Yesterday’s drastic fall in ITC’s shares, after the GST Council hiked the cess on cigarettes under GST, seems to have ended up wiping in just a day all the gains that would accrue to the government from the additional revenue in one year. ITC shares fell as much as 15% intraday yesterday, and lost Rs 49,731 crore loss in the market capitalisation.
Accordingly, the Government of India, which is a significant shareholder in ITC Ltd with 9.1% stake held in the company through SUUTI (Specified Undertaking of the Unit Trust of India), lost Rs 4,521 crore in wealth in a single day. Notably, the hike in GST cess on cigarettes is expected to bring in additional revenue to the tune of Rs 5,000 crore to the exchequer over a period of one year.
Moreover, the move seemed to have hurt another government entity — Life Insurance Corporation of India — even more, as the state-run insurer lost Rs 8,101.17 on its 16.3% equity stake in ITC. LIC had recently hiked holding in ITC, buying 2% of the government’s equity stake from SUUTI for Rs 6,700 crore in June this year.
Earlier this week, the GST Council, in its first review meeting since the implementation of India’s biggest tax reform since independence, hiked the fixed cess on cigarettes by Rs 485-792 per 1,000 sticks, depending on the length of the stick. This is in addition to the 5% ad valorem cess which continues. The government has fixed a peak GST rate of 28% on cigarettes, with the cess being levied on top of the tax.
Following this, ITC shares slumped, giving up almost all the gains in the run up to GST and after its implementation. The intraday fall in ITC’s shares was steepest in 25 years, and was instrumental in sending the benchmark Sensex down by 363.79 points to close at 31,710.99.
The government arm SUUTI holds equity stakes in over 50 companies, including large holdings in L&T, ITC and Axis Bank, earlier held by the erstwhile Unit Trust of India before its breakup. SUUTI’s equity stakes in L&T, ITC and Axis Bank alone are valued at above Rs 50,000 crore.
In another development, the Tobacco Institute of India (TII) said that the government’s move to increase cess on cigarettes will put severe pressure on the industry and also impact tobacco farmers. It will also give a boost to smuggling and illicit cigarette trade in the country, it added.