Mumbai: Shares of cigarette maker ITC Ltd on Friday surged 4.85% to close at a record high with analysts saying the goods and services tax (GST) imposed on the cigarette industry is neutral.
The stock touched a high of Rs289 on the BSE and gained as much as 7.8%, its biggest gain since 23 May 2016. So far this year, it has gained 15%. It closed at Rs281.20 on the BSE from previous close, while the benchmark Sensex index rose 0.21% to 29,648.99 points.
Other cigarette companies too were trading higher. VST Industries Ltd jumped 6.2%, while Godfrey Phillips India rose 0.8%.
On Thursday, the GST council gave its nod to the two remaining pieces of supporting legislation for implementing the reform paving the way for introduction in Parliament and state legislatures.
The cess levied, in the case of cigarettes and chewing tobacco, could be either 290% or Rs4,170 per thousand sticks or a combination of both. These cess rates are an enabling provision and the actual tax incidence could be lower, depending on the decision of the GST council.
Analysts with Antique Stock Broking, Dhirendra Tiwari and Dipojjal Saha, said the upper limits provided on cigarettes at Rs4,170 per 1,000 sticks is slightly lower than the current maximum current specific excise duty of Rs4,426 (levied on king size cigarettes with length above 75mm).
In FY17, the maximum specific duty on king-size cigarettes was Rs4,175 per 1,000 sticks.
Further the 290% ad valorem cess will probably mean that it will be levied on the invoice price (company selling price). In that case if a product is sold at Rs10, it will attract a cess of Rs29 and finally the product will be sold by the company at Rs39.
Our belief is the 290% cess in high probability will not be applied to cigarettes and may apply to other products, where specific excise duty is not applied currently, Dhirendra Tiwari and Dipojjal Saha added.
“We therefore believe that the current situation remains positive for ITC with two years of sub 10% increase in excise duty. This is expected to aid recovery in cigarette volumes for two consecutive years,” an Antique Stock broking report said. The broking firm has maintained its “buy” recommendation on the stock with a target price of Rs310 a share.
Motilal Oswal Securities analyst Sandeep Gupta believes that the government dose not intend to exceed the aggregate tax rates applicable currently on luxury/sin goods.