Sin tax haunts cigarette companies

Sin tax haunts cigarette companies
Highlights

The shares of cigarette companies like ITC, VST and Godfrey Phillips declined between 3 to 7 per cent on Monday, solely reacting to the possible ‘sin tax’ to be imposed on cigarettes under the proposed GST regime.

The investors fear that once the GST regime begins, the tobacco products including cigarettes manufactured by these companies are to be taxed over 40 per cent

Hyderabad: The shares of cigarette companies like ITC, VST and Godfrey Phillips declined between 3 to 7 per cent on Monday, solely reacting to the possible ‘sin tax’ to be imposed on cigarettes under the proposed GST regime.

According to industry source, the domestic cigarette companies are paying VAT at the rate of 25-26 per cent besides central excise duty.

The investors fear that once the GST regime begins, the tobacco products including cigarettes manufactured by these companies are to be taxed over 40 per cent.

Further, industry sources said, if the government levy excise duty now being paid by these company to continue, the cigarette prices go up by 13 per cent as the additional tax burden to the companies, else they have to be passed on to the end users.

If the companies do not pass on the burden, the industry sources assume that the cigarette volumes may dwindle, as it was seen in the earlier years. Considering the foreign counterfeit cigarettes are flooding the country, which are available half the price, the domestic companies are expected to dent their top line, says a stock broker.

Analysts point out that as the government is aggressive on taxing cigarettes would indicate further trouble to the sector hence the share prices reacted so quickly.

Of course, there is some ambiguity in the recommendations, it is still not clear, as the total composite rate will be charged (proposed 40%) or only component of State GST (around 20%) is to be applied, which turnout to be positive to the industry, as it will be less than the existing 25 per cent, industry sources pointed out.

Further, even the applicable time frame also still not clear, however, they say if the implementation time starts from April 1, 2017, then again benefits the cigarette companies, which may increase volumes considerably.

Whatever may be the reason, both VST and ITC shares will be under pressure in the future, more so, both these companies earn about 80 per cent of their profits from tobacco segment.

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