Finance Minister Arun Jaitley proposed to increase the excise duty on cigarettes to the range of 11-72 per cent. Likewise, Jaitley chose to increase the excise duty on paan masala to 16 per cent from 12 per cent, on unmanufactured tobacco to 55 per cent from 50 per cent, and on gutkha and chewing tobacco from 60 per cent to 70 per cent.
The move is expected to increase prices of cigarette sticks by Rs 3-4, depending on the size. The move could fetch the government an additional Rs 4,000-crore revenue. The steepest increase in excise duty for cigarettes sticks below 65 mm is at 72 per cent. For sticks of the size between 65mm and 70mm, the excise duty increase will be 17 per cent. The duty hike will be at 11 per cent for 70-75 mm sticks.
"The excise duty hike was an expected move. But volume concerns will continue to be a problem (for cigarette manufacturers)," said an analyst at Sharekhan. The government had increased excise duty on sticks by 18 per cent in FY13 Budget and 20 per cent in FY14 Budget, which had to be passed on to the consumer.
The cigarettes below the size of 69 mm, however, will attract lower taxes. ITC had launched sub-65 mm and sub-69 mm cigarettes. According to experts, states can further impose value added tax (VAT) on chewing tobacco and gutkha to curb on consumption.
Y C Deveshwar, chairman, ITC, said, "Within the constraints of time and a challenging economic environment, the FM has presented a comprehensive Budget, which addresses some key reforms with a welcome focus on physical and social infrastructure. This should put in place the drivers for long-term growth whilst meeting some of the critical needs of the weakest in society."
Analysts claim cigarette manufacturers have been witnessing a decline in demand for the past three-four quarters and the latest move would possibly impact volumes marginally. However, if the average tax hike would has been higher than 22 per cent, it would have affected volumes adversely.
However, ITC stock closed marginally higher with a jump of 0.32 per cent at Rs 342.50, while Godfrey Philips India scrip was trading at 4.75 per cent down to Rs 2,601.85 and VST Industries was trading close to 18.13 per cent down at Rs 1,453.25 on the BSE on Thursday afternoon trade.
On the tax increase, Tobacco Institute of India said, "The extremely steep excise duty increase of 11 per cent to 72 per cent on cigarettes coming on the back of sharp increases in the two preceding years, will provide a further fillip to the growing illegal trade in India, which is worth 19 per cent of overall cigarette industry. In particular, the increase on below 65 mm segment will give a huge boost to tax evasion. Moreover, the very high increase will further accelerate the shift in tobacco consumption from cigarettes to cheaper and revenue-inefficient tobacco products. As a consequence, the share of the legal cigarette industry, a mere 12 per cent of the total tobacco consumption in India, will be further eroded. In overall terms, the duty increase will neither help revenue enhancement nor serve the objective of tobacco control."
Monika Arora of Public Health Foundation pointed out that the rate of increase in excise hike is a welcome move by the government and would help curb consumption. "The move would help stop children and adolescents from starting smoking. The health minister had also pitched for excise hike and it is a welcome move to see that is reflected in the Budget," she said. She sought increase in tax on pan masala, unmanufactured tobacco, gutkha and chewing tobacco could be a gradual move and states could impose higher VAT.