The Finance Ministry’s declaration of a considerable tax reform on cigarettes and pan masala has resulted in a significant drop in cigarette stocks, where certain firms lost almost 20% of their market capitalization in one trading day.

As of February 1, 2026, the GST compensation cess on cigarettes will be eliminated and substituted with an altered excise duty varying from Rs 2,050 to Rs 8,500 per 1,000 sticks, based on cigarette length. This charge will be levied on top of the current 40% GST. Pan masala products will also be hit by a health and national security cess.

The late announcement made on Wednesday caused a sudden sell-off of cigarette stocks on Thursday. ITC, which is the top player in the market, experienced a decrease of 9.8% in its market value, reaching Rs 364. At the same time, Godfrey Phillips India, the company that has Marlboro’s license for India, saw a decrease of 17.1% in its value, dropping to Rs 2,290. These companies together lost almost Rs 56,300 crore in one day due to the fall in their combined market capitalization.

According to the analysts, the reason for the sharp drop in prices is the expectation of a cigarette price hike by 15-20%, which would adversely affect sales, revenues, and profits. A report by Jefferies, a global brokerage, noted that ITC may need to raise prices by at least 15% to pass the tax impact onto consumers. The report also warned that higher prices could push some demand to the illicit cigarette market.

Tax consultants, however, said that most cigarette brands might not see major price changes, although certain products such as cigars and cheroots could face price revisions. The government stressed that the alterations were directed towards preventing certain goods from cheating on tax by means of GST restructuring.

Furthermore, the government has made it compulsory for the manufacturers of chewing tobacco, gutkha, and similar products to comply with the strictest measures, which include installing cameras in all packing areas and keeping the recorded footage for no less than two years as a way of preventing tax evasion.

The new tax system has put the industry in a very difficult situation where it needs to find a way to balance price, volume, and compliance. This indicates that a turbulent time is coming for the Indian tobacco industry.