Puffing Profits

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: But after the ban on all advertisements relating to tobacco-related products in May 2004, these king-sized hoardings just went up in smoke without leaving a trace.

What’s the impact of government's ban on tobacco advertising? Has it really affected tobacco majors? “I think it has no impact at all on ITC as the company's competitors too cannot advertise their brands,” says a Mumbai-based FMCG analyst. As a result of the ban, tobacco companies are now beefing up their point-of-sale ads and ground events to lure smokers across the country. “ When there is no ban on the sale of the products, why should there be a ban on advertising tobacco products?” asks a leading advertising practitioner in Mumbai.

The tobacco companies have been facing another challenge since April this year. The government has imposed a value-added tax (VAT) of 12.5% on cigarettes. What has been the direct impact of VAT on ITC's performance? The severe taxation and regulatory milieu for cigarettes in India remains a cause for concern, admits Wanchoo. “Despite lower volumes, the additional burden of indirect taxes during the last quarter aggregated Rs 411 crore, consequent to the staggering increase in such taxes of 29% per pack over the corresponding quarter of the previous year,” he adds.

According to analysts, such high rates of taxation at nearly 132% of the value of the product (ex-factory price net of taxes) will only drive consumers to switch to cheaper and inferior forms of tobacco, resulting in lower revenue collections by the exchequer. “This sharp increase in taxes has resulted in a drop in the cigarette industry volumes,” point out analysts.

From December 1 2007, cigarette majors will face yet another major challenge. They are required to print pictorial health warnings on tobacco product packs under the Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COTPA). While these provisions of COPTA are proposed to be made effective from December 1 this year, the scope and implementation processes including the timeline need to be rationalised, point our analysts.