Cigarette sector poised for 5% growth on stable VAT

In the past three years, no state except Rajasthan has toyed with the VAT rate in the tobacco sector

Thanks to stable tax rates on the cigarette industry across the states in the country and the Centre's recent seemingly soft stance on the sector, the cigarette industry in India is poised for a five per cent volume growth in the coming fiscal year.

Cigarette market in India
	Volume (mn kg)	%age share in industry
Total tobacco consumption	562	100
Total legal cigarette market	62	11
Total non-duty paid cigarette market	22.5	4
Other forms of tobacco consumption	477.5	85
Figures are for financial year 2014-15; Source: Ficci Cascade Report, Tobacco Institute of India, Industry estimates

For the past three years, except Rajasthan, no other states have toyed with the value added tax (VAT) rate in the tobacco sector. While states like Uttar Pradesh, Himachal Pradesh and Jammu & Kashmir, which together accounts for six per cent of the total cigarette consumption, charge an average 40 per cent VAT on tobacco consumption in their respective state, West Bengal, which accounts for eight per cent of the sales volume charge as low as 12 per cent on consumption. Chattisgarh, which accounts for three per cent of the sales volume charge half a per cent more than West Bengal.

"Over the years, the states have realised that they need to rationalise taxes on cigarette so that they will not lose revenue to non-duty paid ones on account of tax evasion," Abneesh Roy, Senior Vice President-Institutional Equities at Edelweiss Securities told Business Standard.

However, Rajasthan, which comprises two per cent of the cigarette sales, have increased the average VAT on the tobacco segment from 15 per cent in FY 2016 to 17.3 per cent in FY 2017 and has again increased the rate to 19.8 per cent.

VAT rates on tobacco in Indian states
Major tobacco consuming states	Percentage of sales volume	Rate in FY16	Rate in FY17	Rate in FY18
Andhra Pradesh	12	20	20	20
Tamil Nadu	12	30	30	30
Kerala	11	30	30	30
West Bengal	8	12	12	12
Maharashtra	8	35	35	35
Karnataka	8	24	24	24
Delhi	4	20	20	20
Haryana	2.5	20	20	20
Uttar Pradesh	4	40	40	40
Madhya Pradesh	3	13	13	13
Chattisgarh	3	12.5	12.5	12.5
Bihar	2	20	20	20
Gujarat	2	30	30	30
Rajasthan	2	15	17.3	19.8
Assam	2	30	30	30
Punjab	2	33	33	33
Odisha	1	25	25	25
Himachal Pradesh	1	40	40	40
Jammu & Kashmir	1	40	40	40
Source: Edelweiss Securities Ltd

Industry veterans don't view the tax increase in Rajasthan to dent cigarette sales owing to its low cigarette consumption.

Instead, industry sources and Roy hope that this fiscal year, led by stable tax rates on the cigarette industry, the sector will register a five per cent volume growth.

"The industry, as well as ITC, may register a five per cent growth in the coming fiscal year with tax rates stabilised and rationalised to an extent", Roy said.

In a statement released during its third quarter results for FY 2017 in January-end, quoting an independent study, industry leader, ITC, which commands a 79 per cent market share in the legal cigarette industry said India is now the fourth largest market for illegal cigarettes in the world. Illegal trade comprising smuggled foreign and domestically manufactured tax-evaded cigarettes is estimated to constitute one-fifth of the overall cigarette industry in India and is estimated to cost the exchequer a revenue loss of more than Rs. 9000 crores per annum.

"High taxes in the recent past on legal cigarettes and a discriminatory regulatory regime on the legal cigarettes in the country over the years has led to a significant shift in tobacco consumption to lightly taxed or tax-evaded tobacco products", an industry official said.

However, with the government planning to bring in the non-cigarette tobacco sector under a licensing regime besides increasing the duty on it to create a level playing field, cigarette industry executives sound optimist.

"So far cigarette companies have borne the brunt of high taxes losing out considerable potential in the rural markets. Now with the proposed licensing for non-cigarette industry, there may be atleast some parity in the tobacco segment", the official said.

Further, the Union Budget 2017-18 has also hiked the duty rate on cigarettes by six per cent which is the lowest in the past six years.

"The government has adopted a softer stance in two consecutive budgets and has also increased tax on other forms of tobacco. Also, compulsory licensing of non-cigarette tobacco products is likely and GST (goods and services tax) is poised to impact the unorganised cigarette market", Roy said while reasoning for the projected growth in the cigarette industry.

As per industry estimates, out of the total 562 million kg (mkg) tobacco industry in India, legal or duty paid cigarettes comprise 11 per cent or 22.5 mkg in the trade while 85 per cent or 477.5 mkg tobacco is consumed in other forms like bidi, chewing tobacco and others.