Taxing cigarettes does not hurt :: Business Line

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Over 30 per cent of the Indian adult population consumes tobacco in some form.  But when it comes to user preference, smoking ranks as the least preferred option, accounting for a mere 15 per cent of tobacco consumption. Chewing or snorting are way ahead. Reason: High taxes on cigarettes.

Cigarettes are among the most taxed products. Roughly half the retail price of a pack of cigarette goes towards excise duties. Taxes drive the prices up relative to chewing tobacco, beedis and illegal imported cigarettes. A case in point: Cigarettes account for 75 per cent of the total tobacco revenues. This has kept users from uptrading to cigarettes which are relatively less harmful than other variants.

EATING INTO GROWTH PIE

Much to the annoyance of ITC and Godfrey Phillips, smuggled cigarettes evade the onerous tax burden and eat into their potential volume growth. Volume growth has been sporadic though. Since FY07, cigarette sales slid for two consecutive financial years.

A sharp increase in excise duties on non-filter cigarettes hurt growth in FY09. But volumes bounced back in FY10. Most price hikes happen in the period leading to the budget as tobacco companies justify the hikes to enable them to pass on excise hikes to the final consumer. The budget invariably sees an increase excise duty on tobacco products. In the period leading into the 2011 Budget, anticipating tax hikes, several cigarette majors hiked prices by as much as 18 per cent.

PRICING POWER

Despite excise hikes not materialising, cigarette companies did not reverse the hikes. ITC, VST and Godfrey Phillips, which together account for almost the entire cigarette market, saw net profit growth outpace sales growth. Cigarettes are a great target for taxation because their consumption keeps growing despite price increases. Between FY2006 and FY2011, cigarette prices grew at a compounded pace of twelve per cent. Volumes grew a sedate two per cent in this period from 97.6 billion sticks to 107.5 billion sticks, given that the sizable non-filter, micro and mini-cigarette categories were dropped by major brands.

The most impressive stat of the lot is the net price received by cigarette companies grew at a compounded pace of over 16 per cent over the same period! With volume growth in the first half of this fiscal at 6-7 per cent, the year is expected to be a great one for cigarette makers.

But there are a few negatives. Hike in state-level value-added taxes and anticipated excise duty hikes with the budget around the corner are expected to be dampeners for FY13. But with loyal customers willing to shell out a little more every year for their favourite pack, cigarette players are firmly in the driver's seat.