FAIFA seeks rollback of steep tobacco tax hike; cigarette stocks face continued pressure

The Federation of All India Farmer Associations (FAIFA) has urged the government to roll back the recently notified excise duty hike on tobacco products, adding to concerns about the cigarette industry following market expert warnings about sector underperformance. The Ministry of Finance's notification, effective February 1, imposes an excise duty of ₹2,050-8,500 per 1,000 sticks, depending on cigarette length.

FAIFA Challenges Revenue Neutrality Promise

FAIFA President Murali Babu expressed disappointment over the government's decision, stating that it contradicts the assurance of revenue neutrality given during the announcement of GST 2.0 in September. "While announcing GST 2.0, the Government had assured that in the case of tobacco products, GST would be charged at 40% of the retail sales price, while the overall incidence of tax would be kept unchanged," he said.

The farmers' body warns that the steep tax hike will lead to a drop in sales, hurting farmers' supplies and causing a glut in the tobacco crop market. They argue that India's tobacco tax regime is already discriminatory against FCV tobacco growers from Andhra Pradesh and Karnataka.

Market Expert Warns of Sector Pressure

Market expert Nischal Maheshwari has warned that cigarette stocks are likely to face near-term pressure following the government's sudden and steep excise duty hike. Speaking to ET Now, Maheshwari described the excise duty increase as a major surprise, both in terms of timing and magnitude, especially with the Union Budget just weeks away.

Maheshwari noted that cigarette companies may need to raise prices by 15-25% to fully offset the higher duty, which could hurt volumes in the short term. "Passing on such a sharp increase to consumers will not be easy. Some part will be absorbed, and some will be passed on," he explained.

Concerns Over Illicit Trade Growth

FAIFA officials pointed out that India's legal cigarette costs are already among the least affordable in the world when weighed against per capita income. The organisation warns that increased prices will drive consumers to illicit channels, exacerbating the smuggling challenge. India is already the fourth-largest illicit cigarette market globally, with illegal products accounting for 26% of total cigarette consumption.

Alternative Investment Opportunities

While cigarette stocks face headwinds, Maheshwari remains constructive on the auto sector, highlighting that recent GST cuts provide structural tailwinds. "Vehicles have effectively become cheaper by ₹1.00-2.00 lakh, and interest rates are coming down," he said. His preference order within autos is passenger vehicles first, followed by electric vehicles and two-wheelers.

Among other sectors, Maheshwari sees banking and broader BFSI as offering favourable risk-reward opportunities. He also expects metals to continue performing well, believing the rally that began with precious metals could spread to non-ferrous and ferrous segments.