Duty hike on cigarettes to have little impact on prices

The duty hike on cigarettes by 16 per cent announced in the Union Budget 2023-24 would have a nominal impact of around 7-12 paise per stick across cigarette categories, according to experts.

This upward revision in National Calamity Contingent Duty (NCCD) would have negligible impact on smokers and the companies could easily absorb the shock as it may not also have any resultant impact on margins, they said.

Finance Minister Nirmala Sitharama in the Union Budget for 2023-24 on Wednesday proposed to revise and increase the duty on cigarettes to about 16 per cent.

"National Calamity Contingent Duty (NCCD) on specified cigarettes was last revised three years ago.

"This is proposed to be revised upwards by about 16 per cent," she said in her Budget speech in Parliament.

On the impact of the move, Crisil Ratings Director Anand Kulkarni said, "The upward revision in NCCD on cigarettes is not expected to have a material impact on the profitability of cigarette manufacturers.

"The hike of 15-16 per cent will result in an increase in cost by 7-12 paise per stick across cigarette categories (based on size, filter, etc)."

The profitability will be less than one per cent and will not have any bearing on the credit profiles of players, he added.

Similarly, Nuvama Institutional Equities executive director & head of research committee Abneesh Roy said the overall impact would be negligible.

"This increase seems lower than our and street expectations, so a positive for ITC and other cigarettes companies," he said adding "cigarettes companies will need only low single-digit hike of around 2 to 3 per cent, which is not much of an issue, given three years of hardly any increase in prices for the consumer, will be easily absorbed by consumer."

Following the announcement in the Budget 2023-24, excise duty on filter cigarettes of length more than 70 mm but not exceeding 75 mm will go up to Rs 630 per 1,000 sticks from Rs 545 per 1,000 sticks.

Similarly, excise on filter cigarettes of length over 65 mm but not exceeding 70 mm will go up to Rs 510 per 1,000 sticks from Rs 440 earlier, while the same for filter cigarettes of length not exceeding 65 mm will be Rs 510 per per per 1,000 sticks, up from Rs 440.

For non-filter cigarettes of length not exceeding 65 mm, excise duty has been hiked to Rs 230 per 1,000 sticks from Rs 200, and for those of length exceeding 65 mm but not exceeding 70 mm, it has been increased to Rs 290 per 1,000 sticks from Rs 250 per 1,000 sticks earlier.

Excise duty on cigarettes of tobacco substitutes has also been increased to Rs 690 per 1,000 sticks from Rs 600.

Roy pointed out that during FY13-17, duty on cigarettes increased sharply at a CAGR of 15.7 per cent.

However, tax revenue from cigarettes grew a mere 4.7 per cent CAGR, and thereafter, relative stability in taxation was observed until January 2020.

In the Union Budget for FY2020-21, the government had increased NCCD by 2-4x across cigarette stick sizes, resulting in tax hikes of 9-15 per cent.

The sector is already facing challenges of illicit cigarettes and a sharp tax hike could push consumers to smuggled cigarettes, he added.