High Taxes On Cigarette May Fuel Illicit Trade, Hurt Tax Collection: Report

 New Delhi : The hike in prices of cigarettes following the implementation of additional excise duty beginning this month could lead to a surge in illicit cigarette trade and put pressure on tax collection, a report said. Impact of high tax rates on the entire cigarette value chain, and on the economy, will be significant and difficult to alter later, a report titled 'new tax regime on cigarettes and its impact' said.

"The current increase in cigarette tax rates will therefore not only likely stimulate illicit cigarette trade and consumption that is already flourishing due to high tax arbitrage, but it will also lead to significant socio-economic impacts," Artha Arbitrage Consulting said in the report.

An additional excise duty on cigarettes and tobacco products, and a health cess on pan masala, over and above the highest 40 per cent GST, rate came into effect from February 1.

Cigarette prices have increased by a minimum of Rs 22 to 25 per pack of 10 sticks following the implementation of additional excise duty from Sunday.

The report estimated that the new tax is likely to reduce the offtake of FCV crops by nearly 20 per cent and cause an additional loss of approximately 2.6 million man-days of employment in farming and affiliated activities.

This will be a blow to FCV (Flue-Cured Virginia) tobacco cultivators, agricultural labourers including women, and those labourers engaged in warehousing, auctioning, transportation, and other associated activities of tobacco cultivation, at a time when the employment situation in India is already under sharp distress, it said.

Rising prices are expected to push up demand for illegal tobacco products by nearly 39 per cent, taking total illicit consumption of cigarettes to over 46 billion sticks, it said.

This will be a severe blow to the legitimate tobacco growers' fraternity, besides demolishing the entire industry and destroying livelihoods, the report prepared in association with the Federation of All India Farmer Associations (FAIFA) said.

The report further said that the FCV tobacco agri sector is experiencing intensifying structural stress and even before the new tax regime, products derived from FCV leaf were taxed disproportionately, over 30–50 times higher per kilogram than non-FCV tobacco used in bidis and chewing products.

This persistent tax asymmetry has contributed to a steady contraction in FCV acreage and a decline in the number of growers, as evidenced by data spanning 2011–12 to 2023–24, it said.

"The latest excise hike is likely to exacerbate this imbalance, accelerating a shift toward revenue-inefficient and informal consumption channels. From a fiscal standpoint, the resulting revenue gains risk being outweighed by the broader economic costs of reduced farm incomes, employment losses, and downstream livelihood impacts," it said.