Why cigarette pricing can go the liquor way

If you were unhappy with paying Rs 200 more for a Teacher’s Whisky bottle in Mumbai compared with Delhi, you are about to get a lot angrier if you are a smoker too.While your premium puff has already becoming more expensive, you may soon be charged more for a smoke, depending on which state you live.

According to this Business Standard article, ITC, the dominant player in cigarette making, is likely to consider state-specific pricing for its brands too, thanks to Union Budget 2012.
Finance Minister Pranab Mukherjee decided to introduce an ad valorem duty of ten percent on cigarettes with a length of over 65 millimetre, in addition to the existing specific duty on these products. An ad valorem duty is based on the sale value of the product.

In India, currently, cigarettes of 65 mm, 73 mm, 83 or 84 mm, 93 mm and 100 mm length are sold. The ad valorem duty would be chargeable on 50 percent of the retail sale price declared on the pack.

Given that various states also charge different rate of value added tax, manufacturers may just be forced to charge different rates for cigarettes across India.

“The highest VAT rate is in Rajasthan at 50 percent while the lowest at 12.5 percent is in Arunachal Pradesh,” said the Business Standard article.

Industry analysts think that cigarette makers might consider introducing cigarettes in the less than 65 mm category to beat the tax.

At present, the 65mm and above range constitutes the entire range of ITC’s portfolio. ITC has already hiked the prices of its brands —Navy Cut, Gold Flake, Classic, Classic Milds etc — by 10 to 15 percent. A pack of Classic Milds, which earlier cost Rs 110, now costs Rs 120, while the price of a single cigarette stick has gone up to Rs 7 from Rs 6 earlier.

IDFC Securities in a note had earlier said the move of introducing ad valorem taxes could be a (potential) structural negative for ITC, as it would limit company’s power to continue expanding margins as it has done over the last few years.

“The hike illustrates the intent of the government to capture the pricing element in the domestic cigarettes business. The government is taking cognisance of the fact that companies like ITC have maintained profit growth despite contraction in volumes which limits the government’s revenue potential,” the note had said.