The GST Council has rolled out its biggest reform since the tax was first introduced, simplifying the system into three slabs, 5 per cent, 18 per cent, and a sin tax of 40 per cent. The last one is the Government’s way to show that it will act aggressively on sinful and luxury items, which are used by the upper middle class and the rich. Products like pan masala, gutkha, cigarettes, aerated drinks and high-end luxury cars will fall in this de-merit bracket, making them considerably more expensive for the consumers.
On September 5, the shares of cigarette giant ITC fell by over two per cent, two days after the Government announced the sweeping changes. Earlier, cigarettes faced 88 per cent or more as effective tax, which included GST, along with cess, value-added tax and others. Post-GST 2.0, cigarettes will attract a GST of 40 per cent, but the total incidence is likely to be the same, 88 per cent or more.
What is more important is the additional caveat. From now on, the GST on cigarettes will be not applicable on the transaction value, which was the method earlier, but on the Retail Sale Price (RSP). This means that the MRP (Maximum Retail Price) will include the GST component. The change is good for the tax authorities. It intends to plug loopholes for evading taxes after the cigarettes leave the factories. Earlier, GST was on ex-factory prices. This allowed retailers to evade the taxes if the retail price was higher. No longer.
At least this is how it will work in theory. According to media reports, the RSP change is applicable to other sin and allied goods such as pan masala, gutkha, manufactured tobacco and chewing tobacco. It will happen even before the rollout of the 50 per cent GST, which will begin after the existing compensation cess is phased out. For the consumers, of course, it may imply higher prices, although the tax incidence remains the same. Retailers may further enhance prices till the new packets printed with new prices reach the markets.
Cigarettes in ITC’s financials According to the Q1-FY26 report by Deven Choksey Research, ITC’s cigarette segment grew by 7.6 per cent YoY, led by mid-single digit volume growth, driven by gains in market share from illicit trade, and aided by a stable tax environment. Growth was driven by stronger traction in differentiated and premium offerings. Elevated tobacco leaf costs led to contraction in EBITDA margins by 187 bps YoY. Management expects easing of the procurement prices to support margin recovery from H2-FY-26 (estimates).
Intensified and stronger enforcement, states the report, helped to substitute illegal trade with the legal one. ITC being the largest cigarette-maker was the biggest beneficiary. The tax structure remained stable. Even the new changes, which pushes cigarettes into the sin tax bracket, will lead to simplicity in structure. The earlier regime of 28 per cent GST plus 12 per cent compensation cess is replaced by a single 40 per cent GST. The additional levies, over and above 40 per cent, will remain in place as earlier.
According to Mirae Asset Sharekhan research report, ITC’s Q1-FY26 numbers are a mixed bag with revenue and cigarette volumes being ahead of the estimates. But the margins were a miss. Volume growth of the cigarettes business is expected to sustain, with no increase in tax in the recent Union Budget. The new GST impact may be minimal, say other experts, though prices may go up by five per cent.
“ITC has undertaken relevant strategic actions to revive growth in the non-cigarette FMCG business in the near term. After the demerger of the asset-heavy hotels business, ITC’s return profile will substantially improve in the coming years. The stock continues to trade at a discounted valuation of 24x and 21x its FY26 (estimates) and FY27 (estimates) EPS (earnings per share), respectively. We maintain a Buy on the stock with a revised… (price) of Rs 505,” contend the analysts who wrote the Mirae Asset Sharekhan report.
According to a report by Motilal Oswal Financial Services (MOFS) report, ITC’s core business growth is steady, with cigarette growth coming in better than expected. Consistent focus on new launches, stable taxes and a variety of other initiatives led to seven per cent cigarette growth in FY25, and the momentum continued in Q1-FY26.
“If ITC sustains mid-single digit volume growth in cigarettes, and FMCG business sees a recovery in FY26, we expect valuation re-rating. We reiterate our BUY rating on ITC with our… (price of) Rs 500 (implying 26x Jun’27E P/E). ITC’s core business of cigarettes saw steady performance. With stable taxes… we anticipate stable growth…. We model a five per cent revenue CAGR in FY26-28,” explain the analysts who wrote the MOFS report. Most of the brokerage houses feel the stock price will be over Rs 500.
Beware of risks According to Mirae Asset Sharekhan, any increase in the tax rate on cigarettes, as is the case with the new GST, slow recovery in consumer demand or sustained volatility in raw-material prices will act as key risks to the company’s earnings estimates. ITC strengthened its position with strategic moves against illicit trade. But this may or may not be sustainable. The slight price increase now may encourage and enthuse smuggling. A mix of stable taxes and stricter enforcement aided legal cigarette volumes, which boosted government revenue. The 2025 Union Budget proposed a track-and-trace system for stronger oversight. If these are implemented, they will help the cigarette companies. If not, there may be trouble ahead.
In the future, the company’s premium brands like Classic Connect and Gold Flake Indie Mint, which performed well, may feel demand pressures. Higher leaf tobacco costs were offset by better product mix, pricing, and cost controls. These need to be continued and sustained. Hence, the company will need to carefully track its cigarette business, and give a further push to the FMCG ones, which may gain from the new GST cuts. There too, a problem looms. In some segments, the GST reduction on FMCG comes with the removal of refunds, under Input Tax Credit, of GST paid on inputs.