The stocks of cigarette makers rallied on Friday as concerns on a higher ‘sin tax’ abated with the government keeping the rates on cigarettes unchanged in the goods and services tax (GST) regime.
The Centre has capped the tax rate on cigarettes at 290 per cent over the next five years on expectations that the initial tax rate on this industry will have a neutral impact.
ITC Ltd, which has a 79 per cent market share, rose by over 7.5 per cent to touch Rs288.90 on the BSE in intra-day trade, close to its lifetime high of Rs292. The scrip closed at Rs281.20, registering 4.85 per cent growth.
Shares of VST Industries also shot up by 11 per cent in intra-day trade to touch Rs2,929.85 and finally ended at Rs2,839.45, registering an upswing of 7.55 per cent.
Shares of Godfrey Phillips also peaked at Rs1,283.75 in the intra-day trade, closing at Rs1,298.50, an increase of 1.04 per cent.
Sector analysts attributed the rise in stocks to the markets’ perception that the proposed tax rate in the GST regime to be at par with the existing rate, at least in the initial period of the rollout. An analyst from Motilal Oswal estimated the current average tax rate on cigarettes at 64 per cent, which, under the GST regime, is unlikely to increase.
“When new pieces of legislation are brought in, the government needs to provide some comfort and cushion to the industry, and thus, it is unlikely that the government will make the effective GST rate on cigarettes more the prevalent one,” the analyst said.
However, the analyst said the tax cap and the process appeared complex, and the ambiguity is yet to be resolved by the Council.
Asked about the potential impact on the cigarette industry after the GST rollout, an ITC spokesperson said, “According to media reports, the GST will be revenue-neutral. We do not have details at
the moment and hence cannot offer any further comments.”
Abneesh Roy, senior vice-president, institutional equities, Edelweiss Securities, said the existing rate of tax was Rs2,400 per 1,000 cigarettes and the proposed cap in the GST framework is Rs4,170 per 1,000 cigarettes. Roy said the Centre was likely to keep the existing rate unchanged now, but had kept the provision to increase tax later.
“However, the proposed cap on the cigarette industry has made clear the government’s intention as it has narrowed the limit by which the tax could be increased later,” an analyst with Cholamandalam Securities said.
On Thursday, Union Finance Minister Arun Jaitley said that the cess on demerit goods might be lower than the cap as the GST Council had kept a little headroom for future exigencies. This cess will help create a corpus for compensating states for any loss of revenue from GST implementation in the first five years.
However, the cigarette sector, under the sin tax proposal, has been subjected to the highest slab of 28 per cent and additional cess.
Analysts, citing the recent six per cent duty hike on cigarettes in the 2017-18 Union Budget and the expected tax neutrality in the GST regime, said the government was inching towards rationalising the tax on this industry and the sector would have five per cent growth in the coming financial year.
Sector analysts attributed the rise in stocks to the markets’ perception that the proposed tax rate in the GST regime to be at par with the existing rate, at least in the initial period of the rollout. An analyst from Motilal Oswal estimated the current average tax rate on cigarettes at 64 per cent, which, under the GST regime, is unlikely to increase.
“When new pieces of legislation are brought in, the government needs to provide some comfort and cushion to the industry, and thus, it is unlikely that the government will make the effective GST rate on cigarettes more the prevalent one,” the analyst said.
However, the analyst said the tax cap and the process appeared complex, and the ambiguity is yet to be resolved by the Council.
Asked about the potential impact on the cigarette industry after the GST rollout, an ITC spokesperson said, “According to media reports, the GST will be revenue-neutral. We do not have details at
the moment and hence cannot offer any further comments.”
Abneesh Roy, senior vice-president, institutional equities, Edelweiss Securities, said the existing rate of tax was Rs2,400 per 1,000 cigarettes and the proposed cap in the GST framework is Rs4,170 per 1,000 cigarettes. Roy said the Centre was likely to keep the existing rate unchanged now, but had kept the provision to increase tax later.
“However, the proposed cap on the cigarette industry has made clear the government’s intention as it has narrowed the limit by which the tax could be increased later,” an analyst with Cholamandalam Securities said.
On Thursday, Union Finance Minister Arun Jaitley said that the cess on demerit goods might be lower than the cap as the GST Council had kept a little headroom for future exigencies. This cess will help create a corpus for compensating states for any loss of revenue from GST implementation in the first five years.
However, the cigarette sector, under the sin tax proposal, has been subjected to the highest slab of 28 per cent and additional cess.
Analysts, citing the recent six per cent duty hike on cigarettes in the 2017-18 Union Budget and the expected tax neutrality in the GST regime, said the government was inching towards rationalising the tax on this industry and the sector would have five per cent growth in the coming financial year.
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