Tobacco players such as diversified conglomerate ITC, Four Square-maker Godfrey Phillips, and Charminar manufacturer VST Industries could face heavy selling pressure on the bourses on December 3, as certain reports suggest that the tax slab for cigarettes, aerated beverages, and other 'sin goods' be hiked to 35 percent.

According to media reports, the Group of Ministers on GST rate rationalisation recommended to raise tax on aerated beverages, cigarettes, tobacco, and related 'sin' products to 35 percent from the current 28 percent.

The proposal implies a new 35 percent GST rate slab could be created for tobacco and related products, as recommended by the GoM.

However, higher taxes on cigarettes will result in a sharp decline in cigarette volumes for firms, as consumers tighten their pockets, causing sales to see a sharp decline. Further, consumers will switch to downtrading, purchasing counterfeit goods at a lower price point.

"Over the years, discriminatory and punitive taxation on cigarettes has led to progressive migration of consumption from duty-paid cigarettes to other lightly taxed/tax-evaded forms of tobacco products, comprising illicit cigarettes, bidi, chewing tobacco, gutkha, zarda, snuff, etc.," said ITC in its annual report for FY24.

On July 23, the Finance Minister Nirmala Sitharaman did not announce any changes to sin tax in the Union Budget 2024-25 presentation. As a result, ITC shares and stocks of other tobacco players had soared in trade.

A stable taxation regime augurs well for sustained momentum in the cigarette business. Jefferies noted that the Union Budget kept tobacco taxes unchanged, which came as a relief for ITC. The last tobacco tax hike was 2 percent in February 2023. This stability allows ITC to focus on volume with minimal price hikes, Jefferies had said. Therefore, this move comes as a surprise to most Street participants.

Following ITC's latest earnings show, brokerages expected the tobacco major to report cigarette volume growth in mid-single-digit for FY25. However, the GoM report is now scheduled to be taken up by the GST Council - chaired by Finance Minister and her state counterparts - on December 21 and a final decision on the rate changes will be taken by the council, which could impact volumes going ahead.

Published on Dec 3, 2024 07:55 am

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