ITC, Godfrey Phillips Shares Fall Up to 11% as New Tobacco Tax Rules Spook Markets

Shares of major tobacco companies witnessed sharp selling pressure on Thursday after the government formally notified a new tax structure for cigarettes, tobacco products and pan masala, triggering concerns over profitability and demand. Stocks of ITC and Godfrey Phillips India were among the biggest losers in early trade, reflecting investor anxiety over higher duties set to take effect from February 1, 2026.

The decline followed a notification issued by the government confirming the rollout of additional excise duty on tobacco products and the introduction of a new Health and National Security Cess on pan masala. The announcement removes uncertainty around timelines and signals a decisive shift in how so-called sin goods will be taxed after the expiry of the GST compensation cess regime.

Under the revised framework, the existing GST compensation cess on cigarettes and tobacco products will be replaced with an additional excise duty, while pan masala will attract a separate cess aimed at health and national security objectives. Importantly, GST rates themselves will remain unchanged. Cigarettes and similar tobacco products will continue to attract 40 per cent GST, while bidis will be taxed at 18 per cent. However, the overall tax burden on tobacco products is expected to remain high due to the added excise component.

Market participants reacted swiftly to the clarity provided by the notification. Shares of Godfrey Phillips India plunged more than 11 per cent in early trade, slipping to around Rs 2,449 from the previous close of nearly Rs 2,762. The sharp fall highlights concerns that companies with a heavy dependence on cigarettes and tobacco products could face pressure on margins if higher duties lead to increased costs or force price hikes.

Investors are wary that higher taxes may impact cigarette volumes, particularly in a price-sensitive market like India. In the past, steep tax increases on tobacco have often resulted in downtrading, slower growth in legal cigarette sales, or a shift toward cheaper alternatives, all of which can hurt earnings visibility for manufacturers.

ITC shares also came under significant pressure, falling about 8 per cent during the session and touching a 52-week low of around Rs 370. The stock had ended the previous session close to Rs 403. Despite ITC’s diversified presence across FMCG, hotels, paperboards and agribusiness, cigarettes remain its largest profit contributor. As a result, any policy move that raises the tax burden on tobacco products tends to have a disproportionate impact on sentiment around the stock.

From February 1, 2026, all tobacco products, including cigarettes and chewing tobacco, will be subject to the new excise duty regime. Pan masala manufacturers will also face higher levies under the newly introduced cess. The government has reiterated that the objective is to ensure harmful products continue to bear a high tax burden even after the compensation cess period ends.

Markets are now factoring in the likelihood of higher costs for manufacturers, which could either compress margins or be passed on to consumers through higher retail prices. With the implementation date now fixed, analysts and investors are reassessing earnings assumptions for tobacco companies, leading to the sharp sell-off witnessed in ITC, Godfrey Phillips and other related stocks.