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Shares of India’s largest cigarette maker, ITC, experienced their steepest single-day decline in nearly six years following a sharp new tax imposed on cigarettes by the Finance Ministry.
What Happened?
On Thursday, February 1st, shares of ITC crashed 10%, wiping out over Rs 50,000 crore in market capitalization. Godfrey Phillips India, which sells Marlboro cigarettes in India, fared even worse, falling as much as 19% – its steepest decline as November 2016. This dramatic downturn followed the Finance Ministry’s notification of new excise duties ranging from Rs 2,050 to Rs 8,500 per 1,000 cigarette sticks, depending on length, effective immediately.
The new levy is in addition to the existing 40% Goods and Services Tax (GST), creating a cascading tax impact. The timing of the announcement, late on Wednesday, contributed to the panicked selling on Thursday.
The Financial Impact: A Detailed Look
The excise duty increase is expected to significantly impact the profitability of cigarette manufacturers. Analysts predict price increases of at least 15%, possibly even higher, to offset the tax burden. This price hike could drive consumers towards the illicit cigarette trade, further eroding legitimate sales.
| Company | Share Price Decline (Feb 1st) | market Capitalization Loss |
|---|---|---|
| ITC | 10% | Over Rs 50,000 crore |
| Godfrey Phillips India | up to 19% | Not specified in source |
Jefferies estimates the tax hike could be over 30% if the National Calamity Contingency Duty (NCCD) continues. Even if NCCD is subsumed, the impact is still expected to be well over 20%.
what Does This Mean for the Industry?
This tax increase represents a critically important headwind for the Indian cigarette industry. The combination of high GST and now increased excise duties creates a challenging environment for manufacturers. The potential shift to illicit cigarettes is a major concern, as it undermines goverment revenue and poses health risks.
The industry has historically been heavily taxed in India, and this latest move continues that trend.It reflects the government’s ongoing efforts to discourage tobacco consumption, but also raises questions about the balance between revenue generation and economic impact.
Who is Affected?
- ITC and Godfrey Phillips india: Directly impacted by reduced profitability and potential volume losses.
- Investors: Experienced significant losses on Thursday.
- Consumers: Will likely face higher cigarette prices.
- Government: Aims to increase revenue, but risks a decline in revenue if consumers switch to illicit cigarettes.
- The Illicit Cigarette Trade: Expected to benefit from increased prices of legal cigarettes.
timeline of Events
- Late Wednesday: Finance Ministry notifies new excise duties on cigarettes.
- Thursday, February 1st: ITC and Godfrey Phillips shares experience significant declines.
- Ongoing: analysts assess the impact of the tax hike and predict price increases.
Frequently Asked Questions (FAQs)
- What caused the stock decline?
- The decline was triggered by the Finance Ministry’s announcement of new excise duties on cigarettes.
- How much will cigarette prices increase?
- Analysts predict price increases of at least 15