Is ITC Making Crores Through Cigarette Black Marketing In India? Who Really Profits, Follow The ITC Trail

ITC and India’s cigarette black market are increasingly part of the same uncomfortable conversation. India today sits among the world’s largest consumers of illicit cigarettes. By some estimates, one out of every four cigarettes smoked in the country is illegal – smuggled, non-duty paid, non-compliant with health warnings, and sold openly across paan shops, kiosks and street corners.

The exchequer loses anywhere between ₹16,000 crore and ₹23,000 crore annually in unpaid taxes. Small retailers are squeezed, farmers complain of falling legal demand, and enforcement agencies admit the scale of the problem is overwhelming. And yet, amid this expanding black market, one company remains remarkably resilient.

ITC Ltd, which controls over 70% of India’s legal cigarette market, continues to generate strong cash flows from its cigarette business – even as legal cigarette volumes have fallen sharply over the years. The contradiction is impossible to ignore- if cigarette black marketing is bleeding the industry, why does its largest player keep walking away stronger?

A Black Market That Refuses To Die

According to Euromonitor International, illicit cigarettes account for 26.1% of India’s total cigarette consumption, making India the fourth-largest illicit cigarette market in the world by volume. Industry estimates suggest this share has more than doubled since 2012, coinciding with repeated tax hikes and tightening regulations on legal cigarettes.

The economics are simple. A legal, duty-paid cigarette in India often retails at ₹18 or more per stick, while smuggled brands – ESSE, Mond, Win, Manchester, Black, Paris, Ace, Peacock and others, are widely available at ₹8–10 per stick. These products evade excise duty, GST, cess, licensing costs and compliance expenses. Many also bypass India’s mandatory 85% pictorial health warnings, making their packaging far more attractive to consumers.

For smokers, especially young and price-sensitive ones, the choice becomes obvious. What policymakers often overlook is that high taxation does not eliminate demand, it merely redirects it. When legal cigarettes become prohibitively expensive, consumption does not vanish; it migrates into informal and illegal channels.

Tax Hikes And The Acceleration Of Illicit Trade

The problem is poised to worsen. From February 1, 2026, the government has notified a sharp increase in excise duty on cigarettes under a revamped tax framework that replaces the GST compensation cess with a health and national security cess. Depending on cigarette length, the duty now ranges from ₹2,050 to ₹8,500 per 1,000 sticks, translating into an effective tax increase of 40–50% across several categories.

Trade bodies have warned that this could be a tipping point.

The Swadeshi Jagran Manch (SJM), affiliated with the RSS, has cautioned that steep tax hikes on legal tobacco products historically expand the black market. Distributor groups such as the All India Consumer Products Distributors Federation (AICPDF) and the Federation of Retailers Association of India (FRAI) argue that sudden price shocks kill legal demand at the shop level while pushing consumers towards illegal alternatives.

Even farmer organisations like the Federation of All India Farmer Associations (FAIFA) say higher taxes will reduce legal tobacco procurement, hurting growers in Andhra Pradesh and Karnataka while accelerating illicit trade.

In short, every stakeholder except illicit operators appears to lose.

Enforcement Gaps And A Porous System

Former CBIC chairman P C Jha has described how smuggled cigarettes enter India through containers misdeclared as scrap or consumer goods, land routes via Myanmar and the Northeast, air cargo, and even passenger baggage. Directorate of Revenue Intelligence (DRI) data shows seizures of smuggled cigarettes jumped from around ₹142 crore between 2011–15 to over ₹6,600 crore between 2015–21.

And yet, seizures barely scratch the surface. At the retail end, enforcement is practically futile. Small paan shops stock only ₹10,000–₹20,000 worth of illicit cigarettes at a time, making raids economically pointless.

Customs officials admit that less than 1% of passenger baggage is physically checked at airports due to volume constraints. Once smuggling networks entrench themselves, dismantling them becomes extraordinarily difficult.

This creates a system where illicit cigarettes are cheap, ubiquitous, and low-risk to sell.

Where ITC Enters The Picture

This is where the story becomes uncomfortable – and impossible to ignore.

India’s legal cigarette market has been shrinking steadily, with industry estimates suggesting a 25% decline in volumes over the past decade, largely driven by repeated tax hikes, stricter regulations, advertising bans, and packaging mandates. On paper, this should have been devastating for cigarette manufacturers.

Yet, ITC’s cigarette business continues to generate tens of thousands of crores in annual revenue, throwing off cash flows strong enough to bankroll its aggressive diversification into FMCG, hotels, agri-business, paperboards, and packaging. Even in years when cigarette volumes stagnate or decline, the segment remains ITC’s single largest profit engine.

