The Indian government's notification of a significant overhaul in the taxation structure for cigarettes and other tobacco products, effective from February 1, sent shockwaves through the stock market on Thursday. Leading cigarette manufacturers saw their share prices plummet by as much as 19% as investors digested the implications of the new fiscal regime.
New Tax Structure: The Details
The Finance Ministry, in a late Wednesday notification, laid out the new framework. The existing GST compensation cess on cigarettes will be withdrawn. However, this will be matched by a substantial increase in the basic excise duty. The new excise duty has been set at a range of Rs 2,050 to Rs 8,500 for every 1,000 cigarette sticks, with the exact amount depending on the length of the cigarette. This excise duty will be levied over and above the standard 40% Goods and Services Tax (GST) that continues to apply.
For other products like pan masala, the government has introduced a new health and national security cess. In a major move to curb tax evasion, manufacturers of chewing tobacco, gutkha, and similar items have been mandated to install CCTV cameras covering all packing machines. They are required to preserve this footage for a minimum period of 24 months.
Market Mayhem and Analyst Warnings
The announcement triggered a massive sell-off in tobacco stocks. ITC, the market leader, saw its shares crash by 10% during the late trading session, closing 9.8% lower at Rs 364. Godfrey Phillips India, which holds the license to sell Marlboro in India, faced an even steeper decline, plunging 19% intra-day before closing 17.1% down at Rs 2,290. The combined loss in market capitalisation for just these two companies stood at a staggering nearly Rs 56,300 crore by Thursday's market close.
Analysts were quick to react, estimating that the new tax burden would necessitate a 15-20% hike in cigarette prices for consumers. A report from foreign brokerage Jefferies noted that ITC might need to increase prices by at least 15% to pass on the overall impact. The report warned that the tax hike is "a clear negative as volumes will be impacted" and raised concerns about legal sales being lost to the illicit cigarette industry.
Government Rationale and Conflicting Views
The government defended the changes as critical to ensure that "sin goods" like cigarettes do not end up facing lower taxes due to the ongoing restructuring of the GST framework. The aim is to maintain a high tax incidence on these products for public health reasons.
However, views on the final consumer impact are mixed. While analysts predict significant price increases, some tax consultants believe there may be no immediate impact on the prices of most popular cigarette brands due to the tax change. They suggested companies might use the new levies as an opportunity to revise prices for some segments. One consultant noted, "There is some increase in the case of cigars and some cheroots," indicating the impact may be product-specific.
The market's violent reaction underscores the uncertainty and potential for a substantial hit to sales volumes and company profitability in the coming months. All eyes will now be on how companies like ITC adjust their pricing strategies starting February 1.
