ITC, Godfrey Phillips Shares Rally Despite 40% GST Hike on Cigarettes — Here’s Why
Despite GST on cigarettes rising to 40%, ITC and Godfrey Phillips shares rallied as brokerages expect a lower overall tax burden due to removal of compensation cess.
Shares of ITC, Godfrey Phillips, and VST Industries surged even as GST on cigarettes was hiked to 40%.
Shares of leading tobacco companies, including ITC, VST Industries, and Godfrey Phillips India, surged on Thursday even as the government announced a steep hike in GST on cigarettes and other tobacco products to 40%.
Finance Minister Nirmala Sitharaman confirmed after the 56th GST Council meeting that the new special rate will apply to cigarettes, paan masala, gutka, chewing tobacco (zarda), unmanufactured tobacco, and beedis.
Why Stocks Rose Despite Tax Hike
Brokerages believe the impact of the GST hike will be neutral to positive for tobacco companies. Currently, tobacco products are taxed at 28% GST plus compensation cess, resulting in a total tax burden of 50–55% of the MRP.
With the revised GST of 40%, the compensation cess will be removed, effectively lowering the overall tax incidence — unless new levies are introduced.
Global brokerage Jefferies noted that even if the National Calamity Contingent Duty (NCCD) continues at current levels, the overall tax burden on cigarettes could fall by around 5%, making legal products more competitive against illicit trade.
Market Reaction
At 10 AM on September 4, ITC, VST Industries, and Godfrey Phillips gained between 1–4% in trade.
Analysts say that if the government refrains from adding fresh levies, the reduced effective tax may enable companies to cut prices, regain market share, and strengthen volume growth.
Industry Outlook
Domestic brokerage Emkay Global highlighted that steady taxation over the past few years helped curb illegal cigarette volumes and boosted legal sales, which benefited both companies and government revenues.
However, ITC shares have been under pressure, falling 16% in the past year due to:
- Fears of rising cigarette taxation,
- Competitive gains by Godfrey Phillips, which added ~300 bps market share,
- Inflation in tobacco leaf prices impacting ITC’s EBIT margins.
Still, the latest GST reform could provide much-needed relief if no additional duties are imposed, analysts said.