This divergence, falling volumes on one hand and resilient profitability on the other is not accidental. It is structural. The explanation lies not in demand growth, but in scale, insulation, and regulatory endurance.

Unlike smaller cigarette manufacturers or potential new entrants, ITC does not depend on volume growth to survive. Its dominance is anchored in advantages that were built over decades and are now nearly impossible to replicate in today’s regulatory environment.

First, ITC commands over 70% of India’s legal cigarette market, a share so large that even sharp swings in consumer behaviour or taxation do not threaten its position. Second, it operates a deep, nationwide distribution network that reaches millions of retail outlets – from metros to the smallest towns – ensuring that wherever legal cigarettes are sold, ITC brands are present.

Third, ITC controls a multi-tiered brand portfolio spanning every viable legal price point, from mass-market offerings to premium variants. This allows it to retain consumers even as affordability shifts, something smaller players struggle to do. Fourth, its strong cash flows enable it to absorb regulatory shocks, whether from tax hikes, compliance costs, or temporary volume declines, without existential risk.

Finally, and most critically, the regulatory framework itself has become a barrier. Advertising bans, plain packaging rules, stringent licensing norms, and restrictions on brand-building make it virtually impossible for new entrants to establish themselves or for smaller competitors to scale meaningfully.

When compliance becomes prohibitively expensive, only the largest player can afford to remain compliant at scale.

How Black Marketing Strengthens the Moat

Counterintuitive as it may sound, the rapid expansion of cigarette black marketing does not weaken ITC’s dominance. In many ways, it quietly reinforces it.

Illicit cigarettes do not attack the market leader head-on. Instead, they kill off marginal legal players first – smaller manufacturers, fringe brands, and potential challengers who lack the balance sheet strength to survive declining legal volumes and rising costs. As these players exit or shrink, the competitive field narrows further.

At the same time, high and frequent tax increases raise entry barriers, freezing the legal market in its existing structure. No new serious competitor can emerge when taxes, compliance costs, and regulatory hurdles make profitability uncertain from day one. Advertising bans and restrictive packaging rules compound the problem, preventing challengers from building brand recall even if they manage to enter.

The result is a paradoxical outcome: legal cigarette volumes fall, but pricing power becomes more concentrated. The market does not fragment – it polarises.

On one side sits a vast illegal segment, operating entirely outside the tax net, immune to regulation and enforcement gaps. On the other sits a shrinking but highly concentrated legal segment, dominated almost entirely by ITC.

The middle – where competition should exist – collapses. In this environment, smuggling does not function as a competitive threat; it functions as a filter.

Victim, Whistleblower And Beneficiary?

ITC has repeatedly warned policymakers that cigarette smuggling causes massive revenue losses and, more alarmingly, feeds anti-national and terrorist activities through unaccounted money. Senior executives, including former ITC chief Anil Rajput, have publicly argued that excessive taxation and India’s uniquely large 85% pictorial health warnings have made legal cigarettes uncompetitive and fuelled illicit trade.

These arguments are not without merit. The data supports them.

But they also raise a harder, more unsettling question – one that rarely gets asked in public discourse: If the system is so broken, why does it never seem to break the company that dominates it?

In practice, ITC occupies three roles at once.

—-It presents itself as a victim of illicit trade that erodes legal volumes.

—-It acts as a whistleblower and policy interlocutor, warning the government about the dangers of smuggling.

—-And yet, structurally, it also emerges as a beneficiary of the very distortions it critiques, because those distortions eliminate competition and entrench dominance.

Clearly, this is not a contradiction; it is a moral hazard built into the system.

Who Really Loses?

The casualties of this broken ecosystem are far easier to identify.

—-mall retailers are trapped between falling demand for legal cigarettes and pressure from illegal suppliers offering higher margins.

—-Farmers face reduced procurement as legal cigarette volumes shrink.

—-Distributors struggle with liquidity stress as working capital cycles tighten.

—-Consumers are pushed towards unregulated products of unknown quality.

—-And the government bleeds tens of thousands of crores in lost tax revenue every year.

The one stakeholder that remains largely insulated from systemic collapse is the incumbent market leader.

The Last Bit, A Broken System, Perfectly Legal Profits

When taxation becomes punitive, enforcement remains porous, and compliance costs spiral, markets do not collapse uniformly. They collapse selectively. Those with scale, cash reserves, and regulatory entrenchment survive and often consolidate their advantage.

In India’s cigarette economy, black marketing is illegal. But the advantages it creates for dominant players are perfectly legal, deeply entrenched, and enormously profitable.

And until policymakers confront that uncomfortable reality, the question will continue to hang in the air: Who really profits when cigarette black marketing flourishes in India?