Title of article New excise duty on tobacco products: Cigarette
prices to increase up to Rs 55 per pack
Source The Times of India
Link [Link]
ia-business/new-excise-duty-on-tobacco-product
s-cigarette-prices-to-increase-up-to-rs-55-per-pa
ck/articleshow/[Link]
Date of article publishing Feb 01, 2026
Date of commentary submission Feb 22, 2026
Word count 784
Unit of syllabus Microeconomics
Key concept Intervention
1
New excise duty on tobacco products: Cigarette prices to increase up to Rs 55 per pack.
February 1, 2026 19:17 IST
After the new excise duty regime kicked in, cigarette prices have gone up, with a pack of 10 sticks
now costing at least Rs 22-25 more than before.
This follows the government's decision to raise taxes on cigarettes for the first time in nearly seven
years, bringing India's tobacco taxation closer to global public health norms.
The new levies, approved by Parliament in December, will replace the existing GST compensation
cess framework that has been in place since the rollout of the Goods and Services Tax (GST) in July
2017.
While manufacturers are yet to issue revised MRP declarations, distributors have begun billing old
stock to retailers with 40% GST.
With wholesale markets shut on Sunday, distributors expect fresh stock with new MRPs to be lifted
from Monday onwards.
According to news agency PTI, a packet of Wills Navy Cut (76 mm), earlier priced at Rs 95 per pack
of 10 sticks, is expected to cost around Rs 120 per pack.
Cigarettes of 84 mm length, such as Gold Flake Kings and Lights, Wills Classic and Wills Classic
Milds, currently priced at Rs 170 per pack of 10 sticks, are expected to cost between Rs 220 and Rs
225 per pack.
Similarly, slim cigarettes such as Classic Connect (97 mm), priced at Rs 300 for a pack of 20 sticks,
are expected to have an MRP of around Rs 350, the report said.
However, distributors fear that the price hikes could lead to increased smuggling and the spread of
counterfeit products.
According to the All India Cigarette and Tobacco Distributors Federation (AICPDF), there are around
8,000-9,000 stockists of cigarettes and tobacco products across the country.
"Some companies have already put their stocks on hold. They will start releasing them after billing
under the new tax structure," a stockist told PTI.
"Tobacco products are among the few categories where small shopkeepers are still relevant. If this too
is pushed into the hands of illicit networks, what will be left for honest retailers? This is not just about
taxation-it is about survival," he said.
From February 2026, cigarettes and tobacco products will attract additional excise duty and cess over
and above the highest 40%
GST slab, replacing the current structure of 28% GST plus compensation cess.
The Central Excise Act has also been amended to impose a per-stick excise duty on cigarettes, with
rates varying according to length.
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Microeconomics Commentary
The article examines how excise duty on tobacco affects market equilibrium. This form of
government intervention aims to reduce consumption and improve public health by making cigarettes
less affordable.
The government increases excise duty as a form of indirect tax intervention to discourage
consumption of a demerit good linked to negative externalities, such as second-hand smoke and
higher healthcare costs.
A tax on producers increases the cost of production and leads to a decrease in the quantity
supplied. Consumer prices increase by ₹22–25 per pack, and reach ₹50–55 for premium 76 mm packs.
Figure 1.1 - Impact of an indirect tax on cigarettes in India
Figure 1.1 illustrates an indirect tax on producers of cigarettes. The first equilibrium is A (P,
Q) where demand equals supply (S). In the event of a tax, the supply shifts upward by the tax per unit,
to S + TAX. The consumers can be charged a higher price (P + TAX) and the producers a lower price
(P). Quantity decreases to Q1, illustrating underproduction. The red and blue regions are the tax
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burden distributed between consumers and producers. The triangle marked by welfare loss depicts
deadweight loss, the loss of total surplus resulting from decreased market activity.
Smokers gain private benefits (MPB), while non-smokers face external costs from
second-hand smoke. These health costs reduce overall social welfare but are not taken into account by
the smoker. With this policy intervention, the Indian Government attempts to correct this market
failure, as cigarette prices have risen by approximately Rs 22–25 per pack of 10 sticks. It increases the
marginal private cost of smoking and discourages overconsumption.
Figure 1.2 - Negative externality of consumption of cigarettes in India
Figure 1.2 illustrates a Negative externality of consumption (NEC) diagram. The market
equilibrium occurs where MPB equals MPC, at quantity Qe, which is greater than the socially optimal
level Q*. Allocative efficiency occurs at Q*, where MSB equals MSC. The area between Qe and Q*
represents welfare loss due to overconsumption.
There are numerous assumptions in this analysis. First of all, the analysis assumes ceteris
paribus, which means that all other conditions in the market remain unchanged. It also assumes that
the demand for cigarettes is relatively inelastic which means that consumption will not necessarily
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decrease with an increase in price as consumers are driven by their addiction. Lastly, it is assumed
that the government has the power to fully impose the tax, with consumers only buying cigarettes
legally.
As a result of this government intervention, tobacco producers face higher costs and a
reduction in profits. The government, however, gains increased tax revenue, which can be used to
fund healthcare and public health campaigns. Yet, the policy may encourage illegal trade, as
consumers switch to untaxed alternatives.
Non-smokers benefit from reduced second-hand smoke and lower long-term healthcare costs.
Overall, social welfare may increase if the tax successfully reduces the overconsumption of a demerit
good.
Short-term increases in excise duty cause cigarette prices to rise by about ₹22 to ₹25 per pack, which
lowers demand. Because cigarettes are addictive, demand is comparatively price inelastic, meaning
that consumption slightly declines. Even if government revenue increases, the effectiveness of the
policy may be compromised by the rise of illegal markets. Additionally, different consumer groups are
affected differently by the tax. Consumption does not significantly decline for heavily addicted
smokers because their demand is even more price inelastic. Younger smokers, on the other hand,
usually show more elastic demand, making them more sensitive to price increases.
In the long run, high prices could prevent people from smoking, especially the younger generation.
The young generation in particular may not have a source of income and could rely on their parents.
This would lower negative externalities, such as second-hand smoking, which could lead to
improvements in public health and reduce healthcare costs. However, since the tax is regressive it
would target the low-income group, and this could result in smuggling.
An alternative policy to taxation is healthcare and/or public awareness campaigns. The
government can make consumers aware of the implications of smoking through advertisements or
educational programs. By raising awareness, demand decreases over time as smoking becomes less
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socially acceptable. Moreover, consumers have the power to make informed decisions about their
consumption and its effects.
In conclusion, government intervention, which is an imposition of a higher excise duty tax,
increases prices for a pack of 10 sticks by ₹22-25 more than before. However, because cigarettes are
addictive, the increase in price may not significantly reduce consumption in the short run. In the long
run, it will benefit society, as over time, younger consumers may not decide to start smoking.
Additionally, consumers may switch to substitutes such as e-cigarettes. Thus, this government
intervention may not fully reduce overall nicotine consumption.
Word Count: 784
