Cigarette Tax Hike Hits ITC Stock Hard, Biggest Drop in Nearly Five Years

ITC Shares Tumble After Government Announces Major Cigarette Tax Hike

Shares of ITC Limited recorded their sharpest decline in nearly six years after the Indian government unveiled a substantial increase in excise duties on cigarettes, triggering concerns over profitability for the country’s largest tobacco company.

As per an official notification released late on December 31, 2025, cigarette excise duty will be revised upward to a range of ₹2,050 to ₹8,500 per 1,000 cigarettes, effective February 1, 2026. Market participants were surprised by the magnitude of the increase, which turned out to be significantly higher than what was previously anticipated. Analysts at Jefferies noted that if the National Calamity Contingent Duty (NCCD) continues unchanged, the combined tax burden on cigarettes could rise by over 30%, well above market expectations.

Tobacco Stocks See Heavy Selling Following the announcement, ITC’s share price plunged nearly 10% on January 1, marking its worst single-day performance since 2020. The impact was even more severe for Godfrey Phillips India, whose stock dropped around 17% during the same trading session.

Trading activity surged sharply, with volumes in both stocks jumping to more than 20 times their recent three-month average. ITC sells popular cigarette brands such as Gold Flake and Classic, while Godfrey Phillips markets Marlboro and Four Square in India.Earnings Concerns Take Center Stage

Investors reacted negatively due to uncertainty over how cigarette manufacturers will manage the higher tax burden—whether through price increases or absorbing part of the cost. Cigarettes account for over 40% of ITC’s overall revenue, making the company especially sensitive to any decline in sales volumes.

The development also comes at a time when British American Tobacco (BAT), ITC’s largest shareholder, has been gradually reducing its stake, adding another layer of concern for investors.

Jefferies analysts, led by Vivek Maheshwari, cautioned that significant price hikes could dampen demand and increase the risk of consumers shifting toward illegal or unregulated cigarette markets. Their estimates suggest ITC may need to raise prices by at least 15% to counterbalance the tax impact.

Higher Taxes, Bigger Policy Context

The increased excise duty will be levied in addition to the existing 40% Goods and Services Tax (GST) on tobacco products, also effective from February 1. The government has stated that the move is aimed at offsetting revenue shortfalls following wider tax cuts announced in September.

India has more than 253 million tobacco users, making it the second-largest tobacco-consuming nation globally. According to finance ministry estimates, tobacco-related diseases place an economic burden of over ₹2.4 trillion annually on the country.