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India hikes customs duty by 25% on cigarettes under 65mm

India hikes customs duty by 25% on cigarettes under 65mm

NEW DELHI: Finance Minister, Arun Jaitley, said that government has hiked customs duty by 25 percent on cigarettes under 65 mm and 15 percent on other kinds of cigarettes.

Historically, duties on cigarettes tended to move in tandem with wholesale price inflation, but since FY13 this has changed to rates that are closer to nominal GDP growth. This explains why with last year’s sharp hike, a punitive tax regime has come to India as well. The market was factoring in a 10% hike after last year’s blended duty hike of 18%, but the government has demonstrated that it intends to move along the same lines as other countries’ tax policies on tobacco products.

Abneesh Roy of Edelweiss Securities says that the fourth consecutive round of excise duty hikes, amounting to a weighted average excise increase of 16%, is likely to have a bearing on ITC’s cigarette volume growth. While he expects cigarette EBIT growth of 8% year-on-year in FY16, the company is expected to take price hike of 12-13% in above 65mm cigarettes and Rs 0.5 per stick in 64mm.

Volumes of cigarette manufacturer ITC were expected to revert to high single digits in FY16, but analysts will need to go back to the drawing board after the current hike, which aims to curb consumption of tobacco products. Cigarette manufacturers are likely to see volumes decline by 7-8% after the nine per cent decline in volumes in FY15.