Tobacco: No Major change

In India, 'bidis' and chewing tobacco account for 86% of tobacco consumed. Cigarettes account for the remaining. With such a skew, growth prospects are promising. But globally, the industry under scrutiny for health reasons. It is believed that the Indian tobacco sector is the least taxed on a relatively basis. Given this backdrop, can the growth momentum continue?

Budget Measures

	2% education cess on direct and indirect tax
	Focus on development of agriculture, infrastructure, education and health
	20% dividend distribution tax for corporates who invest in debt funds
	Increase in excise duty on matches made in the mechanised/semi-mechanised sector from 8% without Cenvat credit to 16% with Cenvat credit

Budget Impact

	Though the tobacco companies will have to pay marginally higher tax, the fact that the Finance Minister did not raise any excise duties for cigarette companies was an overwhelming positive
	The distribution tax on debt funds will have an adverse impact on the other income component of companies ITC, who have significant exposure to the debt markets.
	No effect of hike in excise duty on matches, as companies like ITC only market matches sources from small scale industries (SSI)

Sector Outlook

The fact that the FM did not hike excise duties on cigarettes is a big positive for companies like ITC. However, measures like ban on sponsorships by tobacco companies, ban on public smoking and virtually punitive taxation policy continues to put pressure on volume growth. Though the FM has given respite to tobacco this time, the question is whether this respite will continue over the long term. Overall, despite the negatives, we remain optimistic on the tobacco sector, it being a habit industry.

Industry Wish List

	Industry chambers favour that the specific excise duty structure based on the length of cigarettes should be continued.
	Tobacco companies are hoping that a specific policy will be announced to discourage smuggling of contraband cigarettes.
	The tax rebates on investments in tobacco plantations in backward areas should be continued.
	Additional duty of excise (AED) on cigarettes at specific rates should continue even after implementation of VAT.

Budget over the years

Budget 2001-02	Budget 2002-03	Budget 2003-04

Imposed 15% surcharge on excise duty for cigarettes Excise duty on 'bidis' increased from Rs 6 to Rs 7 per thousand bidis Total duty on pan masala increased to 55%-60% Tobacco products like chewing tobacco would be charged a total duty of 60%	The excise duty structure remains more or less unchanged for tobacco sector Sales (value added tax) VAT increased to 16% on cigars and other value added tobacco products	Excise duty on nicotine reduced from 16% to 8%. Henceforth, state levies cannot exceed 4% on tobacco Other than this, the excise duty structure has been more or less left untouched for tobacco sector

Key Positives

	It's a habit industry and hence, continues to thrive despite odds like punitive taxation, ban on smoking in public places and restrictive advertising.
	Being a habit industry, it finds it comparatively easy to pass on excise duty hikes, though lately there have been signs of a resistance to price hikes.

Key Negatives

	Heavily penalized through punitive taxation policies. Cigarette companies pay roughly 50% of their revenues as excise. As a result, the share of cigarettes in total tobacco consumption has declined from 21% in 1981-82 to a mere 14% in 2003.
	Domestic cigarette companies suffer a double whammy. On the one hand, they are barred from sponsoring sports and cultural events and on the other contraband cigarette volumes continue to thrive. Net result, volume growth is sluggish. In the last 20 years, tobacco consumption in non-cigarette varieties has increased especially in the chewing format by 68 m Kgs and reduced in the cigarette format by 21 m Kgs

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