Budget 2023: Hike in cigarette tax, higher spend on rural schemes on anvil for FMCG cos

In the Budget 2023 that will be presented on Wednesday, Finance Minister Nirmala Sitharaman is widely expected to raise the tax on tobacco and tobacco products after leaving it untouched for 2 years.

While taxation of tobacco is primarily under the purview of the GST Council, the central government also levies a National Calamity Contingent Duty (NCCD) on cigarettes, which is subject to changes in the Budget.

The quantum of hike will be crucial for cigarette makers, particularly ITC, as cigarettes constitute more than 80% of the company’s net profit, and about 45% of its topline.

In the Budget for FY21, the government increased NCCD by 2-4 times across cigarette stick sizes, resulting in tax hikes of 9-15%.
NCCD accounts for about 10% of overall taxes on cigarettes, and brokerage Jefferies

India is building in a 5% YoY growth in overall tobacco taxes.

If the quantum of hike in tax is around this level, then Jefferies believes ITC can absorb it by passing on to consumers and not seeing any major hit to volumes.

Other expectations

Even though it will be the last budget by the current government ahead of the general elections in 2024, the centre is widely expected to strike a balance on capex investments and rural spending.

“We expect a clear rural focus budget and any announcements on these lines cannot be ruled out,” said Nuvama Institutional Equities in its report.

Any announcements on these lines would be a booster shot for fast moving consumer goods companies that derive over 50% of their revenue from rural markets.

At a time when the global slowdown is hurting export-oriented companies and seeing them slash jobs, the budget is widely expected to announce job creation schemes to bolster youth employment. This will give further fillip to consumption growth.

Brokerage PhillipCapital expects the government to revise the income tax slab rate to Rs 0.4-0.5 million from Rs 0.25 million.

The budget is also expected to tinker custom duty on gold. If it is hiked, this will be a negative for the entire jewellery industry, particularly for players like Titan, Kalyan Jewellers, Tribhovandas Bhimji Zaveri, and Rajesh Exports, who have seen strong traction in sales.

However, a reduction of the same could bring some relief to the sector.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)