ITC stock has been under pressure on reports that the gov't has formed an expert panel to develop a comprehensive tax policy on tobacco
Key takeaway: ITC stock has been under pressure on reports that the gov’t has formed an expert panel to develop a comprehensive tax policy on tobacco. We take a deep-dive into WHO’s MPOWER measures, which prescribe tax at >75% of retail price. Cigarette tax in India is at c.55%, but tax on other forms (bidi, chewing) is comparatively low. We believe a serious effort to curb tobacco use requires a balanced approach; penalizing only cigarettes may otherwise be counter-productive.
MPOWER: is an acronym for a set of six measures, prescribed by WHO, to curb tobacco consumption & was introduced in 2008. The six measures are: 1) Monitoring tobacco consumption & effectiveness of preventive measures; 2) Protect people from tobacco smoke; 3) Offer help to quit tobacco; 4) Warn about the dangers; 5) Enforce bans on advertising, promotion etc; and 6) Raise taxes on tobacco.
Point system: Each country is ranked on each of these six MPOWER measures on a five-point scale, and countries are expected to reach the highest level of achievement (on this five-point scale) across each of the six measures.
Where India stands: India has the highest level of achievement in two components ‘O’ & ‘W’. The country has taken substantial initiatives even across other measures and ranks 4 out of 5 across each of them as at 2020. In case of R, which stands for raise taxes, WHO requires every country to ensure that >75% of retail price is tax.
India is currently at c.55%; there are countries on either side i.e. lower as well as higher, with some even at c.80%.
Way forward: The expert group will analyse the existing tax structure on all forms of tobacco, including smoking & smokeless. The intent is to also develop a roadmap for tax policy and recommend immediate steps to make India compliant with regard to the ‘R’ component.
Cigarette vs. tobacco: At this stage, it is near-impossible to predict what the expert group would recommend and what gov’t will implement. However, if the real objective is to curb tobacco consumption, there is a strong case to raise taxes as well as have better processes on tax collection for non-cigarettes, which form nearly 90% of consumption but contribute only 20% of taxation.
What about collection? Aggressive tax hike would weigh on volumes and in turn impact tax collection, which could be a concern for the finance ministry. We note that cigarettes contribute >30% to the Compensation Cess Fund of India and is an important resource pool for the government to settle tax deficits faced by states.
Our view on ITC: This move has clearly raised concerns on tobacco taxation in the run-up to the Budget on February 1, 2022; as a result, ITC stock could remain range-bound (and even go down closer to the Budget). Of course, steps towards bringing other forms of tobacco under taxation would be viewed positively while a sharp rise on cigarette to meet >75% tax threshold would be a significant negative.