NEW DELHI (NewsRise) -- Shares of ITC, India's biggest cigarette maker, slumped in Mumbai trading after a government panel proposed imposing a 40% tax on tobacco along with a so-called 'sin tax.'
The 40% rate is much higher than the 17%-18% "standard" rate that will be applicable for most goods and services under the proposal drafted by Chief Economic Advisor Arvind Subramanian. Prime Minister Narendra Modi's administration is seeking to push through the nationwide goods and services tax, which will replace a complex system of state-specific taxes with a uniform rate across the country, as part of efforts to improve the ease of doing business in India.
"In the event the full 40% is applied, cigarette companies will have to take a big hit -- our workings on ITC suggest it will entail an additional 38 billion rupees ($570 million) of tax expenses to be passed on to consumers," JM Financial said in a note.
ITC shares closed 6.7% lower at 313.20 rupees in Mumbai trading on Monday, its lowest level in two-and-a-half months. Today's fall marks the second-biggest drop for the stock in 2015. ITC had shed about 9% this year until Friday, compared with the benchmark S&P BSE Sensex index's loss of about 7% over the same period.
The proposal to raise the tax comes at a time when India's federal government has been trying to create awareness on tobacco-related health issues, launching anti-smoking campaigns and forcing companies to display larger graphic images on cigarette packs. Smoking in public places is also restricted across the country. Subramanian's proposal also included a 'sin' or 'demerit' tax on luxury cars and aerated beverages.
Kolkata-based ITC's cigarette sales, which account for about half its revenue, have suffered in recent years from higher taxes, increasing illegal trade and anti-smoking regulations. In October, the company posted a lower-than-expected second-quarter net income, hurt by slowing sales in its tobacco business.
"ITC will have to take a price hike of 11% on its cigarette portfolio in order to offset the impact of the higher tax-rate and maintain its net realization per stick at current level," brokerage Ambit Capital said in note.
To reduce its dependence on tobacco product, the company, also known for its Maurya hotel chain and consumer products such as Fiama Di Wills shampoo, Dark Fantasy biscuits, and Engage deodorants, aims to boost its food and personal care products businesses, targeting 1 trillion rupees in sales by 2030.
ITC's Yippee noodles benefited from a ban on Nestle India's Maggi noodles earlier this year, helping the company make swift market share gains in the nation's fast food market. Following the ban on Maggi, ITC commanded more than 50% of the instant noodles market in India, jumping from just about 10-12% in May before the Maggi ban, according to a report in business daily Mint in mid-September. The Maggi has since been reintroduced in India.
The government is aiming to push the crucial GST Bill in the upper house of parliament this week, where Modi's Bharatiya Janata Party lacks a majority. The reform, which requires a constitutional amendment that must be approved by a two-thirds parliamentary majority and at least half the states, has faced stiff opposition in parliament, with India's Congress party pressing for changes to the bill. The government aims to implement the tax from April 1, 2016.