Budget 2023: Cigarettes To Be 1–3% Costlier After 16% Duty Hike
Analysts say that the companies are likely to increase prices by 1-3%, which will not impact sales.
Finance Minister Nirmala Sitharaman on Wednesday announced a 16% increase in the National Calamity Contingent Duty on cigarettes, effectively making them more expensive after two years of being kept unchanged.
"The NCCD on specified cigarettes was last revised three years ago. This is proposed to be revised upwards by about 16%," Sitharaman said, during her budget speech in Parliament.
According to the budget fine print, the NCCD has been hiked by Rs 70 per 1,000 sticks to Rs 510 for filter cigarettes of length up to 70 millimetres and by Rs 85 to Rs 630 for filter cigarettes between 70–75 mm in length.
So, for a pack of 10 such cigarettes, the NCCD price impact is less than Rs 1.
For premium cigarettes, such as king-size or extra-longs, whose length increases above 75 mm, the NCCD has been increased from Rs 735 per 1,000 sticks to Rs 850.
So, for a pack of 20 such cigarettes, the price impact is less than Rs 3.
The tax hike has been lower than street expectations. Analysts say that the companies are likely to increase prices by 1-3%, which will not impact sales.
"The overall impact is negligible," according to Abneesh Roy, executive director, institutional equities, Nuvama Research.
"It's a positive for cigarette companies like ITC Ltd. as they will have to take only a low-single hike of around 2-3%, which is not much of an issue, as consumers will easily absorb it given three years of hardly any increase in prices," he said.
From 2012-13 to 2016-17, the duty on cigarettes increased sharply at a compound annual growth rate of 15.7%. However, the tax revenue from cigarettes grew a mere 4.7% CAGR.
Subsequently, the relative stability in taxation was observed until January 2020 and revenue collections grew by 10.2%.
The budget for 2020-21 increased the National Calamity Contingent Duty by two–four times across cigarette stick sizes, resulting in tax hikes of 9-15%.
"A sharp tax hike beyond 12% could push consumers to smuggled cigarettes," Roy said.
The share of legal cigarettes in total tobacco consumption has declined from 21% in 1981-82 to a mere 8% in 2020-21. It was 10% in 2019 fiscal and 11% in 2017 fiscal.
The remaining 92% consumption is in the form of illegal cigarettes and other cheaper tobacco products, such as bidis, chewing tobacco and khaini. This is unlike the rest of the world where tobacco consumption is synonymous with cigarettes, accounting for 90% of total consumption.
Despite accounting for less than one-tenth of the tobacco consumed in the country, duty-paid cigarettes contribute more than four-fifths of the revenue generated from the tobacco sector.
"We believe the surge in NCCD will not have a material impact on overall cigarette volume growth for the industry as it implies only a 1–2% price rise," noted Preeyam Tolia, senior research analyst, FMCG and Retail, Axis Securities Ltd..
According to analysts at ICICI Securities Ltd., the net tax on cigarettes would increase by Rs 0.07 per stick to Rs 0.12 per stick, which would require a small price hike for cigarettes in different categories.
"The hike in taxes is not very high and would be easily passed on by 1-3% increase in prices," it said.
Jefferies had earlier said that an effective tax hike of up to 5% is a positive, while double-digit is a clear negative.
"Anything between 5-9% will be tough yet manageable," it said.
The NCCD is a relatively small part of overall tobacco tax, accounting for 10% of the overall taxes on cigarettes, while 90% is GST tax.
