NEW DELHI : Come 1 April, smoking will not just be injurious to your health, but will also burn a hole in your pocket. With finance minister Nirmala Sitaraman’s proposal to raise the National Calamity Contingent Duty (NCCD) on cigarettes, the prices are likely to go up by 1-3%, said analysts.
In her budget speech, the FM proposed to increase the NCCD on certain categories of cigarettes by about 16%, after almost three years.
NCCD is an excise duty levied on certain manufactured goods at specific rates in addition to other duties of excise chargeable on the goods under the Central Excise Act, 1944.
To be sure, NCCD on cigarettes and other tobacco products was last increased in the Union Budget for FY21, when the duty on the lowest length segment was raised from ₹90 per thousand sticks to ₹200, and from ₹235 per thousand sticks to ₹735 for the longest segment.
However, analysts tracking the sector, said the proposed increase this time is likely to have negligible impact on cigarette prices.
Shares of ITC Ltd, the largest cigarette company in India, ended 2.61% up on the BSE on Wednesday, after dipping 6% intraday.
“A 16% hike in NCCD on cigarettes for FY24 is a step in the right direction as this will lead to a nominal tax increase, bringing stability in taxation. This increase is lower than the Street’s and our expectations, and we expect legal cigarette players to gain share from the illegal ones. It also lends visibility to higher volume growth in FY24. Cigarette companies will need to increase prices by 2-3%—not a big ask since legal cigarette prices have not risen a lot over the past two years,” said Abneesh Roy, executive director, institutional equities, Nuvama Wealth Management.
According to Roy, legal cigarette firms have gained market share from illegal players, given no tax hikes for two consecutive years. Given the nominal overall tax hike in the budget for 2023-24, we expect this momentum to sustain, he said.
The industry has been of the view that high taxes on cigarettes lead to higher sales of illegal cigarette packs.
With the rise in tax, companies could pass on small price hikes to consumers. “Net tax on cigarettes would increase by 0.07 a stick to 0.12 a stick, which would require a 1-3% price hike for cigarettes in different categories. The increase in taxes is not very high and would be easily passed on by a small increase (1-3%) in prices,” said analysts at ICICI Securities.
Jefferies analysts said the over 2% effective tax hike on cigarettes is a key positive for ITC Ltd, considering the company’s strong pricing power.
Tobacco and tobacco products contribute nearly ₹53,000 crore to the tax revenues of the central government annually. Formal sector companies that sell legal tobacco products contribute a very high proportion of tax revenues, but account for only 8% of consumption.
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