India: Cigarette Companies Brace for 8-10% Hike in Excise Duty

Source from:  Live Mint 02/24/2016

It is that time of the year when smokers are reminded of the fact that their puffs affect not just their health but their wealth as well.

Rarely has tobacco escaped the tax man's special attention and this budget is unlikely to be different. Cigarette makers are expecting an 8-10% increase in excise duty on their products in the Union budget to be presented on 29 February by finance minister Arun Jaitley.

And, like every year, about a week before the finance minister makes the announcement, smokers are being overcharged by retailers in anticipation of a price hike. Retailers across the country have been asking for a rupee extra for loose cigarette sticks for the past few days. For a full pack of 10 or 20 sticks, they are asking for Rs.5-10 more than the maximum retail price.

An official price increase, if excise on cigarettes is increased in the budget, will come into effect once the cigarette maker raises the price after calculating the effect of the tax increase. The revised excise duty, however, will be applicable a day after the budget is presented.

ITC Ltd, the country's largest cigarette maker, declined to comment on when it will raise prices.

Sunita Sachdev, an analyst with brokerage firm UBS Securities India Pvt. Ltd, said, "we expect an 8-10% excise duty increase on regular filter (69-74mm length) and king-size (84mm length) cigarettes".

Since July 2014, when Jaitley presented the National Democratic Alliance government's first budget, taxes on cigarettes have been increased substantially. In the 2015 budget, he hiked excise duty by 25% on cigarettes of length not exceeding 65mm, and by 15% on cigarettes of other lengths.

ITC, being the largest cigarette maker, has been hurt by the stiff increase in taxes on cigarettes.

According to reports by Abneesh Roy, an analyst with Edelweiss Securities Pvt. Ltd, ITC's cigarette sales by volume fell 17% in the first quarter from a year earlier, 16% in the second quarter and 4% in the third quarter of the current fiscal.

Roy estimated that cigarette volumes for ITC are likely to decline 10% in the year to March.

"Over the last three-and-a-half years, the incidence of excise duty and VAT (value added tax) on cigarettes, at a per unit level, has gone up cumulatively by 98% and 124%, respectively, which is exerting severe pressure on legal industry volumes even as illegal trade grows unabated," ITC said on 22 January.

Industry body the Tobacco Institute of India (TII), in a statement, said the punitive taxation on cigarette since 2012-13 has been exerting severe pressure on the legal cigarette industry even as illegal cigarettes grow unabated and the overall tobacco consumption continues to shift to cheaper non-cigarette tobacco forms. "The legal cigarette industry in India has dropped from 110 billion sticks in 2011-12 to 95 billion sticks in 2014-15 and is expected to drop further in the current year," it added.

At 6.5% of per capita GDP, cigarette taxes (excise duty and state VAT) in India are among the highest, TII said, referring to a 2015 WHO study. "Cigarette taxes in India are 14 times higher than the USA, nine times Japan, seven times China, five times Australia and three times Malaysia and Pakistan," TII said.

The cigarette market in India recorded a compounded annual growth rate of 10.5% in value terms between FY02 and FY014, according to a report by UBS Securities India. ITC leads the market with a 78.5% volume, followed by Godfrey Philips Ltd (13.5%) and VST Industries Ltd (7%), the report added. Enditem