1. ‘Capping cess for cigarettes provides certainty to tax regime under GST for ITC, Godfrey Phillips’

‘Capping cess for cigarettes provides certainty to tax regime under GST for ITC, Godfrey Phillips’

According to analysts, if the Council finally decides to keep beedis, a cheap substitute to cigarettes, out of the cess net, it would be a 'strange' decision. The GST regime, however, can provide a "certain degree of level-playing field" between cigarette and beedi as the latter will come under a uniform tax rate across India.

By: | New Delhi | Published: March 17, 2017 8:44 PM
“Capping the rate of cess on cigarettes is an welcome development, because it provides certainty to the cigarette manufacturers on what could be maximum rate of cess. Otherwise it would have been anything,” M S Mani, senior director, Deloitte India, told FE.

The GST Council’s move to put a cap at which cess could be levied on tobacco products under the new indirect tax regime is a welcome development for the country’s cigarette makers such as ITC, Godfrey Phillips and Golden Tobacco as for them the cap announced on the cess provides a certainty to the tax regime.

According to analysts, if the Council finally decides to keep beedis, a cheap substitute to cigarettes, out of the cess net, it would be a ‘strange’ decision. The GST regime, however, can provide a “certain degree of level-playing field” between cigarette and beedi as the latter will come under a uniform tax rate across India.

“Capping the rate of cess on cigarettes is an welcome development, because it provides certainty to the cigarette manufacturers on what could be maximum rate of cess. Otherwise it would have been anything,” M S Mani, senior director, Deloitte India, told FE.

The Council in its meeting on Thursday said the cess levied on tobacco could be either 290% or Rs. 4.17 per stick or a combination of both. In this meeting no decision has been taken to levy cess on beedis as of now.

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“Yesterday, the council has reportedly decided to exempt beedi from cess. This was a request made by the Kerala finance minister and that request has been accepted. His argument that was that beedis are consumed by the poorer sections of the people, and therefore there should not be any cess on this product,” Mani said.

“Now, I find it to be a little strange because both these products (cigarette and beedi) are equally harmful to health. So if the health aspects are considered, it does look very strange that two commodities, both of which are harmful to health, are being taxed in different manners,” he observed.

According to him, if the council finally decides to exempt beedis from cess it would drive more people from cigarettes to beedis as the latter would become more cheaper.

Mani, however, maintained that the new indirect tax regime, which can be rolled out from July this year, will provide a “certain degree of level-playing field” between cigarette and beedi as the latter will come under a uniform tax rate across all the states. “Currently, there are excise duty and VAT on beedis. Some states however do not impose VAT on it. As VAT rates are different for different states, interstate smuggling is common for beedis. This smuggling will now go down in all the states as the GST rate will be the same for beedis,” he said.

Analysts said it is difficult now to predict whether the prices of cigarettes will increase or decrease under GST because that will depend on the brands. “Overall the principle the GST Council has been following for all products is that prices before GST and after GST should not change…I am hoping that in cigarettes also the intention would be to keep the prices constant because in the latest budget also the excise duty on cigarettes has been increased,” Mani said.

JM Financial, in its report on ITC Ltd, said interestingly Rs. 4.17 per stick (the cap at which cess could be levied) corresponds exactly to the specific excise (including additional duty and NCCD) that King-sized cigarettes were subjected to prior to the February 2017 Union Budget (since increased to Rs. 4.42/stick).

“If the government does indeed abolish excise in entirety and in its place, levies a ‘specific’ length-based tobacco cess and matches the length-wise cess to the composite excise per stick that were in force prior to the Feb’17 Budget, then cigarette taxes would indeed be ‘neutral’ in true sense of the term – these rates would then be 6% lower vs the prevailing excise (as increased in the 2017 Budget) which seems to be to compensate for the 450 bps rise in GST base rate (28% vs existing blended VAT rate of 23-24% using ITC’s financials as the benchmark). If this is indeed the case, it would tantamount to the best-case scenario being played out, which will trigger a decisive re-rating for the ITC stock, we believe,” it added in the report on Thursday.

On Friday, the country’s largest cigarette maker ITC’s scrip rose 4.85% to end the day at Rs. 281.20 on the BSE. When contacted, an ITC spokesperson said,”As per media reports, the GST will be revenue neutral. We do not have details at the moment and hence cannot offer any further comments”.

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