Excise duty raised on cigarettes by up to 6%, duty on chewing tobacco doubled

Arun Jaitley’s proposed excise duty hike on tobacco products is below the estimates of equity analysts


Excise duty for paan masala has been increased from 6% to 9% and unmanufactured tobacco from 4.2% to 8.3%. Photo: Mint
Excise duty for paan masala has been increased from 6% to 9% and unmanufactured tobacco from 4.2% to 8.3%. Photo: Mint

New Delhi: Like every year, the taxman has given special attention to tobacco products in this year’s Union budget proposals.

In his budget speech, Union finance minister Arun Jaitley on Wednesday proposed to hike excise duty on all tobacco products, including bidi. This is the first budget where Jaitley has increased basic excise duty on handmade bidi by 33% and on machine-made by 2.7 times, contrary to three of his previous budgets when the finance minister had left bidi, which is considered small-scale industry, untouched.

The proposed excise duty hike is below the estimates of equity analysts. Analysts had expected the duty increase to be around 10%. Budget has given a positive surprise with mere 6% in excise duty on cigaretes against expectations hovering between 8% and 10%. “This is the lowest hike in past six years,” said Abneesh Roy, analyst with Edelweiss Securities Ltd.

While excise on various lengths of cigarettes has been increased by 2.5% to 6%, for paan masala, it has been increased from 6% to 9% and unmanufactured tobacco from 4.2% to 8.3%. For other tobacco products like chewing tobacco, jarda-scented tobacco and gutkha, Jaitley proposed to double the excise from 6% to 12%. For hand-made bidis, the finance minister proposed to hike basic excise duty from Rs21 per 1,000 to Rs28 per 1,000, and for machine-made bidi Jaitley increased the basic excise duty to Rs78 per 1,000 from Rs21 per 1,000.

Since July 2014, when Jaitley presented the National Democratic Alliance government’s first budget, taxes on cigarettes have increased substantially.

In the 2015 budget, Jaitley hiked excise duty by 25% on cigarettes of length not exceeding 65mm, and by 15% on cigarettes of other lengths. In last year’s budget, Jaitley increased excise on cigarettes by around 10%.

Companies will decide on the actual price increase on cigarettes and other tobacco products after calculating the effect of the tax increase. Retailers, however, expect maximum retail price of cigarettes to go up by Rs5-10 in retail for a full pack of 10 or 20 sticks.

ITC Ltd, the country’s largest cigarette maker, declined comments. Its shares were up 4.51% at Rs269.70 on BSE at the close of trading hours on Wednesday.

ITC had a few weeks before the budget increased price of its cigarettes of 69mm and 74mm lengths by around 14%. Roy of Edelweiss said ITC can ‘easily’ increase the price by another “4% to counter 6% excise hike”. The brokerage firm has, however, increased its estimates for cigarette volumes of ITC to 5% from 3% earlier. It has also revised its estimate for ITC’s earnings growth to 16.1% in fiscal year ended 31 March 2018 from 13.6% earlier.

Tobacco Institute of India (TII), the association that lobbies for cigarette companies, has long been vocal about high tax structure which it said has created the market for smuggled foreign cigarette impacting the legal cigarette manufacturers.

On the other hand, relatively lower taxed tobacco products like bidi, khaini, chewing tobbaco, gutkha and smuggled cigarettes constitute for about 89% of total tobacco consumption in India, according to TII.

TII director Syed Mahmood Ahmad declined comments on the excise hike.

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