GST 2.0: ITC shares rally as cigarettes face 40% tax
What's the story
Shares of tobacco companies, including ITC and Godfrey Phillips India, surged on Thursday despite Finance Minister Nirmala Sitharaman announcing a 40% Goods and Services Tax (GST) rate on cigarettes. The new tax will also apply to paan masala, gutka, chewing tobacco products like zarda, and unmanufactured tobacco. Sitharaman made the announcement during the 56th GST Council meeting on Wednesday.
Market reaction
Currently, tobacco products attract 28% GST plus cess
Despite the GST hike, brokerages are predicting a neutral or even positive impact on tobacco companies. Currently, tobacco products attract a 28% GST plus cess, which is made up of specific and ad valorem duties. The total tax incidence is about 50-55% of the maximum retail price (MRP). After the new rate comes into effect, no compensation cess will be levied.
Tax implications
Positive impact on tobacco companies
Jefferies noted that if no other levy is imposed apart from the new GST rate of 40%, it would be a positive development for the tobacco sector. Even if National Calamity Contingent Duty (NCCD) continues at current levels, the total tax incidence on cigarettes could be lower by 5%. This could prompt the tobacco industry to reduce prices and "make them competitive against illicit competition."
Market challenges
ITC's market position and challenges
ITC has lost market share to Godfrey Phillips India (GPI), which has gained nearly 300 basis points of market share from ITC. Further, inflation in tobacco leaf prices has impacted ITC's earnings before interest and tax (EBIT) margin. Despite these challenges, the company remains one of India's largest cigarette manufacturers with a significant presence in the tobacco industry.