Statutory warning: Be wary of tobacco stocks

Analysts suggest caution in near term till clarity emerges on final GST rate

- NIKITA VASHISHT

Hopes of a lower effective tax rate on tobacco products, including cigarettes and bidis, went up in smoke on Friday after the central government indicated it may impose an additional cess over and above the 40-per cent goods and services tax (GST) rate proposed for sin goods in the new GST regime.

On the bourses, investors pressed the "sell" button for Elitecon International, ITC Ltd, and VST Industries, triggering a decline of 1.6 per cent to 5 per cent in their share prices. On the contrary, Godfrey Phillips share price moved 6.5 per cent higher intraday and ended with gains of 5.8 per cent. For perspective, the BSE Sensex dipped 0.01 per cent on Friday.

Analysts suggest investors stay cautious about the "expensive" tobacco stocks in the near term till clarity emerges on the final tax rate.

At present, taxes on cigarettes are a structural combination of variable payout and fixed charges per stick. Like all sin or demerit goods, cigarettes are taxed at 28 per cent base GST, with fixed and variable cess across the lengths of the sticks. This takes the effective tax rate on cigarettes to 50-53 per cent.