Shares of ITC Ltd. plunged the most in nearly six years after a higher levy on tobacco products by the government fueled concerns about its impact on India’s largest cigarette maker.
Shares of the cigarette-to-cookie maker dropped 10%, the most since 2020, while Godfrey Phillips India Ltd. closed 17% lower in Mumbai on Thursday. Trading volume of both the shares was more than 20 times their three-month average. ITC sells cigarette brands like Classic and Gold Flake, while Godfrey sells Marlboro and Four Square.
The tax burden is higher than previously anticipated by analysts and investors, with stakeholders struggling to map the impact which fueled uncertainty and pushed the stocks lower. It may weigh on the sales of ITC, which gets over 40% of its revenue from cigarettes. The levy adds to ITC’s woes at a time when its largest shareholder, British American Tobacco Plc, has been selling stake in the company.
The latest levy is in addition to the Goods and Services Tax, or GST, of 40% on tobacco-based products and cigarettes — also kicking in from February 1 — and aimed at offsetting the revenue hit from sweeping tax cuts on a range of products in September.
“This is a harsh increase,” Abneesh Roy, an analyst at Nuvama Wealth Management wrote in a note. Historically, steep tax hikes have led to volumes dropping by as much as 9% for ITC, he said.
India has over 253 million people who are tobacco users, making it the second-highest population globally. Indian government projects the economic burden of tobacco-related diseases will exceed 2.4 trillion rupees ($26.7 billion) annually, according to the finance ministry.
The government has been taking steps to prevent sin goods from becoming more affordable and accessible. The latest notifications follow a new health and national security tax on machines used to produce a tobacco-related product. In March, it sought to ban advertisements on the Indian Premier League for these items.
A taxation framework that keeps cigarettes “sufficiently expensive” remains one of the most effective tools to discourage use and limit its impact on India’s public health systems, the nation’s finance ministry said in a statement. The ministry does not see higher taxes on these items stoking smuggling and growth of grey market.
