GST Impact: Compensation Cess Increased on Cigarettes, Smoking to Become Costlier

ITC shares have the fourth-highest weighting in India's S&P BSE Sensex and NSE Nifty 50 Indexes.

The 19th meeting of the GST Councilheld today chose to increase the levy on cigarettes. At 11:34 am, the stock of cigarettes-hotel (FMCG) major ITC was trading 11.50 percent or 37.45 points lower at Rs 288 on the BSE. Godfrey Phillips India Ltd., which counts Philip Morris as an investor, tumbled 7.8 percent.

Hence, it chose to increase the compensation cess on all cigarettes. With ITC, the effective tax will come down, the minister said, adding that companies are facing some operational issues in claiming the ITC due to their operations spread over different states, which the ministry is looking into.

The GST Council on Monday raised the cess on cigarettes to take away an estimated Rs 5,000 crore annual "windfall" manufacturers could have reaped from lower GST rates, Finance Minister Arun Jaitley said.

ITC was identified by us as one of the key beneficiaries of lower GST rates in our report dated May 24.

Brokerage firm CLSA has downgraded the stock to "Cut" from "Buy" and lowered its target price to Rs285 a share from the earlier target price of Rs417.

On the other hand, Macquarie Securities still seemed upbeat on ITC shares, as it maintained its "Outperform" rating with a price target of Rs 340, even while cutting its EPS estimate by 8-10% for FY18/19E.

CLSA is "forced to downgrade to sell as earnings outlook weakens", the brokerage said in a note to clients on Tuesday. "The outcome is clearly negative from the neutral stance that the government mentioned". The company's cigarette revenue had seen a 5.1 percent growth a year ago.

An analyst from HSBC Global Research said that the current increase in tax signals that taxation on cigarette will remain punitive and uncertain.

Vanessa Coleman