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Cigarettes and other tobacco products currently fall under the 28 percent GST slab
ITC, VST Industries, Godfrey Phillips Shares Decline Up To 4%
Tobacco stocks experienced a sharp decline on February 20 following reports that the Goods and Services Tax (GST) Council may raise the GST on cigarettes and other tobacco products.
The potential increase would be implemented once the compensation cess on these products is removed, according to an Economic Times report.
Shares of ITC, Godfrey Phillips (maker of Four Square), and VST Industries (producer of Charminar) all dropped significantly. By 9:55 am, ITC’s stock had fallen by 1.6 per cent to Rs 400, while Godfrey Phillips was down 3 per cent at Rs 6,364.4, and VST Industries saw a 3.7 per cent dip to Rs 288.3 per share.
Higher taxes on cigarettes could lead to a significant decline in cigarette sales, as consumers may cut back on spending, resulting in lower volumes for tobacco firms. Additionally, there is a risk of consumers turning to cheaper, counterfeit alternatives.
In the Union Budget for 2025, Finance Minister Nirmala Sitharaman did not propose any changes to tobacco taxes. The stable tax regime is seen as beneficial for sustained growth in the cigarette industry, with the last tobacco tax hike being a modest 2 per cent in February 2023.
Cigarettes and other tobacco products currently fall under the 28 per cent GST slab, but with additional levies, including a compensation cess, the total tax burden rises to 53 per cent. There are proposals under consideration to raise the GST rate to 40 per cent, the maximum allowable rate, while introducing an additional excise duty.
The objective is to maintain stable tax revenues from tobacco products once the compensation cess is phased out, set to end by March 31, 2026. Government officials have indicated that a replacement cess is unlikely to be introduced.
Currently, the excise duty on cigarettes up to 65 mm is Rs 5 per 1,000 sticks, with higher duties for longer filter cigarettes. The National Calamity Contingent Duty (NCCD), which has been in place since 2023, ranges from Rs 230 to Rs 850 per 1,000 sticks, depending on the size, filter type, and flavor.
A GST Council ministerial panel will review these proposals before submitting recommendations, but the final decision rests with the Council.
As ‘sin goods,’ tobacco products are taxed multiple times, including GST, basic excise duty, the compensation cess, and NCCD. Despite the current 53 per cent tax rate, this still falls short of the World Health Organization’s (WHO) recommended 75 per cent.
Tobacco products, including cigarettes and pan masala, contribute significant revenue for the government, generating Rs 72,788 crore in the 2022-23 financial year, according to ET.
