GST 2.0: ITC, VST Industries shares fall as Govt eyes extra tobacco tax

GST rate hike on tobacco products: Tobacco stocks ITC, VST Industries fell today after govt signaled an extra GST cess on cigarettes and bidis, raising margin risks. Analysts suggest stock strategy

Hopes of a lower effective tax rate on tobacco products, including cigarettes and bidis, went up in smoke on Friday after the central government indicated it may impose an additional cess over and above the 40-per cent goods and services tax (GST) rate proposed for sin goods in the new GST regime.

 

On the bourses, investors pres­sed the “sell” button for Elitecon International, ITC Ltd, and VST Industries, triggering a decline of 1.6 per cent to 5 per cent in their share prices. On the contrary, Godfrey Phillips share price moved 6.5 per cent higher intraday and ended with gains of 5.8 per cent. For perspective, the BSE Sensex dipped 0.01 per cent on Friday.

 

Analysts suggest investors stay cautious about the “expensive” tobacco stocks in the near term till clarity emerges on the final tax rate.

 

At present, taxes on cigarettes are a structural combination of variable payout and fixed charges per stick. Like all sin or demerit goods, cigarettes are taxed at 28 per cent base GST, with fixed and variable cess across the lengths of the sticks. This takes the effective tax rate on cigarettes to 50-53 per cent.

 

Against this backdrop, markets expected the net tax incidence to fall to 40 per cent on tobacco products after the finance minister said the current tax structure of GST combined with an additional cess will continue until the cess helps repay loans taken to compensate states during the Covid-19 period. “After that, these goods will migrate to the 40 per cent slab,” Finance Minister Nirmala Sitharaman had said. 

 

Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal has, however, told Business Standard that the government will impose an additional levy on sin goods over and above the 40 per cent tax. 

 

This, analysts said, could take the effective rate closer to the earlier 53 per cent, creating margin risk and regulatory overhang for related sto­cks. “Tobacco remains in the high-tax ‘sin’ bucket, with CBIC flagging the possibility of an additional levy, creating margin/revenue risk, and regulatory overhang. The bidi concession (GST cut to 

 

18 per cent, and the same on tendu leaves slashed to 5 per cent) protects rural liveliho­ods but could shift lower-end sm­okers toward bidis, creating mixed risk for cigarette makers,” cautioned Sandeep Abhange, rese­arch analyst for consumer-related and midcap stocks at LKP Securities.

 

Besides, Abhange added, there could be some execution risk in converting incremental volume into sustainable Ebit (earnings before interest and taxes) as more sales don’t automatically translate to margin if trade spends rise.

 

Echoing similar views, G Chokkalingam, founder and head of research at Equinomics Research, said higher tax could have an adverse impact on tobacco companies’ margins even if they decide to fully pass on the price hike to customers. Meanwhile, in the first quarter of 2025-26 (Q1FY26), ITC’s cigarette segment Ebit margin slipped 270 basis points (bps) year-on-year (Y-o-Y) and 80 bps quarter-on-quarter (Q-o-Q) to 71.1 per cent.

 

Godfrey Phillips India’s cigarette business, too, reported an earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 18.62 per cent, a slight contraction from 19.86 per cent Y-o-Y. VST Ind­ustries, on the other hand, saw Ebitda margin improvement of 610 bps Y-o-Y and 310 bps Q-o-Q to 26 per cent.

 

“ITC derives 40-45 per cent of its fast-moving consumer goods revenue from the cigarette business. Thus, a steep rise in tax is a key headwind. Steep taxation also risks driving illicit trade, which is elastic to tax policy, leading to slower volume growth and market share loss for regulated players. This combination poses profitability challenges despite resilient underlying demand,” said Aurav Chaube, rese­arch analyst at SAMCO Securities.

 

Chokkalingam suggests that investors offload their tobacco stocks due to regulatory headwinds amid expensive valuations of related scrips. “Investors can consider buying these stocks once they have seen decent corrections,” he opined.