Tax rejig sends cigarette stocks crashing up to 19%

NEW DELHI: The withdrawal of GST compensation cess on cigarettes from next month will be matched by an increase in excise, and pan masala will face a health and national security cess.

While govt had announced the changes earlier, the date for the tax rejig, from Feb 1, was notified late Wednesday, sending cigarette stocks crashing by up to 19% on Thursday.

The finance ministry notified excise duty of Rs 2,050-8,500 for every 1,000 sticks, depending on the length of the cigarette, which will be over and above 40% GST. Govt has also put in place an elaborate system to check evasion, mandating that manufacturers of chewing tobacco, gutkha and similar products to install CCTVs covering all packing machines and preserve the footage for at least 24 months.


The slide in the stocks came as analysts estimated a 15-20% hike in cigarette prices. The steep price hike could hit sales of cigarettes that in turn could hit revenue and profits of these companies, they argued.

A report by leading foreign brokerage house Jefferies said that some details of the tax hikes are still awaited. "Basis our understanding, ITC may need to take up prices by at least 15% to pass on the overall impact to consumers, if not higher," the report noted.

The report noted that the tax hike would be "a clear negative as volumes will be impacted and concerns would also re-emerge on risk of losing some volumes to illicit industry".

Tax consultants, however, said that there was unlikely to be an impact on prices of most cigarette brands due to the change in taxes, but companies may cite the levies as an excuse to revise some prices. "There is some increase in the case of cigars and some cheroots," said a consultant with a leading firm.

Govt argued that the changes were critical as it did not want sin goods to face lower taxes due to restructuring of GST.

Shares of ITC, the leading player in the segment, crashed 10% in late session and closed 9.8% down at Rs 364. Godfrey Phillips India, the company that owns the licence to sell Marlboro brand in India and sells some other cigarette brands, crashed 19% in late session and closed 17.1% lower at Rs 2,290.

Compared to Wednesday's numbers, at the close of trading on Thursday, the combined market capitalisation loss for these two companies was nearly Rs 56,300 crore.