Budget 2007-08: Tobacco

Budget Measures

The specific rate of excise duty on cigarettes is increased by 5 %.

Similarly, excise duty (excluding cess) on bidis, which was last fixed in 2001, will be raised from Rs 7 to Rs 11 per 1,000 for non-machine made bidis and from Rs 17 to Rs 24 per 1,000 for machine made bidis. However, there is an exemption from excise duty for unbranded bidis up to 2 m bidis in a year subject to fulfillment of the condition of declaration with the Department of Central Excise and regular monitoring.

Pan masala containing tobacco will continue to bear an excise duty of 66%. Also the exemption for pan masala containing tobacco and other tobacco products that is now given to units in the North Eastern States has been withdrawn.

1% higher cess to be charged

Dividend distribution tax rate increased from 12.5% to 15%.

The dividend distribution tax on dividends paid by money market mutual funds and liquid mutual funds increased to 25 % for all investors.

Budget Impact

Finance minister's strong support to the campaign "say no to tobacco" has created a negative impact on the tobacco sector. Excise increase on cigarettes will hit the sales of the cigarettes.

Increase in tariff on bidis will aid cigarette volumes.

As most companies have huge investments in the liquid funds, the higher tax on dividend distribution will reduce their other income.

The impact of higher tax (cess) on the industry is likely to lower net margins, albeit marginally.

Sector Outlook

India is the second largest producer of tobacco. Out of the total tobacco produced in India, only one-third is flue-cured tobacco suitable for cigarette manufacturing. Most of the tobacco produce is suitable for the manufacture of chewing tobacco, bidis and other cheap tobacco products, which have no demand outside the country. Every year, the industry faces hike in excise duties, which then are passed on to consumers.

The companies continue to face tougher times due to government intervention. Going forward, this is likely to rise. However, considering that as per capita income increases and there is a change in the demographic profile of the populace, there is still some scope for growth for the industry.

Company Outlook

Increase in excise duty to hit companies like ITC, Godfrey Phillips and VST industries.

Increase in tariff on bidis will help cigarette major ITC to increase its cigarette sales.

Industry Wish List

Industry chambers favour that the specific excise duty structure based on the length of cigarettes should be maintained.

Additional excise duty (AED) to be replaced /reduced if VAT is implemented. It would be illogical to charge both the AED and VAT. AED was implemented to collect tax on behalf of states. Since states would anyway collect VAT directly, there is no reason to charge AED.

Specific policies should be announced to discourage smuggling of contraband cigarettes.

The tax rebates on investments in tobacco plantations in backward areas should be continued.

Custom duties to be maintained at 30.6%.

Budget over the years

Increase in excise duty on matches made in the mechanised/semi-mechanised sector from 8% without Cenvat credit to 16% with Cenvat credit

Specific rates on cigarettes raised by 10%

Surcharge of 10% imposed on ad valorem duties on other tobacco products including gutka, chewing tobacco, snuff and pan masala

Excise on matches made by mechanized or semi-mechanized sectors reduced from 16% to 12%. However, no excise on hand made matches.

Excise duty on cigarettes increased by 5%.

Excise on unbranded other smoking tobacco and unmanufactured tobacco and tobacco substitutes at 16%.

Tariff rate of excise duty on bidis increased.

Excise exemption to small-scale smoking tobacco and tobacco substitute manufacturers restricted to Rs 1 m.

Excise duty on all types of pan masala rationalized at 66%.

Habitual industry: Despite high government intervention and campaigns against smoking along with high tax rates, the industry continues to thrive. Also, ban on smoking in public places and restrictive advertising has not stopped this industry from growing.

Excise an easy pass on: Since it is a habit industry, companies find it comparatively easy to pass on excise duty hikes. Last year, the government increased excise by 10%, but it was easily passed on to consumers, without demand being affected.

Per capita consumption ridiculously low: The per capita consumption of cigarettes in India is merely a tenth of the world average. Thus, as disposable incomes increase, people might shift from bidis to cigarettes and hence there lies a huge potential to convert. Being the No. 1 player in the segment, ITC is likely to be a big beneficiary of this change.

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 hand, 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.