Budget 2005-06: Tobacco

In India, 'bidis' and chewing tobacco account for 86% of tobacco consumed. Cigarettes account for the remaining. With such a skew, growth prospects are promising. But globally, the industry under scrutiny for health reasons. It is believed that the Indian tobacco sector is the least taxed on a relatively basis. Given this backdrop, can the growth momentum continue? Read more

Budget Measures Specific rate on cigarettes to be raised by 10% Surcharge of 10% to be imposed on ad valorem duties on other tobacco products including gutka, chewing tobacco, snuff and pan masala Bidis not subject to any of the above levies Excise on matches made by mechanized or semi-mechanized sectors reduced from 16% to 12%. However, no excise on hand made matches Corporate tax reduced to 30% from 35% Budget Impact The 10% hike in specific rate on cigarettes will have a negative affect on companies like ITC, GTC and Godfrey Philips Excise reduction on semi-mechanized and mechanized matches production to benefit ITC marginally Reduction in corporate tax will be a welcome relief for this sector Also, the personal income tax relief and rural focus has the potential to improve the living standards, which in turn is likely to enhance the number of people upgrading to cigarettes from other tobacco consumption forms like bidis. But this again is a long term phenomenon Sector Outlook After 3 years of treating the cigarette industry with kid gloves, the FM finally hiked the excise duty (once again) on the industry. The move is in line with what is happening across the globe, where tobacco companies are facing public and government pressure. However, in our view, cigarette is a habit industry. And though the current move is likely to impact companies like ITC negatively in the short term, in the long term, the companies have always managed to pass on such hikes to the hapless consumer. Though volume growth is likely to get affected in the short term, increasing per capita incomes and rising living standards are likely to continue aiding this industry. Industry Wish List Industry chambers favour that the specific excise duty structure based on the length of cigarettes should be continued. Tobacco companies are hoping that a specific policy will be announced to discourage smuggling of contraband cigarettes. The tax rebates on investments in tobacco plantations in backward areas should be continued. Additional duty of excise (AED) on cigarettes at specific rates should continue even after implementation of VAT. Budget over the years Budget 2002-03 Budget 2003-04 Budget 2004-05 The excise duty structure remains more or less unchanged for tobacco sector Sales (value added tax) VAT increased to 16% on cigars and other value added tobacco products Excise duty on nicotine reduced from 16% to 8%. Henceforth, state levies cannot exceed 4% on tobacco Other than this, the excise duty structure has been more or less left untouched for tobacco sector Increase in excise duty on matches made in the mechanised/semi-mechanised sector from 8% without Cenvat credit to 16% with Cenvat credit [Read more on Budget 2002-03] [Read more on Budget 2003-04] [Read more on Budget 2004-05]
Key Positives It's a habit industry and hence, continues to thrive despite odds like punitive taxation, ban on smoking in public places and restrictive advertising. Being a habit industry, it finds it comparatively easy to pass on excise duty hikes, though lately there have been signs of a resistance to price hikes.		Key Negatives Heavily penalized through punitive taxation policies. Cigarette companies pay roughly 50% of their revenues as excise. As a result, the share of cigarettes in total tobacco consumption has declined from 21% in 1981-82 to a mere 14% in 2004. Domestic cigarette companies suffer a double whammy. On the one hand, they are barred from sponsoring sports and cultural events and on the other contraband cigarette volumes continue to thrive. Net result, volume growth is sluggish. In the last 20 years, tobacco consumption in non-cigarette varieties has increased especially in the chewing format by 68 m Kgs, and reduced in the cigarette format by 21 m Kgs. With the government going against even a Supreme Court verdict relating to cigarette related excise, its policy has become even more abundantly clear towards the sector.

Before 1987, cigarettes were subject to ad valorem rates of duty resulting in administrative problems as well as reduced revenue to the exchequer. The specific excise duty rate on the basis of length of cigarettes introduced in 1987. As per the CII, it has resulted in increased excise revenue to the exchequer from Rs 13 bn in FY87 to over Rs 53 bn in FY02. This reduced litigations considerably and helped fill government coffers.

Over the years, the government has become pretty predictable in its policy towards the tobacco sector. Every year, the industry faces hike in excise duties, which then are passed on to consumers. However, in the last three budgets (2002-03 to 2004-05), the finance minister kept the excise duty structure more or less unchanged for tobacco sector. However, on cigars and other value added products sales (value added tax) VAT was increased 16%. These years were a positive for the cigarette companies.