What are ITC’s investors smoking?
The benefits from GST may take time to show up, and the regulatory risk of tobacco control remains very much alive and should be watched out for.business Updated: Jul 05, 2017 16:21 IST
That the goods and services tax (GST) is good for ITC Ltd is well known. In fact, the GST Council had decided in its 17 March meeting to cap the cess on demerit goods, and said it wanted the tax burden to remain the same. Since then, the company’s share has risen by a fifth, and gained by 8.7% in the past week alone.
Why does ITC benefit? Rates can be changed only by the GST Council now, lessening the possibility of sharp annual increase in taxes on cigarettes. The need to raise revenues, and the presence of states dependent on tobacco in the council, will help keep cigarette tax hikes in check. Stable taxation gives investors predictability and should also help ITC become more competitive versus illegally sold cigarettes. It also levels the playing field in respect of other forms of tobacco consumption.
In brief, cigarettes will be taxed at 28% and a cess of 5%, and a cess in rupees per thousand sticks, which varies by length. The cess is to compensate states for revenue lost due to GST, which they are entitled to for five years. On paper, it means the cess is time-bound but that could change too.