FAIFA Raises Alarm Over Sharp Price Hike of Finished Goods

FAIFA has warned that the sharp hike in taxes comes at a time when farmers are already under severe stress due to falling export realisations, stagnant domestic prices, rising input costs and shrinking cultivation areas imposed by regulatory caps. The organisation stated that excessive taxation has historically failed to reduce consumption and has instead encouraged the growth of illicit trade, leading to revenue losses for the exchequer. According to FAIFA, the current tax increase will push consumers towards smuggled and illegal products, directly harming Indian farmers while benefiting foreign producers operating outside the legal framework.

Reacting to the notification, FAIFA said the increase contradicts earlier assurances by the government that the transition from the Compensation Cess regime to an alternative tax framework would be revenue neutral. The organisation cautioned that domestic manufacturers would be forced to raise prices of finished products, resulting in a drop in legal sales. This, in turn, could reduce demand for domestically grown tobacco and lead to a glut in the tobacco crop market, further hurting farmer incomes.

FAIFA also highlighted what it described as a discriminatory tax regime against flue-cured Virginia (FCV) tobacco growers, primarily based in Andhra Pradesh and Karnataka. FCV tobacco, used in cigarettes, is taxed at rates that are more than 50 times higher per kilogram than bidis and over 30 times higher than chewing tobacco. While FCV tobacco attracts more than ₹6 in tax per dose in the finished product, other tobacco forms used in bidis and chewing products are taxed at less than one paisa per dose. FAIFA argued that this disparity disproportionately penalises the most regulated and compliant farmers, and that the latest excise hike further widens this fiscal imbalance, threatening to destabilise the entire tobacco economy.

Murali Babu, President of FAIFA, said the farming community had relied on the government’s assurance given during the GST 2.0 announcement on 4 September 2025 that tobacco products would be taxed at 40 per cent of the retail sales price while keeping the overall tax incidence unchanged. He noted that farmers had welcomed the government’s decision to rationalise GST rates and do away with the 12 per cent slab, which had helped reduce prices. “We are shocked to see that the promise has not been kept, and instead a sharp increase in taxes has been notified at the cost of farmer livelihoods,” he said.

FAIFA leaders also pointed out that legal cigarette prices in India are already among the least affordable globally when measured against per capita income, as reflected in the affordability index of the World Health Organization. They warned that the latest tax increase would make legal products unaffordable for a large section of consumers, accelerating their shift to illegal channels.

Citing industry and market data, FAIFA said India has already emerged as the world’s fourth-largest illicit cigarette market, with illegal products accounting for around 26 per cent of total cigarette consumption. This growth, it said, has been driven largely by tax arbitrage, where high and uneven taxation makes smuggled products significantly cheaper than legal ones. A further spike in legal prices, FAIFA warned, could cause the illicit market to expand rapidly, overwhelming enforcement efforts and resulting in significant revenue losses for the government.

The organisation also drew attention to the prolonged stress and volatility faced by the FCV tobacco farming sector over the past decade. Auctioned FCV quantities declined from 315.95 million kg in 2013–14 to 304.21 million kg in 2023–24, reflecting a steady fall in legal demand. During the same period, FCV cultivation acreage shrank sharply from 2,21,385 hectares in 2013–14 to 1,22,257 hectares in 2020–21, leading to an estimated loss of nearly 35 million man-days of employment across farming, auction platforms and allied activities.

At the same time, input costs have remained high. Global fertiliser prices firmed up again in 2025, with the World Bank noting a 15 per cent rise in its fertiliser price index since the start of the year and sharp increases in key nutrients such as DAP. Labour costs have also risen, with official data indicating a 7 per cent increase in notified wage rates for FY2024–25 over the previous year, along with persistent pressures from diesel-linked transport and logistics costs. FAIFA said these factors have compressed farmer margins, leaving growers with little capacity to absorb any further demand shock triggered by abrupt price hikes in the legal market.

Appealing for an urgent review, FAIFA has called on the government to roll back the steeply notified excise rates and revise them to revenue-neutral levels. It argued that a sudden and excessive tax shock would destabilise millions of farmers, farmworkers, auction labourers and small retailers who depend on the legal tobacco value chain. According to the organisation, such a move would shrink legal demand, fuel illicit trade and push honest livelihoods into distress. FAIFA urged the government to uphold its commitment to stability, revenue neutrality and farmer welfare, and to ensure that taxation policies do not penalise those who have consistently operated within the law.