An unprecedented tax hike combined with a revised excise duty structure on cigarettes could trigger a surge in illicit trade and lead to significant revenue losses for the exchequer, experts warned.

Earlier this week, the finance ministry notified amendments to the Central Excise Act, imposing excise duties ranging from Rs 2,050 to Rs 8,500 per 1,000 cigarette sticks based on length, effective February 1. The duty will apply over and above the existing 40 per cent GST.

The move implies an overall tax burden of 60–70 per cent, depending on cigarette length, compared with the current 50–55 per cent.

Concerns have been raised that the unexpected tax hikes — introduced during the transition from the GST compensation cess to excise on demerit goods — could fuel smuggling and illegal cigarette trade.

“Public finance theory is clear that excessive taxation of inelastic goods fuels illicit trade, not compliance,” Think Change Forum Secretary General Ranganath Tannir said.

“This risk is amplified in India, where cigarettes are already among the most unaffordable globally, as measured by the WHO’s affordability indicators. Making them even more expensive will not suppress demand, but redirect it — most likely towards smuggled and illegal products — undermining revenue,” he added.

According to global financial firm J P Morgan's Asia Pacific Equity Research report, a higher rate for the King Size Filter Tip (KSFT) segment implies increased risk of consumer downtrading to cheaper variants, and may also induce an increase in the offtake of illicit cigarettes.

In India, illicit tobacco already accounts for about 26 per cent of the total tobacco market, making it the fourth-largest market for smuggled tobacco globally.

Another brokerage house, Nomura, in its research report said, "high taxes on cigarettes, while aimed at reducing consumption, have unintended consequences of fuelling growth of illicit cigarettes and pushing consumers towards cheaper, non-tax paid smuggled cigarettes".

Citing a report by the Tobacco Institute of India (TII), Jefferies said the industry body has requested the government for a review, as a wider legal price gap could help non-duty-paid cigarettes, which will also result in tax leakage.

International experience from Australia demonstrates how overly aggressive tobacco taxation can backfire by fuelling organised crime. Repeated tax hikes between 2012 and 2020 drove cigarette prices sharply higher, triggering a surge in illicit tobacco from under 2 per cent to around 14 per cent of the market.

"The new excise levies are unprecedented. Since they come into effect from February 1, 2026, there is still time to revisit and rectify them before they spawn a much larger problem of uncontrollable illicit networks," an analyst said.