Budget 2020: Higher Tax To Hurt ITC’s Cigarette Sales

Higher excise duty will force cigarette makers like ITC Ltd. to increase prices, hurting their volumes.

Finance Minister Nirmala Sitharaman in her budget for 2020-21 increased the National Calamity Contingent Duty on cigarettes. The overall excise duty now stands at Rs 200-250 for every thousand sticks without filter and Rs 440-735 on cigarettes with filter, depending on the length.

That’s an increase from Rs 5 on every thousand sticks across cigarette categories. This is the second time that cigarettes saw a change in taxation since the implementation of Goods and Services Taxes in 2017.

The higher duty will increase the tax on ITC’s cigarette business by 10 percent, according to a note by HDFC Securities. The brokerage said the tax goes up by 10 to 13 percent on the cigarette of between 64-69 millimeters in length and increase by 5 to 8 percent on sticks of 74 millimeters and longer. To support its operating margins, the company is expected to hike prices by 9 to 10 percent, it said

Shares of ITC, India’s largest cigarette maker, fell 6.3 percent on the budget day compared with a 3.11 percent decline in the Nifty 50 Index.

According to Prabhudas Liladher, cigarette makers are expected to increase prices by 4 to 8 percent to neutralise the impact of higher taxation.

Both the brokerages said that that this means an adverse impact on volumes. For ITC, the maker of Gold Flake, cigarettes contribute nearly half of its consolidated revenue.

The excise duty is a ‘structural negative’, Prabhudas Liladher said. It also leaves room for more tax hikes in the future. The brokerage expects ITC’s volumes to fall 1 percent in the financial year ending March 2021 and decline 3 percent in the following fiscal.