Tobbaco products to cost more - FM increases Cess on Tobacco products

Cigarettes and gutka are going to cost you dear, and not just in terms of health. The FM — who often struck a debonair pose with his pipes —having kicked the habit, on Friday announced dramatic structural changes in excise duties on tobacco products, along with increases in rates, that will burn a hole in your pocket if you are in the "unhealthy habit".

Although the move was not entirely unexpected, the quantum of the hike — about 17%— came as a shock to companies. Analysts say the manufacturers are likely to pass on a substantial part of the additional costs to consumers.

While the exact amount of retail hike is likely to vary across brands and pricing points — it would depend on parameters like how financially strong the company is and its need to factor in various state taxes as well — experts say the firms would be unwilling to completely absorb the extra cost accruing in the form of higher excise duties. "It's an extremely steep increase and we are evaluating the impact," an ITC spokesman said.

Decisions on across-the-board hikes are normally taken by most companies after considering the ramifications of the Union Budget. It will take a few days for the price pinch to sink in.

"The weighted average increase in excise duties of around 17%, coupled with the recent VAT hikes in different states, is amongst the steepest tax hikes on cigarettes in recent years. In addition to this, the introduction of a new slab for filter cigarettes below 60mm length at Rs 669 per thousand sticks, will not allow the industry to position brands at Re 1 per stick, which is the price at which most of the duty-evaded cigarettes are sold," Tobacco Institute of India director Udayan Lall pointed out.

"As a result, the industry will be unable to compete with this large and growing illegal sector," he added.
The 2010-11 Budget is not only unfriendly towards the cigarette industry but will also encourage the growth of the duty-evaded segment. It will trigger a shift to cheaper and low revenue yielding alternatives, resulting in considerable loss to the exchequer," Lall said.

Incidentally, ITC — the market leader in cigarettes — was the top loser at the BSE on Budget Friday, with its shares sliding 6.17%.