ITC – Tamil Nadu raises VAT on cigarettes::RBS

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TN state has notified that it has raised VAT on tobacco products including cigarettes to 20%. TN
is a state that gives ITC over 10% revenue sales, hence, we believe this move will raise weighted
average VAT incidence from 15.5% to 16.5%. While, on the margin negative, we overall remain
positive on ITC.


Tamil Nadu slaps a 20% VAT on cigarettes
􀀟 The State Government of Tamil Nadu has notified that tobacco products, which includes
gutkha, pan masala, chewing tobacco, scented tobacco (jarda), snuff tobacco and cigarettes
would be charged a VAT of 20%. The earlier levy was on cigarettes at 12.5%.
􀀟 The State has also raised VAT rates on some electronic products like mobile phones, LCDs,
DVDs, CDs and iPhones.
􀀟 The state estimates that the above move would raise its tax revenues by Rs39bn.
Tamil Nadu is one of the key states for ITC's revenues
􀀟 While, we do not have access to state-wise sales of ITC, we believe that ITC derives over
double-digit revenue sales from the State of Tamil Nadu.
􀀟 We estimate the current weighted average VAT incidence on ITC at around 15.5%.
􀀟 Consequent to the above increase of VAT in Tamil Nadu by 7.5% (12.5% to 20%), we
estimate that ITC's weighted average tax incidence would rise to 16.5%. This would call for a
1% increase in prices on an all India basis to neutralise the sharp rise in tax incidence in one
state. ITC follows uniform pricing structure on an all India basis.
􀀟 Clearly, state taxes in 2011 have been rising, and it is a growing concern for ITC. Earlier, we
had the states of Gujarat and Rajasthan raise VAT on cigarettes.
Rising taxes of other formats on tobacco, a structural positive
􀀟 In India cigarettes account for 15% of the consumption share of tobacco, with the balance
being accounted for by other, more dangerous formats of tobacco like bidis, chewing tobacco
etc. Besides, only 5.7% of all adults in India smoke cigarettes, while almost 35% of adults
consume tobacco products.
􀀟 However, the share of cigarettes in the tax collections is high at 75%, which historically has
ensured a faster growth in consumption of other formats of tobacco products.
􀀟 The two recent state budgets - Kerela and Tamil Nadu have raised VAT taxes on other
formats of tobacco as well to 20%. While Kerela did not raise the VAT on cigarettes, but only
on other formats of tobacco, Tamil Nadu has raised it on both cigarettes and other formats to
20%.


􀀟 Beside the taxation increase on other formats of tobacco, there have been moves to ban the
use of plastic packaging for chewing tobacco, which is also on the margin affecting the easy
mass sales of these products.
􀀟 Overall, we believe, unless GST is implemented on cigarettes, ITC will likely have to face this
repeated VAT increase in many more states in the coming quarters. While this would be
negative, we believe the competitive position of ITC in cigarettes in India ( 80%+ market
share of cigarette revenues), its pricing power and the scope for long-term volume growth
expansion, makes us remain positive on the cigarettes business.