100 million smokers in India face New Year’s bad news: cigarette taxes rise by up to 660 yuan per 1,000 sticks; Indian tobacco stock ITC plunges 10%.
```
The Indian government's new tax on cigarettes has caused tobacco stocks in the country to plummet on Thursday, with industry leader ITC recording its biggest single-day decline in almost six years.
The Indian Ministry of Finance announced late Wednesday that, starting February 1, a consumption tax of 2,050 to 8,500 rupees (159 to 660 RMB) per thousand cigarettes will be imposed, with the specific rate depending on cigarette length.
Jefferies analysts stated that if the National Disaster Emergency Surcharge is imposed, the additional tax on so-called "sin goods" (tobacco products) will rise by more than 30%.
ITC is India's largest cigarette manufacturer, producing brands such as Gold Flake; its shares plunged 9.7% on Thursday, hitting the lowest level since February 2023. Godfrey Phillips India, distributor of Marlboro in India, fell by more than 17%.
Significant Tax Burden Increase Sparks Cost Pressure
Analysts generally believe that the higher tax burden will prompt Indian tobacco companies to raise prices.
The new cigarette tax will be added to the existing 40% Goods and Services Tax (GST), which also comes into effect on February 1, aiming to offset revenue loss from a series of widespread product tax cuts in September. According to ICICI Securities analysts, the new tax effectively increases the overall cost of 75-85mm cigarettes by 22%-28%.
ICICI Securities points out that cigarettes over 75mm long account for about 16% of ITC’s sales, and such products may see a price increase of 2 to 3 rupees per cigarette due to the new tax.
Jefferies analysts call this move a "clear negative," believing it will hurt sales and reignite concerns over the illegal tobacco industry eating into market share. The Jefferies analyst team said in a report:
If the Indian consumption tax is confirmed, ITC may need to raise prices by at least 15% to pass the full impact onto consumers, and the actual price increase could be even higher.
Both ITC and Godfrey Phillips India plunged sharply, with the former becoming the biggest loser in the Nifty 50 index and leading declines in the Indian fast-moving consumer goods index. Trading volumes for both stocks exceeded 20 times the three-month daily average.
This decline was an added blow for ITC, whose largest shareholder, British American Tobacco, has been reducing its stake. Abneesh Roy, analyst at Nuvama Wealth Management, said in a report:
This is a harsh tax increase. Historical data shows that steep tax hikes have caused ITC’s sales to drop by as much as 9%.
Government Escalates Tobacco Control Policies
India has more than 253 million tobacco users, making it the country with the second largest number of tobacco consumers globally.
According to the Ministry of Finance, the Indian government expects the economic burden of tobacco-related diseases to exceed 2.4 trillion rupees (186.7 billion RMB) annually.
The Ministry of Finance stated in a release that keeping cigarettes "sufficiently expensive" through the tax framework remains one of the most effective tools for deterring use and limiting their impact on the public health system.
The Ministry of Finance believes that raising taxes on these goods does not encourage smuggling or the growth of the gray market.
Previously, the Indian government imposed a new health and national security tax on machines used to manufacture tobacco-related products and sought to ban advertisements for such products during the India Premier League this March.
Risk Warning and DisclaimerThe market has risks, and investments must be made cautiously. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific situation. Investment decisions made accordingly are at their own risk. ```