Why Tobacco Stocks-Godfrey Phillips India & ITC fall up to 10% on January 01

On January 1, 2026, the Indian stock market opened the New Year with a sharp decline in tobacco shares. Godfrey Phillips India saw its stock price plunge by 10 per cent, reaching a low of Rs 2,488.30, while the industry leader ITC dropped over 6 per cent, touching a 52-week low of Rs 378.35. This sudden sell-off was triggered by a late-night government notification confirming that a new, more stringent tax regime for "sin goods" will be implemented starting February 1, 2026.

The primary reason for the investor panic is the introduction of an additional excise duty on tobacco and a new Health and National Security Cess on pan masala. These new levies are designed to replace the existing GST compensation cess, which is set to expire. By notifying the implementation date, the government has removed any lingering hope for a tax reprieve, leading investors to fear a significant rise in Service prices that could hurt sales volumes and profit margins.

According to the new framework, cigarettes, tobacco, and pan masala will now attract a flat GST rate of 40 per cent. This is a notable increase from the previous 28 per centbracket. While biris will be taxed at a lower rate of 18 per cent, the broader tobacco category faces a much heavier burden. The Central Excise (Amendment) Bill, 2025, specifically gives the government the power to levy excise duties on cigarettes ranging from Rs 5,000 to Rs 11,000 per 1,000 sticks, depending on their length.

Beyond just cigarettes, the "Health Security and National Security Cess Bill, 2025" introduces a capacity-based tax on pan masala manufacturing. The revenue generated from these higher taxes is earmarked for public health and national security initiatives. The government’s intent is clear: to maintain high prices on tobacco products to discourage consumption, ensuring that the tax incidence does not drop even after the original compensation cess is phased out.

Market analysts note that the impact will be felt most by companies like Godfrey Phillips and ITC, as they may be forced to pass these costs on to consumers. With total taxes on cigarettes in India currently making up about 53 per cent of the retail price—still below the World Health Organisation's recommendation of 75%—there is concern that this is just the beginning of a long-term trend toward even higher taxation.

The timing of the notification on New Year's Eve caught many off guard, leading to the dramatic price corrections seen on the first day of 2026. While ITC has a diversified portfolio including hotels and FMCG, cigarettes remain its biggest profit generator, making the stock highly sensitive to such policy shifts. As February 1 approaches, the industry will be closely watching how these changes affect consumer demand and the overall stability of the tobacco sector.

Disclaimer: The article is for informational purposes only and not investment advice.