The Telegraph
Friday , July 11 , 2014
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Cigarettes get the stick

A cigarette shop in Calcutta on Thursday. (PTI)

Calcutta, July 10: Cigarette sticks will turn dearer as the NDA government followed the footstep of the UPA regime in today’s budget slapping high taxes on tobacco products.

The biggest impact will be felt most on cigarette of smaller lengths, which is priced less than Rs 20 for a pack of ten. The hit will be less for sticks of higher length.

Finance minister Arun Jaitley did not spare other tobacco items, raising duties on gutkas and pan masalas.

“I propose to hike the specific excise duty on cigarettes in the range of 11 per cent to 72 per cent. Similar increases are proposed on cigars, cheroots and cigarillos. Likewise, the excise duty is being increased to 16 per cent from 12 per cent on pan masala, to 55 per cent from 50 per cent on unmanufactured tobacco and to 70 per cent from 60 per cent on gutkha and chewing tobacco,” he said.

Jaitley hoped the measure would mobilise additional revenue to cover the loss coming out of sops provided in direct taxes. He clubbed the announcement with an additional duty of excise at 5 per cent on aerated waters containing added sugar.

“These are healthy measures and I hope everyone would welcome them from the point of view of human and fiscal health,” he said.

The stock of ITC, India’s largest cigarette maker, did not react violently to the tax proposals as the market was probably expecting a harsher regime. The ITC scrip was down 0.32 per cent compared with the 0.28 per cent drop of the Sensex. The scrip closed at Rs 342.50 a share, down Rs 1.10 from the previous close of Rs 341.40.

According to a report by brokerage firm Edelweiss, the weighted average of all hikes put together would be 21 per cent.

“Though the hike will have a bearing on ITC’s cigarette volume growth, we still expect cigarette EBIT growth of 15 per cent year-on-year in fiscal 2015. We expect ITC to hike prices by 12-13 per cent, which has already seen an 11 per cent hike in some brands, in above 65mm cigarettes and about 50 paise to Rs 1 hike in 64mm per stick. ITC can potentially gain share as hike in 64mm will be harsher for other cigarette players who have higher saliency in this segment,” Abneesh Roy, an analyst with Edelweiss, said.

The brokerage firm maintained a buy rating on the stock.

Nikhil Vora, founder of Sixth Sense Venture, however, maintained a cautionary note. “It is more than clear that incrementally the severity of punitive taxation regime is here to stay. (I) Do think that the re-rating of ITC as a consumer business will keep getting challenged,” he said.

The Tobacco Institute of India, expectedly, criticised the move. “The extremely steep excise duty hike on cigarettes coming on the back of sharp increases in the two preceding years, will give a further fillip to growing illegal trade in India which is already a significant 19 per cent of overall cigarette industry,” the institute said in a statement.

In particular, the increase on the less than 65mm segment will boost the domestic tax-evaded Re 1 cigarettes. Moreover, the very high increase will further accelerate the shift in tobacco consumption from cigarettes to cheaper and revenue inefficient tobacco products, it added.

“As a consequence the share of the legal cigarette industry which is a mere 12 per cent of the total tobacco consumption in India, will be further eroded. In overall terms the duty increase on cigarettes will neither help revenue enhancement nor serve the objective of tobacco control,” the statement further noted.