Tobacco tax hike hits cigarette makers Q1 numbers

A steep government hike in taxes on cigarettes and tobacco products has begun weighing on the country's leading cigarette makers, with ITC, Godfrey Phillips India and VST Industries reporting declines in net revenue, sales volumes and profitability for the April-June quarter, the first full quarter under the revised tax regime.

The three companies together account for more than 90 per cent of the domestic cigarette market, which some reports estimate has an annual volume exceeding 100-120 billion sticks.

The government had raised the Goods and Services Tax (GST) on cigarettes and tobacco products to a flat 40 per cent in February, replacing the compensation cess with a new additional excise duty ranging from Rs 2,100 to Rs 8,500 per 1,000 sticks depending on cigarette length.

While reported revenues from operations rose sharply across the sector as the higher duty component flowed through to sales figures, underlying revenues and profits came under pressure as companies absorbed the impact of the tax increase.

Market leader ITC reported a 73.71 per cent rise in cigarette business revenue to Rs 16,596.67 crore for the June quarter, up from Rs 9,553.86 crore a year earlier, a rise the company attributed to its "staggered pricing approach amidst unprecedented increase in tax." 

However, ITC's gross revenue from sale of products and services in the cigarettes segment, which strips out duty pass-through which fell 31.45 per cent to Rs 3,769.11 crore, from Rs 5,498.93 crore in the year-ago quarter, pointing to pressure on underlying sales volumes.

ITC, which controls over three-fourths of the domestic cigarette market, said it had mounted a "strategic and calibrated response by the Cigarettes Business to the unprecedented increase in tax, balancing the interests of all stakeholders." 

The company's cigarette brands include India Kings, Insignia and Classic in the premium segment, and Gold Flake, Wills Navy Cut, Scissors, Capstan and Players in the mass-market segment.

Godfrey Phillips India reported a 44.3 per cent decline in consolidated net profit to Rs 198.39 crore for the quarter. Revenue from operations of the Modi Enterprises firm nearly doubled to Rs 3,819.56 crore, largely due to Rs 2,614 crore in excise duty paid during the period. 

Excluding excise, the company said its net revenue fell 18.8 per cent to Rs 1,206 crore, from Rs 1,486 crore a year earlier. Godfrey Phillips sells cigarettes under brands including Cavanders, Four Square, Red & White, Stellar, North Pole and Tipper, along with Marlboro, which is owned by Philip Morris.

VST Industries, which owns the Total, Editions and Charms brands, said its quarterly performance was also weighed down by the tax increase. Revenue nearly doubled to Rs 881.49 crore in the June quarter, from Rs 424.93 crore a year earlier, but profit after tax fell 24.42 per cent to Rs 42.42 crore, from Rs 56.13 crore in the first quarter of FY26. The company's net revenue declined 13.5 per cent to Rs 256 crore, comprising Rs 216 crore from the cigarette business and Rs 40 crore from unmanufactured tobacco against Rs 296 crore (Rs 255 crore and Rs 41 crore, respectively) in the year-earlier quarter. Its average monthly cigarette volume fell 14 per cent to 611 million sticks, from 714 million a year earlier.

The government had revamped the taxation structure for tobacco products effective February 1, imposing an additional excise duty on cigarettes and other tobacco products and a health cess on pan masala, on top of the highest GST slab of 40 per cent. The move replaced the earlier regime of 28 per cent GST plus compensation cess that had been in place since the GST system's rollout in July 2017.

Under the revised structure, short non-filter cigarettes of up to 65 mm attract an additional duty of about Rs 2.05 per stick, while short filter cigarettes of the same length face an additional duty of around Rs 2.10 per stick. Following the new duty structure's implementation, cigarette prices rose by about Rs 22-25 per pack of 10 sticks across several categories, prompting manufacturers to undertake calibrated price hikes and portfolio adjustments at the time.

(With inputs from PTI)