At the Stroke of Midnight, GST Benefits on Cigarettes Come Undone

With 28 percent GST and 5 percent ad valorem, cigarettes will cost more or less the same as it did before GST.

Cigarette prices will not come down under the Goods and Services Tax.

The GST Council on Monday increased the compensation cess on cigarettes to ensure that the effective tax rate does not reduce under the new indirect tax regime.

While the 28 percent GST rate and 5 percent ad valorem on cigarettes remain, the additional cess will change as per the length of the cigarettes, Union Finance Minister Arun Jaitley told reporters after the GST Council met via video conferencing.

BloombergQuint was the first to report that the government may hike cess on cigarettes if prices fell after GST implementation.

Cigarettes fall in the highest 28 percent bracket and attract an additional cess depending on their length under GST.

However, the effective levy is about 8 percent lower than earlier, brokerages CLSA and ICICI Direct said earlier.

This is mostly because the additional excise duty was dropped under GST, they said. The higher compensation cess has now plugged this loophole.

Shares of ITC Ltd, India’s largest cigarette producer, had closed 3.4 percent lower in the anticipation of the announcement. Brokerage Morgan Stanley, quoting the BloombergQuint article from 16 July, said that it expects the ITC stock to “trade weak” on the back of the news, in a note during Monday’s trading hours.

The stock has gained around 40 percent in 2017 and one of the reasons for its out-performance was the "relatively benign tax policy" after implementation of GST, where tax on cigarettes was likely to around 7 percent lower, Morgan Stanley said.

ITC declined to comment when contacted by BloombergQuint.

Godfrey Phillips, another Indian cigarrette maker, said that it will take an action on pricing according to the market leader ITC.

The price of cigarettes will depend upon their decision, my initial guess is that prices will go up post the new cess.

President of Godfrey Phillips to BloombergQuint

The changes will come into effect starting midnight.

The government will get Rs 5,000 crore from the higher cess, which otherwise would’ve either translated to profits on the books of cigarette makers or a reduction in the retail prices, Jaitley said.

The increase in compensation rates finalised are as follows:

Non Filtered Cigarettes

• Up to 65 mm length: Increase of Rs 0.485 per cigarette
• 65-70 mm length: Increase of Rs 0.792 per cigarette

Filtered Cigarettes

• Up to 65 mm length: Increase of Rs 0.485 per cigarette
• 65-70 mm length: Increase of Rs 0.621 per cigarette
• 70-75 mm length: Increase of Rs 0.792 per cigarette

(This article was originally published in BloombergQuint)