Tobacco Stocks See Volatility Amid Tax Changes and Price Hikes

Shares of major Indian tobacco companies experienced significant fluctuations in February 2026 following government notifications regarding changes to the tobacco tax regime. Initial declines, triggered by the announcement of new excise duties, were partially offset by subsequent price increases implemented by manufacturers to mitigate the impact on profitability.

Initial Market Reaction: Shares Dip on New Tax Regime

On February 1, 2026, the Indian government formally implemented a revised excise duty structure on cigarettes and other tobacco products, replacing the existing GST compensation cess. This led to an immediate negative reaction from investors. Shares of Godfrey Phillips India initially fell by as much as 10% on the BSE, although ITC Ltd saw a decline of 6.11% The Indian System. ITC hit an intraday low of ₹385, and Godfrey Phillips tumbled to ₹2,540.15 Jurishour.

Under the new framework, excise duties on cigarettes range from ₹2,050 to ₹8,500 per 1,000 sticks, in addition to the existing 40% GST. Pan masala and similar products as well face a 40% GST, while ‘beedi’ cigarettes are taxed at a lower rate of 18% The Indian System.

Companies Respond with Price Increases

Cigarette manufacturers responded swiftly to the increased tax burden by raising prices. Godfrey Phillips India increased the price of Marlboro Compact from ₹9.5 to ₹11.5 per stick Economic Times. ITC is expected to raise cigarette prices by 20–40% across its brands, with the new pricing taking effect with upcoming shipments Economic Times. Retailers are also reportedly selling existing inventory at higher prices.

Market Rebound and Reduced EBIT Pressure

The price hikes led to a partial recovery in stock prices. Shares of ITC, Godfrey Phillips India, and VST Industries Ltd surged after reports of the price adjustments. The moves are expected to limit the decline in Earnings Before Interest and Taxes (EBIT) to around 2%, significantly less than earlier forecasts of 8–15% Economic Times. Godfrey Phillips shares rose over 6% on Thursday, February 6, 2026, extending a three-day winning streak with a 31% increase Economic Times. VST Industries also saw a modest increase of 0.3%.

Future Considerations: NCCD and Illicit Trade

While the immediate impact of the excise duty increase has been partially mitigated by price hikes, concerns remain regarding potential impacts on demand and the risk of increased illicit trade. The government also raised the statutory National Calamity Contingent Duty (NCCD) rate on tobacco products from 25% to 60%, although the effective rate will remain at 25% for now, providing companies with flexibility for future tax adjustments Economic Times.

Despite the recent rally, Godfrey Phillips share price remains down over 10% since the beginning of the year.