Chidambaram goes after smokers-again

TOBACCO: 18% excise duty increase to impact organised players like ITC and VST

Finance minister P Chidambaram on Thursday proposed an increase in the specific excise duty on cigarettes, cigars, cheroots and cigarillos by 18 per cent. An increase in excise duty is hardly a surprise for the industry but 18 per cent is higher than what the industry and the market expected. Cigarette companies are expected to pass it on to the consumers by raising prices in the coming days.

“We were expecting 15 per cent. It’s higher than what we expected  but lower than last year. Last year, the hike was 21 per cent and companies increased prices around 15 per cent to ward it off. This year, too, a similar hike will negate the impact of excise duty hike. We expect volumes to be flat, owing to the increase in prices,” Gaurang Kakkad, an analyst with Religare, said. Market leader ITC showed resilience with the stock closing flat, while Godfrey Phillips India and VST Industries ended in the red.

The Union Budget FY12-13 had proposed a mixed structure—ad valorem and excise—for cigarettes,   later withdrawn for a rise on the specific duty. To that extent, an increase in the excise duty augurs better for the industry, as the ad valorem component calls for a structural change in pricing. However, with the increase limited to cigarettes, cigars, cheroots and cigarellos, the focus appears to be on the organised sector. The Tobacco Institute of India (TII) has expressed its disappointment on this count.

“We were disappointed that cigarettes, which represent only 15 per cent of total tobacco consumption, were singled out for this steep increase of 18 per cent in excise duty rates. This inequitable treatment, coupled with an ever-increasing VAT incidence, will substantially increase the tax arbitrage opportunity, thereby further incentivising the rapidly growing illicit trade. The affordability and accessibility of cheap illicit cigarettes will not only undermine revenue collections but also the tobacco control policies of the government,” TII director Udayan Lall said. Cigarettes generate about 75 per cent of tax revenue from tobacco. “By targeting only cigarettes, the tobacco tax base remains narrow and the differential between cigarettes and other tobacco products (bidis, chewing, etc) continues to increase. As evidenced in the past, this only shrinks consumption, whilst the overall tobacco consumption in India continues to increase,” Lall added.