Excise changes should aid cigarette makers

TOBACCO: However, duty rise may fuel evasion, says industry

Finance minister Pranab Mukherjee has proposed that pan masala, gutkha, chewing tobacco, unmanufactured tobacco and zarda-scented tobacco in pouches are to be leviable for excise duty under the compounded levy scheme. However, for cigarettes, the increase in duty is only on certain brands.

For chewing tobacco, the rates of duty specified per packing machine for these items will also be stepped up, taking into account improvements in the efficiency of machines used by the industry. The move is a huge positive for cigarette makers like ITC, Godfrey Phillips India and VST Industries, as was reflected in their stock movements. The ITC stock moved up 3.2 per cent to Rs 216.65, Godfrey Phillips by 2.2 per cent to Rs 3,085 and VST by 9.3 per cent to Rs 1,377.05, on a day the major indices ended on a negative note. It was widely expected that the increase in excise would be across the board, including on cigarettes. However, the 10 per cent increase on ad valorem basis is just on certain cigarette brands. “So, it’s a major positive for companies like ITC,” an analyst said.

The Tobacco Institute of India was, however, disappointed with the introduction of an ad valorem component. “The increase in cigarette excise duties will also substantially aggravate the tax arbitrage between duty paid and duty evaded on cigarettes. This huge arbitrage will, unfortunately, incentivise the rapidly growing trade of excise evaded and smuggled cigarettes. According to Euromonitor International, illegal cigarettes in India account for 16 per cent of the industry, having grown by 58 per cent between 2004 and 2009. India is now the sixth largest illicit cigarette market in the world,” said Institute director Udayan Lall.

The excise on non-cigarette consumption is, however, expected to have a positive impact on cigarette makers. With the huge difference in prices between cigarettes and non-cigarette forms of tobacco, the switch to other forms of tobacco is always a threat. But with the increase in excise on non-cigarette tobacco, that would get mitigated. “A new duty on cigarettes has been introduced. We will be able to evaluate the impact only after studying the Finance Bill,” a ITC spokesperson said.