Policy

Budget Analysis: Hike in cigarette excise duty – Consumers will grimace and smoke it

Aarthi Krishnan Chennai | Updated on March 12, 2018

>Finance Minister P. Chidambaram’s decision to hike the excise duty on cigarette comes with full knowledge that while most smokers will grumble when manufacturers inevitably raise prices, they will have no choice but to do so with a cigarette in hand.

The hike is targeted at middle-to-high-end brands: only cigarettes exceeding a length of 65 mm will attract the 18 per cent hike in excise duty. So while Wills Navy Cut and Four Square will cost more, budget smokes like Cavenders will escape a price hike.

Tobacco titans like ITC and Godfrey Philips are unlikely to be worried at the prospect of their revenues being eroded by the hike in prices too.

Excise duty on cigarettes has been hiked — or the duty structure tweaked — three times in the past five years, with 2011-12 being the only exception. But the cost of a packet of cigarettes has been rising year-on-year, as manufacturers factored in the increasing input costs besides taxation issues.

But neither sales nor the profits of the cigarette behemoths have been dented too much. To illustrate this, consider FY2010-11, when then Finance Minister Pranab Mukherjee had lowered the excise duty on cigarettes shorter than 60 mm, but raised it by over 10 per cent for sticks that were longer in length.

Despite the subsequent hike in prices, ITC was able to post a 12.6 per cent rise in revenues from its cigarette business during the year, while Godfrey Philips reported a 17.2 per cent and VST a 24.1 per cent jump.

And despite a higher outgo on excise duty, ITC reported a 16 per cent growth in net sales, while Godfrey Philips and VST posted a 15.8 per cent and 22.5 per cent rise, respectively.

And in 2011-12, a year in which companies were spared a hike in excise — but consumers were subjected to an increase in the price of a pack of smokes — ITC’s net sales rose 17.2 per cent, whereas Godfrey Philips registered a 16.9 per cent and VST a 17.6 per cent improvement.

Published on February 28, 2013

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