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Impact on cigarette to be neutral under GST regime

Avishek Rakshit/Kolkata 20 May 17 | 10:46 PM

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Neither the demand-consumption structure nor the price is likely to change for cigarettes, though it has been put in the highest 28 per cent duty slab in the Goods and Services Tax (GST) regime, with an additional five per cent compensational cess and another of varying degree.

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Currently, say sector analysts, the applicable average net value added tax (VAT) is 64 per cent. Under GST, cigarettes will be paying 28 per cent and an additional five per cent. Added to which is another complex structure, depending on the length of a cigarette. At the end of the calculation, “the general understanding from media reports is that the government intends GST to be revenue-neutral. We are in the process of studying the details", said a spokesperson for ITC, the sector leader.

“Although the additional cess is a bit more than expected, I don’t think the cigarette industry and the channel trade will face a major problem because of the tax rate," an industry official said. Adding that consumption of low-end ones might even increase, once there is more clarity on country-made bidis, if these come under a higher tax slab.

 The Tobacco Institute of India, which represents a little over 90 per cent of the legal cigarette trade, feels GST will help curb smuggling of cigarettes and reduce contraband usage. For, says an analyst, retailers will reduce stocking of contraband and smuggled items, as those cannot be reported in the stricter GST structure. “It will necessarily imply that they will be stocking the duty-paid cigarettes in greater quantity," he said.

 That apart, an initial hiccup in the trade, in line with other sectors, is projected with the GST roll-out. Says Abnessh Roy, senior vice-president at Edelweiss Securities, “Stringent compliance norms will hit unorganised players." And, that working capital requirement was likely to go higher for the entire distribution chain.

Around 70 per cent of cigarette sales, it is estimated, is through unorganised retail — betel shops, petty establishments and the like. A distributor in Kolkata says the lowest end of the sales channel lags in maintaining of any records. And, are likely to be hit in the initial days when GST is implemented.

“However, as was the case with VAT, these traders will also gradually cope with the new tax structure. But, given their limited working capital, initial stocks might be hit," the distributor said.

In sum, the cigarette industry isn’t expecting a significant price change in the near term

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