NEW DELHI : After April 1, smoking will not only harm your health, but will also burn a hole in your pocket. With Finance Minister Nirmala Sitaraman’s proposal to hike the National Contingent Dilution Duty (NCCD) on cigarettes, prices are likely to rise by 1-3%, analysts said.
In his budget speech, the FM proposed to increase the NCCD on certain categories of cigarettes by about 16%, after almost three years.
NCCD is an excise duty levied on certain manufactured goods at specific rates in addition to other excise duties chargeable on the goods under the Principal Excise Act, 1944.
To be sure, the NCCD on cigarettes and other tobacco products was last increased in the Union Budget for FY21, when the duty on the smallest item was raised from ₹90 per mile stick to ₹200, and from ₹235 per thousand sticks to ₹735 for the longest segment.
However, analysts who track the sector said that the proposed increase this time is likely to have a negligible impact on cigarette prices.
Shares of ITC Ltd, India’s largest cigarette company, ended 2.61% up on the BSE on Wednesday, after dipping 6% during the day.
“The 16% increase in NCCD on cigarettes for FY24 is a step in the right direction as this will lead to a nominal tax increase, which will bring stability in taxation. This increase is lower than the Streets and our expectations, and we expect legal cigarette players to take share from the illegal ones. It also gives visibility to higher volume growth in FY24. Cigarette companies will have to raise prices by 2-3% – not a big ask since legal cigarette prices have not risen significantly in the last two years,” said Abneesh Roy, executive director, institutional equities, Nuvama Wealth Management.
According to Roy, cigarette law firms have taken market share from illegal players, without any tax increase for two years in a row. Given the nominal overall tax increase in the budget for 2023-24, we expect this momentum to last, he said.
The industry believes that high taxes on cigarettes lead to higher sales of illegal cigarette packs.
With the increase in the tax, companies could pass on small price increases to consumers. “The net tax on cigarettes would increase from 0.07 sticks to 0.12 sticks, which would require a 1-3% price increase for cigarettes in different categories. The increase in taxes is not very high and could easily be passed on by a small (1-3%) increase in prices,” said analysts at ICICI Securities.
Jefferies analysts said the effective tax hike of over 2% on cigarettes is a key positive for ITC Ltd, considering the company’s strong pricing power.
Tobacco and tobacco products add almost ₹53,000 crore to the tax revenue of the central government every year. Companies in the formal sector that sell legal tobacco products contribute a very high percentage of tax revenue, but only account for 8% of consumption.
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Updated: 02 February 2023, 12:35 AM IST
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