ITC, VST Industries, Godfrey Phillips, Golden Tobacco shares: Will tax on cigarettes go up in Budget 2025 today?

Union Budget 2025 is a few hours away and 36.17 lakh small investors of ITC Ltd would be wondering whether the Finance Minister Nirmala Sitharaman will be increasing excise duty or National Calamity Contingent Duty (NCCD) duty on cigarettes and tobacco products this time. Shares of cigarette makers such as Godfrey Phillips India Ltd (down 10 per cent), VST Industries (down 6 per cent), Golden Tobacco Ltd (down 4.83 per cent) and ITC (down 3.7 per cent) fell up to 10 per cent in January, partly on such uncertainty.

Stock market analysts believe no tax hike would be the best scenario for cigarette stocks, followed by a single-digit growth in taxes that they believe could be easily absorbed by cigarette makers. A double-digit hike, if it comes, would weigh on cigarette stocks, they said. "The consumer sector might see a mid-to-high single-digit increase in cigarette taxes," said Bajaj Broking. Emkay Global said no tax hike or mid-single digit increase in tax would be positive for ITC while a double-digit hike, whose probability is low, would be negative.

Axis Securities believes raising of excise duty or NCCD duty on cigarettes and tobacco products will have a bearing on cigarette players such as ITC, Godfrey Phillip and VST Industries. "We reckon a low probability of a sharp hike in cigarette tax in the Budget given: i) a small tax hike was taken last year; and ii) legal cigarette volumes are gradually recovering amid an urban slowdown (3 per cent volume growth YoY). In case of a double-digit tax hike, tax collections could suffer due to the negative effect on legal cigarettes and market share gains for illegal players," said Nuvama Institutional Equities.

To recall during FY13 to FY17, the duty on cigarettes increased sharply at a CAGR of 15.7 per cent. But the tax revenue from cigarettes rose at a mere 4.7 per cent CAGR. A relative stability in taxation was observed until January 2020. Revenue collections during this period grew by 10.2 per cent. The budget for FY21 increased the NCCD by 2–4 times across cigarette stick sizes, resulting in tax hikes of 9–15 per cent. A double-digit tax hike now could push consumers towards smuggled cigarettes, analysts warned.