GST cess pulls cigarette sales down 8-9% in July-August

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Mumbai : India’s legal cigarette sales volume declined by 8-9 per cent in July and August over the same period last year due to the steep increase in cess under the goods and services tax (GST).

Sales declined across segments with the maximum fall seen in the entry and premium-end where the tax hike was maximum, three analysts said. It is one of the highest in recent months.

A recent report by Macquarie said its channel check across distributors reveal significant pressure on cigarette volumes led by higher decline in the king size filter (length 84 mm) and regular size filter (69 mm) where prices have gone up by 20 per cent and 23 per cent respectively in the last nine months.

Macquarie said since a significant portion of the entry level cigarettes of 64 mm length is now priced more than Rs 5 per stick, this segment too is contributing to volume pressure. At the same time, consumers are downgrading from 69 mm length to the 64 mm length where the price is almost half.

“The maximum impact is in the 64 mm segment since consumers shift to the illegal and smuggled cigarettes which are sold at Rs 2 to Rs 4 per stick. Normally, cigarette makers are quite hesitant to increase prices in this segment since it’s price sensitive, but they were compelled due to tax hike, which will lead to significant volume decline,” said EdelweissBSE -0.37 % Securities senior vice president Abneesh Roy.

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Revised estimates suggest that market leader ITC’s cigarette sales volume for the fiscal will fall by 4-5 per cent as compared to earli er estimates of flat cigarette sales. ITCBSE 1.37 % accounts for three of the four cigarettes sold legally in India. Cigarette sales volume had been flat in the January to March period, while in April to June quarter it had declined marginally by 1-2 per cent.

An email sent to ITC did not elicit any response till Monday press time. Macquarie said the higher price increases during FY 14-16 led to significant sales volume decline, but the expectation was of less of a decline this time on account of phased price increases and an improvement in demand environment which, however, has not played out in the first two months of price increases.

ITC in July increased cigarette prices by 4-8 per cent due to the increase in GST cess across its brands such as Classic, Gold Flake, Navy Cut, Bristol, Flake, Scissors and Capstan. The overall price increase for cigarettes in the last nine months has been about 14 per cent.This is the sixth straight year of tax increase and price hike for the cigarette industry.

Analysts believe illegal cigarette and bidi sales will further thrive this year due to rising price difference with cigarettes. As per industry body, The Tobacco Institute of India (TII), legal cigarette industry volume shrunk by more than 25 per cent since 2012-13 due to recurrent increase in taxation and prices. It said illegal cigarette trade constitutes one-fifth of the industry in the country and India is the fourth largest market for illegal cigarettes in the world.

Source : ET

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