Unlike oral tobacco products such as chewing tobacco and gutkha, which are taxed on MRP, the cigarette industry operates very differently. Oral tobacco was brought under MRP-based taxation years ago because that sector was fragmented and unorganized. Even today, however, it suffers from evasion and a flourishing black market. Cigarettes, in contrast, belong to a well-organized, transparent industry that already carries one of the heaviest tax burdens in the world. Adding another layer of taxation could throw the system off balance.
“GST 2.0 must not repeat the mistakes of the past by creating more slabs or raising the peak rate. The real reform lies in simplification – two slabs today, and eventually one rate tomorrow. That is the path to higher compliance, fewer distortions, and sustainable revenue growth” says Nilanjan Banik, Professor at Mahindra University
One big concern is the growth of illicit trade. Legal cigarettes account for less than 10% of India’s tobacco consumption today. If prices rise even further, more and more consumers will simply turn to cheaper, smuggled options. This not only undermines government revenue but also exposes consumers to unregulated, potentially more harmful products. India already struggles with one of the world’s largest illicit cigarette markets, and this proposal would hand more space to smugglers and tax-evaders.
According to Alyssamae A. Nuñez, Economics Instructor at the University of Asia and the Pacific, “Our main enemy is the smugglers. Higher taxes contribute to higher prices; that’s why illicit traders are encouraged to sell more cigarettes to those in the lower socioeconomic classes. We cannot impose new taxes on the cigarette industry because it only hurts the industry itself as well as consumers. There should be more action from the authorities. The government cannot afford to impose new taxes on an industry facing illicit trade. Without effective enforcement in eliminating illicit cigarettes, all efforts in ensuring a level playing field, lowering smoking prevalence and raising revenue all go down the drain.’’
The smarter path forward lies in staying true to the government’s stated objective of revenue neutrality under GST 2.0—collecting the same tax without creating fresh distortions. An MRP-based levy risks doing the opposite, with short-term gains on paper but long-term losses through reduced volumes, a shrinking legitimate tax base, and rising illicit trade. Instead of rewriting the GST framework for a single product, policymakers should focus on strengthening enforcement against smuggling, maintaining a balanced GST–excise structure that offers predictability, and considering specific duties per stick to ensure greater clarity and prevent manipulation.
Levying GST on MRP for cigarettes may seem like a quick win, but the longer-term costs—rising illicit trade, farmer distress, and a weakened GST framework—far outweigh the benefits. A calibrated approach under GST 2.0, rooted in global best practices, offers a more sustainable way to protect government revenues while safeguarding livelihoods.
