India: Budget 2016: Excise Duty on Tobacco Products up by 10-15%; Cigarettes Set to Cost More

Source from:  Economic Times 03/01/2016

Smoking is going to pinch harder with prices of cigarettes likely to go up by 8-9% with the government increasing taxes on cigarettes for the fifth successive year.

While the Budget did not change the basic custom duty on cigarettes, the additional duty of excise on cigarettes has increased by more than three times across cigarette sizes. As a result, the net impact on taxes will be around 10%.

Cigarette companies will decide the price increase after taking into account any increase or lowering of VAT by various state governments which will be announced in their state budgets. However, analysts expect a staggered price hike to cushion customers since cigarette sales volume are down for last eleven quarters.

The government also increased excise duty on gutkha, chewing tobacco (including filter khaini) and jarda scented tobacco from 70% to 81%. It has not changed taxes on biri.

"Although this (the hike on cigarette taxes) is lower than 13% hike in FY16 and 21% hike in FY15, still this step makes the harsh stance of government clear yet again on cigarettes," said a report by Edelweiss. The report said this hike may lower cigarette sales volume in the next fiscal by 7% as compared to 10% decline in the current fiscal.

The tobacco industry said the continuing discriminatory treatment of cigarettes is a matter of deep concern since bidis has once again been spared with no increase in tax after 2012-13. Industry body, The Tobacco Institute of India (TII), in a release said nearly 70% of tobacco consumption in the country is largely produced in the unorganized sector which does not pay any form of tax either due to exemptions or evasion.

TII said the increase of 10% in duty rates announced in this year's union budget will take up the cumulative duty impact since 2012-13 to 118%. It said the high taxation has severely impacted the legal cigarette industry, sub-optimized government's revenue collection, encouraged shift to non-cigarette tobacco products, provided a huge fillip to illegal cigarette trade and adversely impacted the livelihood of tobacco farmers in the country.

"The 2016-17 Duty increase is likely to put further pressure on the shrinking legal cigarette industry, accelerate the shift to cheaper low quality non-cigarette tobacco products and provide added arbitrage opportunity to illegal cigarette trade operators," TII said in the note.

Around 11% of total tobacco in India is consumed in the form of legal cigarettes while the balance 89% is consumed in other forms of tobacco and illegal cigarettes. However, legal cigarettes contribute 87% of the excise revenue from tobacco due to high taxation.

TII said the steep increases in excise duty on cigarettes in recent years has resulted in widening the differential in excise duty rates (on a per kg of tobacco basis) between cigarettes and other tobacco products from 28 times in 2005-06 to over 53 times currently.　Enditem