New Delhi

The domestic cigarette industry is bracing for a 6–8 per cent decline in volumes in the next financial year, following changes in the tax structure effective February 1, according to a report by Crisil Ratings.

The revised taxation framework includes the removal of the compensation cess and the introduction of an additional excise duty ranging from Rs 2.05 to Rs 8.5 per cigarette stick, depending on length. In addition, the GST on the final retail price of cigarettes will rise to 40 per cent, further increasing the tax burden on the sector.

The impact of the tax changes is expected to vary across market segments. Mid to premium cigarettes, typically longer than 65 mm, will attract excise duties between Rs 3.6 and Rs 8.5 per stick. Meanwhile, the mass segment, comprising cigarettes shorter than 65 mm, will face lower duties in the range of Rs 2.05 to Rs 2.1 per stick.

While the mass segment accounts for 40–45 per cent of total industry volumes, manufacturers are expected to partially absorb the tax hike in this category due to high price sensitivity among consumers.

Commenting on the expected industry response, Shounak Chakravarty, Director at Crisil Ratings, said manufacturers are likely to adopt differentiated pricing strategies across segments.

“While the mid to premium segment will see higher duty hikes, amounting to around 25 per cent of the current maximum retail price (MRP), manufacturers are expected to largely pass on the impact to consumers, who typically show greater brand loyalty to specialised offerings such as low-nicotine variants and flavoured products,” Chakravarty said.

“In contrast, duty hikes in the price-sensitive mass segment will be lower at about 15 per cent of the current MRP, and manufacturers are likely to absorb part of the increase to limit volume erosion. Overall, industry volumes could still decline by 6–8 per cent next fiscal, similar to trends observed during previous duty hikes,” he added.

Despite the anticipated contraction in volumes, Crisil Ratings expects the financial profile of the industry to remain resilient. Earnings before interest and tax (EBIT) margins may contract by 200–300 basis points, but are projected to stay strong at over 58 per cent in the coming fiscal year.

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The credit strength of leading cigarette manufacturers is supported by robust liquidity and negligible debt levels. The organised cigarette segment, which accounts for roughly 10 per cent of total tobacco consumption in India, currently holds a cash surplus exceeding Rs 20,000 crore, the report noted.