Cigarettes attract a sin tax or a higher rate to discourage smoking. Yet, after years of price hikes triggered by increasing levies, they are set to become cheaper, at least for now.
Under the newly implemented Goods and Services Tax cigarettes fall in the highest 28 percent bracket and attract an additional cess depending on their length. The effective levy is about 8 percent lower than earlier, according to brokerages CLSA and ICICI Direct. Mostly because the additional excise duty has been dropped under GST.
And the government is not thinking of bringing back the additional excise duty at the moment, two finance ministry officials told BloombergQuint requesting anonymity.
This is ironic. It will certainly reduce the cost of cigarettes. The intention of the government was to burden sin goods with more taxes and reduce consumption of tobacco indirectly.Sumit Lunker, Partner-Indirect Tax, PwC
One of the officials cited above said as per the government's calculation the effective tax rate under GST rate is the same as it was before the new tax was implemented.
The lower tax cited by analysts might be on account of different rates of value-added tax in various states or cascading which took place earlier, the official said.
The government may take a call once cigarette companies reduce prices. If the companies don't and a complaint is registered with the anti-profiteering agency, it will conduct an investigation. If the probe proves that the effective tax rate has come down, the government can step in and levy central excise to bring the levy to the pre-GST level, the official said.
A head of a cigarette manufacturing company told BloombergQuint requesting anonymity that the industry is seeking clarity on central excise and credits. The pending inventory would be sufficient for a month and the new pricing will be decided after that, the executive said.
A spokesperson for the country's largest cigarette maker ITC Ltd. told BloombergQuint that the company will pass any tax benefit to consumers.
Also Read: GST May Be Good News For ITC
The tax per cigarette is expected to drop 7- 9 percent on an average for ITC, according to foreign brokerage Credit Suisse. “If ITC does not drop prices of cigarettes, the lower tax per stick will result in higher realisation by approximately 8-10 percent on an average,” the brokerage said in its July 3 report.
The main source of the gain is that the value-added tax earlier was applicable on gross sales including on the excise duty, while the ad valorem tax will be applied on net sales under GST, the report said.
ITC's rival VST Industries Ltd., maker of brands like Charms and Charminar, may cut prices by 6 percent, ICICI Direct said.
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