The association has warned that the new tax regime is likely to reduce the offtake of Flue Cured Virginia (FCV) crops by nearly 20 per cent.
Highlighting that the new tax regime on cigarettes and tobacco product will hurt millions of tobacco farmers and farm workers, the Federation of All India Farmer Associations (Faifa) has warned that new tax is likely to reduce the offtake of Flue Cured Virginia (FCV) crops by nearly 20 per cent. This will cause an additional loss of approximately 2.6 million man-days of employment in farming and affiliated activities, the association said.
Titled ‘New tax regime on cigarettes and its impact’ and developed by Faifa and Artha Arbitrage Consulting LLP, the report highlighted that the tax shock would disrupt the tobacco value chain severely, by sharply fuelling the growth of illicit trade. Rising prices are expected to push up demand for illegal tobacco products by nearly 39 per cent, taking total illicit consumption of cigarettes to over 46 billion sticks. This will be a severe blow to the legitimate tobacco growers’ fraternity, besides demolishing the entire industry and destroying livelihoods.
“More than any other stakeholder, the new tax disproportionately hurts tobacco farmers in India, especially FCV growers in South India. The share of Indian FCV farmers in the overall tobacco market has already fallen sharply, from 21 per cent to 10 per cent, due to punitive and discriminatory taxation and the rapid growth of illegal tobacco. This share will shrink further, leaving FCV growers with an increasingly narrow and unsustainable space to operate,” stated Murali Babu, President, Faifa.
On 31 December 2025, the Centre abolished existing compensation and introduced higher rates of central excise duty on tobacco products linked to Retail Sale Price (RSP) with effect from 1st February 2026. Data released in the latest report showed a consistent downward trend in both the number of FCV tobacco growers and the area under cultivation between 2011–12 and 2023–24.
During this period, the planted area fell sharply from 258.23 thousand hectares to 146.54 thousand hectares. This contraction has directly reduced farm incomes, livelihood of lakhs of farmers / farm workers and the tax hike is expected to further aggravate the situation by depressing demand, accelerating farmer exits and deepening income losses across the sector, it added.
“The FCV tobacco agri-sector is experiencing intensifying structural stress. Even before the new tax regime, products derived from FCV leaf were taxed disproportionately, over 30 to 50 times higher per kilogram than non-FCV tobacco used in bidis and chewing products, translating to more than Rs 6 per dose compared to less than one paisa for other forms. The latest excise hike is likely to exacerbate this imbalance, accelerating a shift toward revenue-inefficient and informal consumption channels. From a fiscal standpoint, the resulting revenue gains risk being outweighed by the broader economic costs of reduced farm incomes, employment losses, and downstream livelihood impacts,” highlighted Naveen Srivastav from Artha Arbitrage Consulting LLP, who carried out the research for the report
Socio-economic Impact
Highlighting the socio-economic impact of a high tax regime, the report noted that that tobacco cultivation in India is predominantly undertaken by small and marginal farmers operating on poor soils, largely under rain-fed conditions and with limited access to resources.
The report added that the shift to an RSP-linked GST regime marks a fundamental break from transaction-value taxation. With GST raised to 40 per cent, taxes are now imposed on a substantially higher retail base, while abatement applies only to GST and not to excise duty or NCCD (National Calamity Contingent Duty). This results in taxes being levied on tax-inclusive values, triggering a cascading, multiplier effect that sharply inflates the overall tax burden.
The report also brought out that historical and global evidence shows a clear correlation between sharp tax hikes and illicit trade growth. A global study covering 71 countries finds that a one percentage-point increase in cigarette unaffordability leads to a 0.8 percentage-point rise in illicit trade. The report further stated, once illicit trade gets embedded and established in marketplace, it becomes difficult to remove and enforcement alone cannot control illicit trade.
