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How GST will impact tobacco stocks

Guest Author | 21 Apr, 2017  | Follow Author | Add to my Favourites 
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With the Rajya Sabha approving legislation to enact a watershed goods and services tax (GST) effective July 1st, the tobacco industry is breathing a bit easier after the government confirmed some of the applicable rates.

While tax rates for goods and services will fall into four brackets (5%, 12%, 18% and 28%), according to the finance ministry, the government has yet to categorize and assign rates across the board.

The tobacco industry, identified by the government as a promoter of vice, has seen excise duties rise in recent Union Budgets. Concerned that it would bear the brunt of the new indirect tax code, it lobbied the government to use GST to curb the illegal cigarette trade and help tobacco farmers.

How are tobacco and tobacco products currently taxed?

Currently, tobacco products are subject to value-added tax (VAT), which varies from state to state and is based on the size and type of product.

In the most recent budget, the excise duty on unmanufactured tobacco increased from 4.2% to 8.3%, while the duty on chewing tobacco and gutkha doubled from 6% to 12%. Paan masala, beedi and cigarettes of varying length also saw a hike in excise duty.

According to the World Health Organization, inconsistent state taxation on tobacco means VAT combined with excise duty on some products is as low as 20% in some states and as high as 81% in others.

How will tobacco and tobacco products be taxed under GST?

The Central Board of Excise and Customs has clarified that the maximum rate of 28% will apply to luxury and demerit goods - a so-called “sin tax” that includes tobacco.

Tobacco and tobacco products will also be subject to excise duty on top of GST for five years to compensate states for an expected shortfall in revenue when the harmonized tax is introduced.

This cess on cigarettes and chewing tobacco is reported to be capped at 290%, or Rs 4.17 per cigarette.

How has the tobacco industry responded to the rates?

Public health experts and parliamentarians had recommended a 40% tax rate on tobacco products, including beedi and chewing tobacco. The maximum slab of 28% therefore came as a relief to the industry.

Shares in some of India’s main cigarette companies, such as ITC Ltd., Godfrey Phillips India Ltd. and VST Industries Ltd. - already buoyant after a relatively benign Union Budget - rose in March when the GST council approved legislation. ITC’s shares closed at a record high as the company said GST would be “revenue neutral.”

Cigarette sales in India have declined steadily since 2010-11, due largely to a shift toward smuggled and counterfeit smokes, rather than increased taxes or health fears, according to market research firm Euromonitor. As the excise duty and GST news are in line with with expectations, analysts have raised the possibility of a recovery in legal cigarette sales.

However, there are reports that beedi may be exempt from the cess, which has alarmed cigarette companies who fear consumers flocking to the cheaper, rolled product.

For more GST and Indian market news, visit BloombergQuint.


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