INDIA BUSINESS WORLD - FEBRUARY 2007
The Month that was ...

TOBACCO'S HOPES GO UP IN SMOKE, YET AGAIN

"I STRONGLY support the campaign 'say no to tobacco'," are the words that struck doom and deja vu into the hearts of the cigarette and tobacco industry. Even as manufacturers had smoke coming out of their ears, the ITC stock remained one of the few scrips to show an upward trend as the Union Budget speech was being made due to the company's 52% contribution to topline from its non-cigarette turnover. Even as ITC held its own, the market ensured that every other perceived cigarette stock fell due to the hike in excise duty on cigarettes by 5% in the budget.

The industry is upset because the burden will have to be passed on to consumers and sources can cite historical evidence to show that the higher levy will not necessarily result in higher collections. Moreover, the possible introduction of a 12.5% value-added tax (VAT) from the coming fiscal will add to the industry's woes on top of the existing central duties.

"The hike in excise duty triggers a chain reaction. Demand for cigarettes is elastic in India and an upward levy is inevitably followed by a price hike, selective or across the board. This impacts the industry's consumption pattern.

"It is disappointing to note that cigarettes, which account for only 15% of overall tobacco consumption and generate as much as 85% of the total revenue that comes from tobacco, has been singled out for an increase in excise duty.

That's not altogether true the FM has has also raised the excise duty (excluding cess) on bidis from Rs 7 to Rs 11 per thousand for non-machine made bidis and from Rs 17 to Rs 24 per thousand for machine made bidis, in addition to retaining the 66% excise on paan masala that contains tobacco. There is an exemption from excise duty for unbranded bidis up to 20 lakh bidis in a year but that is subject to declaration with the Department of Central Excise and regular monitoring. Oddly enough though, the FM has also withdrawn the duty exemption on nicotine gum, used by many as an aid to quit smoking.