While the exact impact under new tax structure is still evolving, the higher levy is likely to force companies such as ITC and their peers to raise prices
Considering the recent tax hikes in cigarette business and near-term headwind in the industry, Axis Direct has cut the margin estimates for ITC for the financial year 2026 (FY26)/FY27 but remains positive on medium to long-term growth.
Centre has notified a new tobacco tax structure effective 1 February 2026, replacing the earlier 28 per cent goods and services tax (GST) plus compensation cess regime with 40 per cent GST and a higher excise duty, while NCCD remains unchanged. While the exact impact under new tax structure is still evolving, the higher levy is likely to force companies such as ITC and their peers to raise prices, which could dampen sales volumes in near term, leading to potential demand softness.
On the other hand, if the price hikes are delayed, companies could face pressure on operating margins, the report added.
“ITC will need to implement an immediate portfolio-level price hike merely to maintain its current net realisation per stick. This is expected to disrupt its product mix, where the company had been benefiting from a recent period of tax stability,” the report pointed out.
Axis Direct highlighted that as prices increase, consumers are likely to downtrade from premium variants, such as king size, to cheaper and shorter formats to manage costs, which would materially dilute ITC’s overall margins. With legal prices now poised to rise sharply, the price arbitrage between tax-paid and smuggled brands is set to widen significantly.
“This widening gap is expected to drive meaningful volume migration towards other brands, potentially reversing several years of gains achieved by organised players such as ITC. Cigarette volumes are expected to be impacted in the near term due to higher taxes, with cigarettes contributing around 48 to 50 per cent of total revenue,” the report mentioned.
Adding further, the report highlighted that the fast-moving consumer goods (FMCG) portfolio has seen an improvement in demand momentum and is positioned for a recovery in the coming quarters. Government budgetary measures, GST rate reductions (except sin goods), an expanding outlet network, localisation initiatives and a continued focus on premiumisation are expected to further support growth in the coming years, it added.
