Smoking will burn a bigger hole in your pocket now as govt imposes new excise duty on tobacco

Cigarettes are set to get costlier from February by up to 20%, with premium large sticks facing the steepest increase, due to an increase in taxation. This may force manufacturers to exit popular price points like ₹10 and ₹20, impacting sales volume for the next two-three quarters, industry executives and analysts said.

The "unprecedented increase in duty" will cause immense hardship and loss to more than 40 million farmers, MSMEs, retailers and local value chains nurtured by the industry, the Tobacco Institute of India said in a news release. This will also provide a "huge fillip to illicit industry and damaging national enterprises", it said.

The share prices of cigarette manufacturers crashed Thursday. The shares of the country's largest manufacturer, ITC Ltd, hit a 52-week low of ₹362.70 before closing 9.7% down at ₹363.95 on the BSE, where the benchmark Sensex ended nearly flat. Rival Godfrey Phillips India fell more than 17% to ₹2,289.65.

Nuvama Institutional Equities said in a note that there could be a more than 20% price hike on the back of the over 30% tax hike.

"Historically, after such a sharp hike, volumes decrease 3-9%. For example, FY11 logged a 3% volume decrease YoY after an around 18% price hike versus a strong FY10 (7% volume growth). A double-digit tax hike could push consumers towards smuggled cigarettes," it said.

The government on Wednesday notified February 1 as the effective date for imposing new excise duty on tobacco, replacing the compensation cess. This duty will come on top of 40% goods and services tax. Cigarettes will have an excise duty ranging from ₹2,050 to ₹8,500 per 1,000 sticks, depending on length. Beedi, pan masala and chewing tobacco too will face new excise duties.

For instance, in the case of 69mm length cigarettes, the GST rate will move from 28% to 40%. While the compensation cess (5% on factory cost plus ₹2,747 per 1,000 sticks) will cease to exist, the basic excise duty has been increased to ₹4,000 per 1,000 sticks as compared to ₹5 earlier. The national calamity contingent duty at ₹510 per 1,000 sticks remains.

An analyst said the worst impacted will be entry-level cigarettes which are of length not exceeding 65 millimetres and were sold at around ₹10 per stick, since this segment accounts for the bulk of the market and is extremely price sensitive. The price hike in this case will be around 8-9% with the tax hike being 15%, while for the larger size sticks, the tax hike is 30-35% which will have a price hike of around 15-20%, he said.

The industry association said it is "shocked and surprised" since the government had said on multiple occasions that the overall impact of the transition of taxes would be revenue neutral. It said for every three legal cigarettes sold, one smuggled or illicit cigarette is sold which will get a further boost due to this high taxation, promoting anti-social activity.