Budget 2014: Excise duties on cigarettes, tobacco, pan-masala, gutka hiked

KOLKATA: Be ready to pay more the next time you think of a smoke. Cigarette price is going to go up by 12-14% for regular length cigarettes whose excise duty has been increased by 11-21%, while the smaller size cigarettes of 64 mm length prices will go up from Rs 2 per stick to Rs 2.5-3 per stick due to a whopping 72% increase in duties in this segment.

According to Edelweiss Securities associate director (institutional equities – research) Abneesh Roy, the weighted average excise increase has been around 21%. Centre had hiked excise duty on cigarettes by 22% in 2012-13 and 18% last fiscal with several state governments too hiking the VAT rates.

Industry body, The Tobacco Institute of India said the extremely steep excise duty increase of 11% to 72% 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 already a significant 19% of overall cigarette industry.

“In particular, the increase on the less than 65mm segment will give a huge boost to the domestic tax evaded illegal cigarettes which is sold at Re1. 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, which is a mere 12% of total tobacco consumption in India, will be further eroded. In overall terms, the duty increase on cigarettes will neither help revenue enhancement nor serve the objective of tobacco control,” the Tobacco Institute said in a statement.

Analysts said the excise duty hike will impact market leader ITC’s cigarette volume. “But as a business, ITC has strong pricing power. Despite of the hike in duties in last two years, ITC’s cigarette EBIT grew by 19% CAGR over FY 12-14. The company can potentially gain share as hike in 64mm will be harsher for other cigarette players who have higher saliency in this segment,” said Roy.

ITC’s share price closed at 0.32% high on Thursday’s closing at Rs 342.50 at the Bombay Stock Exchange, while the stock of Godfrey Phillips India fell by 4.78% to close at Rs 2601.85.

The hike in excise duty for cigarettes was widely expected since prime minister Narendra Modi had recently tweeted about reducing tobacco consumption in India. The union health minister too has been championing the cause of reducing tobacco consumption.

The budget also increased basic excise duty from 12% to 16% on pan masala, from 50% to 55% on unmanufactured tobacco and from 60% to 70% on zarda scented tobacco, gutkha and chewing tobacco.