Chewing tobacco has been a tradition in India for centuries. Of the total amount of tobacco produced in the country, around 48 per cent is in the form of chewing tobacco, 38 per cent as bidis, and only 14 per cent as cigarettes.

Thus, bidis, snuff and chewing tobacco (such as gutka, khaini and zarda) form the bulk (86 per cent) of India's total tobacco production. In the rest of the world, production of cigarettes is 90 per cent of total production of tobacco related products.

The per capita consumption of cigarettes in India is merely a tenth of the world average. This unique tobacco consumption pattern is a combination of tradition and more importantly the tax imposed on cigarettes over the last 2 decades. Cigarette smokers pay almost 85 per cent of the total tax revenues generated from tobacco.

Budget Measures Excise duty on cigarettes increased by 5% Excise on unbranded other smoking tobacco and unmanufactured tobacco and tobacco substitutes at 16% Tariff rate of excise duty on biris increased Excise exemption to small-scale smoking tobacco and tobacco substitute manufacturers restricted to Rs 1 m. Excise duty on all types of pan masala rationalized at 66%  Budget Impact Excise increase on cigarettes to hit companies like ITC, Godfrey Phillips and VST industries [Get Quote] Excise duty imposed on unbranded players will be a boon to companies like ITC Increase in tariff on biris will aid cigarette volumes.  Sector Outlook Despite being the second largest producer, India is only the ninth largest exporter of tobacco and tobacco products in the world. Out of the total tobacco produced in India, only one-third is flue-cured tobacco suitable for cigarette manufacturing. Most of the tobacco produce is suitable for the manufacture of chewing tobacco, bidis and other cheap tobacco products, which have no demand outside the country. Going forward, tobacco companies are likely to face tougher times with the government's intervention on the rise. However, considering that as per capita income increases and there is a change in the demographic profile of the populace, there is still some scope for growth for the industry.  Industry Wish List Industry chambers favour that the specific excise duty structure based on the length of cigarettes should be continued. Tobacco companies are hoping that a specific policy will be announced to discourage smuggling of contraband cigarettes. The tax rebates on investments in tobacco plantations in backward areas should be continued. Additional duty of excise (AED) on cigarettes at specific rates should continue even after implementation of VAT.  Budget over the years Budget 2003-04 Budget 2004-05 Budget 2005-06 Excise duty on nicotine reduced from 16% to 8%. Henceforth, state levies cannot exceed 4% on tobacco Other than this, the excise duty structure has been more or less left untouched for tobacco sector Increase in excise duty on matches made in the mechanised/semi-mechanised sector from 8% without Cenvat credit to 16% with Cenvat credit Specific rates on cigarettes raised by 10% Surcharge of 10% imposed on ad valorem duties on other tobacco products including gutka, chewing tobacco, snuff and pan masala Excise on matches made by mechanized or semi-mechanized sectors reduced from 16% to 12%. However, no excise on hand made matches. [Read more on Budget 2003-04] [Read more on Budget 2004-05] [Read more on Budget 2005-06]
Key Positives It's a habit industry and hence, continues to thrive despite odds like punitive taxation, ban on smoking in public places and restrictive advertising. Being a habit industry, it finds it comparatively easy to pass on excise duty hikes, though lately there have been signs of a resistance to price hikes.		Key Negatives Heavily penalized through punitive taxation policies. Cigarette companies pay roughly 50% of their revenues as excise. As a result, the share of cigarettes in total tobacco consumption has declined from 21% in 1981-82 to a mere 14% in 2004. Domestic cigarette companies suffer a double whammy. On the one hand, they are barred from sponsoring sports and cultural events and on the other contraband cigarette volumes continue to thrive. Net result, volume growth is sluggish. In the last 20 years, tobacco consumption in non-cigarette varieties has increased especially in the chewing format by 68 m Kgs, and reduced in the cigarette format by 21 m Kgs. With the government going against even a Supreme Court verdict relating to cigarette related excise, its policy has become even more abundantly clear towards the sector.

Before 1987, cigarettes were subject to ad valorem rates of duty resulting in administrative problems as well as reduced revenue to the exchequer. The specific excise duty rate on the basis of length of cigarettes introduced in 1987. As per the CII, it has resulted in increased excise revenue to the exchequer from Rs 13 bn in FY87 to over Rs 53 bn in FY02. This reduced litigations considerably and helped fill government coffers.

Over the years, the government has become pretty predictable in its policy towards the tobacco sector. Every year, the industry faces hike in excise duties, which then are passed on to consumers. However, in the last three budgets (2002-03 to 2004-05), the finance minister kept the excise duty structure more or less unchanged for tobacco sector. However, on cigars and other value added products sales (value added tax) VAT was increased 16%. These years were a positive for the cigarette companies.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.