. The most likely scenario is around 58% tax increase and approximately 34% price hike Implementing excessively high excise taxes on cigarettes may have unintended consequences that could weaken the ongoing fight against illegal cigarette trade. Another alternative is people will likely shift their consumption to other alternatives like bidis and chewing tobacco, which may be equally hazardous. India has a unique consumption pattern with only 4% of adult population (15+ years), as consumers of cigarettes, while bidi and chewing consumers are significantly higher at 8% and 21% respectively. For every cigarette smoked, 8 bidis and 22 units of chewing tobacco are consumed in the country. Therefore, it is illogical that other tobacco forms like bidis have today a much lower tax incidence, which in no way supports the public health narrative. Legal cigarettes constitute only 10% of the total tobacco consumption while contributing 80% of tobacco tax revenue to the Government. Globally, cigarettes account for approximately 90% of tobacco consumption, making them the most prevalent form of tobacco use worldwide. However, in India, legal cigarettes constitute only about 10% of the total tobacco consumption. The remaining 90% comprises 29 other tobacco products, including bidis, chewing tobacco, khaini, and illegal cigarettes. There is a huge disparity in effective taxation between cigarettes and other tobacco products like bidi, chewing tobacco etc., which are lightly taxed as compared to cigarettes. The tax on Cigarettes is 54 times higher than Bidis and 32 times higher than Chewing tobacco.
Given this scenario, the cigarette centric high taxation policy, will not affect overall tobacco consumption in the country but only lead to a shift in consumption from legal cigarettes to other forms of tobacco consumption and an increasing overall tobacco use in the country. In addition, due to our long and porous borders, despite the best efforts of the Enforcement Agencies, smuggled cigarettes are entering the country and are being sold at extremely low prices due to tax-evasion, in every nook and corner of the country. What this illegal market spawns in turn is a major area of concern. There are issues related to implementation. Of the 90,000 sanctioned positions for customs officers, the government is operating with only 54,000 filled. Bribery is another consequence of this shortage. The substantial tax arbitrage created in the past between duty-paid legal cigarettes and illegal cigarettes, resulted in illicit cigarettes reaching as high as 26.1% of the total cigarette market. This makes India, the 4th largest market for illegal cigarettes worldwide. It is estimated that at the current tax rates, the illicit trade results in an annual revenue loss exceeding Rs.23,000 crore for the government in tax revenues alone. And all of these factors lead to a loss in government revenue that it expect from an increase excise on cigarettes.
The tobacco sector in India plays a critical socio-economic role, particularly in rural areas. From employment generation to export earnings, the importance of this commercial crop remains pivotal. Tobacco is a highly labour-intensive crop grown in semi-arid and non-irrigated lands where no other equally remunerative cultivation is possible. The growing illicit cigarette trade has had a severe impact on the Indian FCV tobacco farmers, as contraband products do not use locally grown tobacco. FCV tobacco production had dropped by a steep 40% between 2013-14 and 2021-22, resulting in shrinkage in farm earnings and loss of employment in tobacco-growing areas. The drop in crop production during the past decade (2013 to 2023) has resulted in a cumulative loss of 238 million man-days of employment in tobacco growing areas. The Industry had faced excessively high increases of compounded annual growth rate (CAGR) of 15.7% in excise duty rates between 2012 and 2017. This surge in taxes had led to unintended consequences of growth in illicit trade more than doubling from 12.6% in 2012 to 26.1% in 2024.
It is important to state that the years of ‘no tax increase’ or ‘marginal increases’ coupled with increased enforcement by regulatory agencies has helped partially arrest the growth of illicit trade and led to revenue increase for the Government. Relative tax stability since 2021-22 has provided growth in tax revenues from Cigarettes as legal industry continued to claw back volumes from illicit. Revenue growth from cigarettes for the period 2020-21 to 2024-25 was CAGR of 10.7%. The incidence of illicit trade also dropped from 27.6% in 2020-21 to 26.1% in 2024-25.
India is the 2nd largest producer of tobacco in the world, providing livelihood to 4.57 crore people in the country. Tobacco cultivation and allied activities provide employment to farmers, landless labourers, tribal communities and women, many of whom belong to economically disadvantaged groups. A dominant part of this workforce is engaged in the agricultural sector, underlining tobacco’s deep rural footprint.
The distribution of tobacco in the country is through millions of small retailers who operate from small shops, kiosks, pavements etc. This is unlike the West where tobacco products are sold through organized large formats like supermarkets etc. and vending machines. These retail formats, which sell paan, bidi, biscuits, shampoo, juice, cold drinks, etc., provide livelihood to millions of poor Indians and are the backbone of Indian retailing. These retail outlets provide self-employment to lakhs of Indians who belong to poorer sections of society and help them make a living with dignity.
Tobacco taxation policy must take a holistic approach, balancing public health priorities with the socio-economic realities of tobacco-dependent livelihoods. The Government should cognize for the adverse consequences of high taxes as seen in the past and the global experiences and maintain revenue neutrality for cigarettes. This will be right policy direction to disrupt and curb the growth of illicit trade, ensure that the Government realizes its rightful revenue, and enable the farming community to regain lost ground by allowing the legal industry to recover share lost to tax-evaded illicit trade.
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