Tobacco stocks came under significant selling pressure on Monday, with shares dropping as much as 6%, following a GST panel’s recommendation for a 40% tax rate on demerit goods such as tobacco and pan masala.
ITC shares fell 5.67% to Rs 316.55 on the BSE. The fall made the company the worst performer among Sensex-listed blue-chip stocks. On the other hand, Godfrey Phillips‘s shares declined 5.7%. Last but not least, VST Industries declined 4.21%.
The recommendation was made by a Finance Ministry panel, chaired by Chief Economic Advisor Arvind Subramanian, which proposed a standard GST rate of 17-18% on most goods and services across the country, with higher rates for demerit goods.
The Goods and Services Tax (GST), which aims to unify India’s indirect tax system, is slated for implementation from April 1.
Over the years, discriminatory and punitive taxation on cigarettes has led to progressive migration of consumption from duty-paid cigarettes to other lightly taxed/tax-evaded forms of tobacco products, comprising illicit cigarettes, bidi, chewing tobacco, gutkha, zarda, snuff, etc., said ITC in its annual report for FY24.
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On July 23, Finance Minister Nirmala Sitharaman announced no changes to sin taxes in the Union Budget 2024-25, sparking a rally in ITC and other tobacco stocks.
Jefferies noted that a stable tax regime supports sustained growth in the cigarette business. The absence of a tobacco tax hike in the budget was seen as a relief for ITC, especially as the last increase was a modest 2% in February 2023. This stability has allowed ITC to focus on volume growth with minimal price adjustments, the brokerage said, adding that the latest tax proposal has caught the market by surprise.
After ITC’s recent earnings, brokerages had projected mid-single-digit cigarette volume growth for FY25. However, the GST Council, chaired by the Finance Minister and state representatives, is set to review the GoM’s recommendations on December 21.