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Cigarette Sales to Drop 6-8% as New Taxes Kick In, Says Crisil

Crisil Ratings projects a 6-8% volume decline for India's domestic cigarette industry in the next fiscal year following new tax measures. The changes include an additional excise duty based on stick length and an increase in the GST rate to 40%. Manufacturers are expected to pass on most of the tax hike to premium segment consumers but absorb part of it for the price-sensitive mass market. Despite the volume drop, the industry's strong liquidity and high margins are anticipated to keep its financial health stable.

Key Points: New Cigarette Taxes to Cut Industry Volume by 6-8%

  • New excise duty & 40% GST from Feb 1
  • Mass segment gets lower duty hikes
  • Premium segment sees ~25% MRP impact
  • Industry EBIT margins to stay above 58%
2 min read

Cigarette volumes expected to fall as new duty takes effect: Crisil Ratings

Crisil Ratings forecasts a 6-8% volume decline in cigarettes due to new excise duties and a higher GST rate, with mass and premium segments affected differently.

"manufacturers are likely to partially absorb the same to minimise volume de-growth - Shounak Chakravarty, Crisil Ratings"

New Delhi, January 28

Crisil Ratings reports that the domestic cigarette industry is preparing for a 6-8 per cent volume reduction in the next fiscal year. This follows the imposition of additional excise duties and an increase in GST rates, which are effective February 1. Under the new tax structure, the compensation cess component will be removed, and an additional excise duty ranging from Rs 2.05 to Rs 8.5 per stick will be levied based on cigarette length. Furthermore, the GST applicable to the final price of cigarettes will increase to 40 per cent.

The tax changes will impact different market segments in varying ways. Mid to premium cigarettes, which are longer than 65 mm, will face excise duties between Rs 3.6 and Rs 8.5 per stick. For the mass segment, consisting of cigarettes shorter than 65 mm, the duty will be between Rs 2.05 and Rs 2.1 per stick. While the mass segment accounts for 40-45 per cent of industry volumes, manufacturers are expected to partially absorb the tax hike in this category because consumers are highly sensitive to price changes.

Shounak Chakravarty, Director at Crisil Ratings, noted the differing strategies manufacturers will likely use for these segments. "While the mid to premium segment will see higher duty hikes, amounting to ~25% of the current maximum retail price (MRP), manufacturers are expected to pass on the impact majorly to the end users as consumers in this segment exhibit higher loyalty to specialised offerings, such as low nicotine variants and specialised flavours. On the other hand, duty hikes in the price-sensitive mass segment will be lower at ~15% of the current MRP, and manufacturers are likely to partially absorb the same to minimise volume de-growth. That said, overall segment volumes might get impacted by 6-8% next fiscal in line with the impact seen during earlier duty hikes."

Despite the projected volume decline, the industry's financial health is expected to remain stable. EBIT margins are likely to decrease by 200-300 basis points but should remain strong at over 58 per cent next fiscal. Crisil Ratings indicates that the credit profiles of major players will be supported by robust liquidity and negligible debt. The organised cigarette industry, which represents 10 per cent of total tobacco consumption in India, currently maintains a cash surplus of more than Rs 20,000 crore.

- ANI

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Reader Comments

S
Sarah B
Interesting analysis. The segmentation strategy makes sense from a business perspective, but I wonder if it will just push mass segment consumers towards cheaper, unregulated tobacco products like bidis or chewing tobacco, which are also harmful.
R
Rohit P
Cash surplus of more than ₹20,000 crore! That's staggering. While the volume dip is projected, the industry's margins are still incredibly strong. Shows how inelastic demand can be, even with price hikes. Hope some family members who smoke finally consider quitting.
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Priya S
As someone trying to get my father to quit, I support this. Every price increase is another reason for him to cut down. But the government needs a dual approach—higher taxes AND more accessible cessation programs in smaller towns.
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Vikram M
While the health angle is important, let's not forget the lakhs of farmers involved in tobacco cultivation, especially in states like Andhra and Gujarat. The policy should be accompanied by support for crop diversification. A balanced approach is needed.
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David E
The economic modelling here is sharp. Passing on costs to premium users who are less price-sensitive and absorbing some for the mass market is classic strategy. The 6-8% volume drop seems manageable for an industry with such high margins and zero debt.

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