“I propose to raise excise duty, by way of National Calamity Contingent Duty,” announced Finance Minister Nirmala Sitharaman during Budget 2020. Smoking had never been the same. It pinches.
The government had proposed to increase the national calamity contingent duty (NCCD) on cigarettes and other tobacco products with the exception of bidis. With an increase in the ‘sin tax’, price of cigarettes will go up by 6-7% in case of smaller sticks, while for the larger size sticks and premium packs the price hike will be 4-5%.
The decision apparently is focussed on regulating cigarette usage. However, the revenue is expected to bridge a widening fiscal deficit.
But who does this benefit? Will India be able to regulate Cigarette usage with an increase in tax? Why is the stock price of ITC going down? Here are some details:
Post-Budget Blues: Plummeting ITC Market
The market shares of ITC, India’s largest cigarette maker fell 6.9 per cent to 219 rupees, a piece. Rival Godfrey Phillips India Ltd., the maker of Red & White and Four Square cigarette brands, also slipped 6.5 percent after the announcement outstripping the 2.4 percent decline in the benchmark S&P BSE Sensex, reported Bloomberg.
The company which used to be the fourth most valuable with an mcap of 4.2 lakh crore, now ranks 12th with an mcap of 2.6 lakh crore.
Though ITC has a diverse range of products from body wash to instant noodles, the cigarette trade still contributes the largest chunk to its revenues. At 22,913 crore, cigarettes contribute to 46.4% to the ITC’s total revenue.
Will the move benefit Illegal Traders?
While on one side, the pressure on the domestic market is aggravated and its stock prices are falling due to the increase in price, the illegal smugglers are making a profit out of the central government’s move. According to The Tobacco Institute of India (TII), illegal cigarettes now account for one-fourth of the Indian cigarette market.
Also one needs to understand that the prosperity of these illegal smugglers is clearly dependent on the value-chain of the legal tobacco business.
According to Euromonitor International, India is now the fourth largest illegal cigarette market in the world with illicit cigarettes more than doubling from a level of 11.1 billion sticks in 2004 to 25.6 billion sticks in 2018, resulting in an annual revenue loss of Rs 13,000 crore to the government.
Legal cigarettes account for about 10% of the overall consumption. However, they are responsible for 86 percent of the tax venues. Thus a dip in the sale, would only make things difficult for the central government.