Budget 2016: Cigarette prices may go up by 7-8%

Hike, however, lower than rate of excise duty increases previous years

In a bid to curb cigarette smoking in the country, the government has increased excise duty on tobacco products other than Bidi by 10-15%. The hike for FY2017 however is lower than the rate of excise duty increase in the previous years.

“In its fifth consecutive harsh hike on cigarettes, the government has increased excise duty on cigarettes by 10% (versus our expectation of 8-10%). Although this is lower than 13% hike in FY16 and 21% hike in FY15, this step makes the government’s harsh stance clear yet again on cigarettes; while bidis continue to see no increase in taxes," Abneesh Roy, Associate Director - Institutional Equities - Research Analyst, Edelweiss Securities said. The government hiked excise on tobacco products by 18% in FY2014.
 

 

While, the move might impact cigarettes major ITC’s future sales, the company’s stock turned positive in the Bombay Stock Exchange after the budget speech was over. “We expect 6-7% decline in cig volumes in FY17 versus 10% decline witnessed in FY16E (estimated) when weighted average excise hike was 13%”, Roy said.

Condemning the govt’s move Tobacco Institute of India (TII) said, “The continuing discriminatory treatment of cigarettes is a matter of deep concern particularly due to the fact that Bidis, which are the most popularly consumed smoking tobacco product in India, especially in rural areas, have once again been spared with no increase in tax after 2012/13. 

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According to TII, the 10% duty hike announced today will take up the cumulative duty impact to 118% since 2012-13. The direct impact of duty hike, however, expected to increase cigarette prices. ITC may need to increase prices by 7-8%, Roy said.

According to experts, the consecutive duty hikes may help the unorganized tobacco products industry to flourish further in India. According to TII’s estimates, nearly 70% of tobacco consumption in the country is largely produced in the unorganized sector (including Bidi) “which does not pay any form of tax either due to exemptions or evasion."

“Increase in duty in 2016-17 likely to put further pressure on the shrinking legal cigarette industry, accelerate the shift towards cheaper low quality non-cigarette tobacco products and provide added arbitrage opportunity to illegal cigarette trade operators," it added.

According to Euromonitor International, illegal cigarettes have nearly doubled in last 10 years from 11.1 billion sticks in 2004 to 22.8 billion sticks in 2014, making India the 4th largest illegal cigarette market in the world. ITC’s stock increased by 1.65% to Rs 295.8, recovering from Rs 269 points during budget announcement.

Another cigarette major Godfrey Phillips’ stock went up by 5.2% to Rs 1,074. The BSE benchmark index slipped 23,002 points – 0.66% or 152.3 points lower at the end of the day.