Tax on tobacco? Pass it on

Specific rate on cigarettes to be raised by 10%

Surcharge of 10% to be imposed on ad valorem duties on other tobacco products including gutka, chewing tobacco, snuff and pan masala

Bidis not subject to any of the above levies

Excise on matches made by mechanized or semi-mechanized sectors reduced from 16% to 12%. However, no excise on hand made matches Corporate tax reduced to 30% from 35%

The 10% hike in specific rate on cigarettes will have a negative affect on companies like ITC, GTC and Godfrey Philips

Excise reduction on semi-mechanized and mechanized matches production to benefit ITC marginally

Reduction in corporate tax will be a welcome relief for this sector

Also, the personal income tax relief and rural focus has the potential to improve the living standards, which in turn is likely to enhance the number of people upgrading to cigarettes from other tobacco consumption forms like bidis. But this again is a long term phenomenon

After 3 years of treating the cigarette industry with kid gloves, the FM finally hiked the excise duty (once again) on the industry. The move is in line with what is happening across the globe, where tobacco companies are facing public and government pressure.

However, in our view, cigarette is a habit industry. And though the current move is likely to impact companies like ITC negatively in the short term, in the long term, the companies have always managed to pass on such hikes to the hapless consumer. Though volume growth is likely to get affected in the short term, increasing per capita incomes and rising living standards are likely to continue aiding this industry.

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.

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

Increase in excise duty on matches made in the mechanised/semi-mechanised sector from 8% without Cenvat credit to 16% with Cenvat credit

It's

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.

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 2004.

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.

With the government going against even a Supreme Court verdict relating to cigarette related excise, its policy has become even more abundantly clear towards the sector.