Even though cigarettes have been kept in the highest 28 per cent duty slab in the Goods and Services Tax (GST) regime with additional five per cent compensational cess and another varying degree of cess, the demand-consumption structure or the prevalent price is unlikely to change.
Sector analysts opined that currently, under the Value Added Tax (VAT) regime, the applicable average net tax on cigarettes is 64 per cent which will not change significantly as GST will be rolled out.
Under the GST tax structure, cigarettes will be paying a 28 per cent GST and an additional five per cent cent. Added to it is another complex tax structure.
The filter cigarettes of a length not exceeding 65mm will attract an additional Rs 1,591 per thousand sticks and the variants more than 75mm will attract Rs 4,170 per thousand sticks under the GST structure. Under the present tax structure, apart from the VAT, which varies across states, the highest slab for cess is Rs 4,421 per thousand sticks.
"The general understanding from media reports is that the government intends GST to be revenue neutral. We are in the process of studying the details", a spokesperson with industry leader, ITC Ltd said.
Previously, after the Centre hiked a moderate six per cent tax on cigarettes in the 2017-18 Union Budget, analysts, who expected the government towards inching to a softer stand on cigarettes, had predicted a Rs 4,170 cess per thousand sticks.
"Although the additional cess is a bit more than expectations, I don't think the cigarette industry and the channel trade will face major problem because of the tax rate", an industry official said adding that consumption of low-end cigarette may increase once there is more clarity on country-made bidi.
"If bidi has a higher tax slab, actually we might see an aspiring section of consumers upgrading to low-end cigarettes from bidi", the official said.
The Tobacco Institute of India (TII), which represents over 90 per cent of the legal cigarette trade, opined that GST will help curb smuggling of cigarettes in India as well as reduce contraband usage.
An analyst opined that since GST will have a stricter and tighter framework when compared to VAT, tobacco retailers will reduce stocking contraband and smuggled items as those cannot be reported in the books. "It will necessarily imply that they will be stocking the duty-paid cigarettes in greater quantity. However, it will not mean that overall cigarette consumption will increase; it will be that the smuggled ones can be replaced by the duty-paid ones", the analyst said.
However, although the industry expects the cigarette industry to remain impact neutral following the GST rollout, an initial hiccup in the trade, in line with other sectors, is projected.
Abneesh Roy, senior vice president of institutional equities at Edelweiss Securities said, "Under the GST regime, stringent compliance norms will hit unorganised players", adding that working capital requirement is likely to go high for the entire distribution chain.
The bulk of the retail cigarette sales, estimated at 70 per cent occurs through unorganised retail which comprises of betel shops, petty shops and others.
As per a tobacco distributor in Kolkata, the lowest end of the sales channel lags in maintaining sales and revenue records and are likely to be hit in the initial days when GST is implemented.
"However, as was the case with VAT, these traders will also gradually cope with the new tax structure but given their limited working capital, initial stocks may be hit but will ease", the distributor said.
Given the declared tax structure and the modus operandi, the cigarette industry isn't expecting any significant price hike in the near term.