Higher tax rate on cigarette would exacerbate legal sales: ITC

The legal cigarette industry has witnessed a 25% decline in volumes from FY12-13

India's largest cigarette manufacturer ITC on Thursday said that higher tax rate under the just introduced GST regime will "exacerbate" the pressure on the entire legal cigarette value chain.

The legal cigarette industry has witnessed a 25 per cent decline in volumes from FY 2012-13, said ITC.

"The additional tax burden caused by the increase in the Compensation Cess rates...Will exacerbate the pressure on the entire legal cigarette value chain in the country," said ITC in its quarterly results.

The high incidence of taxation on cigarettes was further compounded by the steep increase in taxes announced by the GST Council on July 17, 2017, it said.

"The increase in Compensation Cess on cigarettes as announced by the GST Council ranges from Rs 485 to Rs 792 per thousand cigarettes. Under the 'Others' segment i.E. cigarettes of length exceeding 75 mm (including the length of filter), a 31 per cent increase in the ad valorem component of the cess has been levied," said ITC.

The intent of the GST Council behind increasing the Compensation Cess was to correct an apparent anomaly in cigarette taxation under the new tax regime announced earlier, on account of the removal of the cascading effect of Excise Duty which existed in the pre-GST regime.

"However, such increase has resulted in significantly higher tax incidence on cigarettes under the new tax regime compared to the pre-GST scenario which is not in keeping with the fundamental principle of revenue neutrality," it said.

In fact, the combined impact of increase in Excise Duty announced by the Union Budget 2017 and the recent increase in tax rates effected by the GST Council is estimated to result in an incremental tax burden of over 20% on the company.

"The cumulative growth in tax incidence on cigarettes, after cognising for the latest increase in Cess rates, stands at a staggering 202 per cent since 2011-12, i.e. The last six years," it added.

However, ITC, which have brands that include Wills Navy Cut, Gold Flake, Insignia, India Kings and Classic said that despite the extremely challenging operating environment, it sustained its leadership position in the industry through focus on delivering world-class products, continuous innovation and value addition.

In Q1/FY 2017-18, ITC's revenue from cigarettes increased 6.60 per cent to Rs 8,774.16 crore, from Rs 8,230.60 crore in the year-ago period.