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ITC: Stock under pressure on proposed tobacco tax policy

Way ahead: The skilled group will analyse the prevailing tax structure on all types of tobacco, together with smoking & smokeless. The intent is to additionally develop a roadmap for tax policy and advocate speedy steps to make India compliant with regard to the ‘R’ part.

Key takeaway: ITC stock has been under pressure on studies that the gov’t has shaped an skilled panel to develop a complete tax policy on tobacco. Wetake a deep-dive into WHO’s MPOWER measures, which prescribe tax at>75% of retail value. Cigarette tax in India is at c.55%, however tax on different varieties (bidi, chewing) is relatively low. We imagine a critical effort to curb tobacco use requires a balanced method; penalizing solely cigarettes might in any other case be counter-productive.

MPOWER: is an acronym for a set of six measures, prescribed by WHO, to curb tobacco consumption & was launched in 2008. The six measures are: 1) Monitoring tobacco consumption & effectiveness of preventive measures; 2) Protect individuals from tobacco smoke; 3) Offer assist to stop tobacco; 4) Warn in regards to the risks; 5) Enforce bans on promoting, promotion and many others; and 6) Raise taxes on tobacco.

Point system: Each nation is ranked on every of those six MPOWER measures on a five-point scale, and nations are anticipated to achieve the best stage of accomplishment (on this five-point scale) throughout every of the six measures.

Where India stands: India has the best stage of accomplishment in two elements ‘O’ & ‘W’. The nation has taken substantial initiatives even throughout different measures and ranks 4 out of 5 throughout every of them as at 2020. In case of R, which stands for elevate taxes, WHO requires each nation to make sure that>75% of retail value is tax.

India is at the moment at c.55%; there are nations on both facet i.e. decrease in addition to greater, with some even at c.80%.

Way ahead: The skilled group will analyse the prevailing tax structure on all types of tobacco, together with smoking & smokeless. The intent is to additionally develop a roadmap for tax policy and advocate speedy steps to make India compliant with regard to the ‘R’ part.

Cigarette vs. tobacco: At this stage, it’s near-impossible to foretell what the skilled group would advocate and what gov’t will implement. However, if the actual goal is to curb tobacco consumption, there’s a robust case to lift taxes in addition to have higher processes on tax assortment for non-cigarettes, which type almost 90% of consumption however contribute solely 20% of taxation.

What about assortment?: Aggressive tax hike would weigh on volumes and in flip influence tax assortment, which could possibly be a priority for the finance ministry. We observe that cigarettes contribute>30% to the Compensation Cess Fund of India and is a vital useful resource pool for the federal government to settle tax deficits confronted by states.

Our view on ITC: This transfer has clearly raised issues on tobacco taxation within the run-up to the Budget on February 1, 2022; because of this, ITC stock might stay range-bound (and even go down nearer to the Budget). Of course, steps in direction of bringing different types of tobacco under taxation can be considered positively whereas a pointy rise on cigarette to satisfy>75% tax threshold can be a major unfavorable.

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