Explained: Why ITC shares jumped after GST overhaul hit cigarettes – News Air Insight

Shares of ITC Ltd, India’s largest cigarette maker, rose 3.5% to Rs 425.70 on Thursday even as the government unveiled a sweeping revamp of the goods and services tax (GST) that places tobacco products in a special category. Brokerages bet the shift could ultimately lower the company’s effective tax burden and reduce policy uncertainty.

ITC shares rose with other tobacco counters also gaining on the day. The move came after Finance Minister Nirmala Sitharaman announced that while the GST Council has cut most items to two slabs of 5% and 18%, sin goods such as cigarettes, paan masala and gutka have been placed in a separate high-tax category of 40% levy.

GST overhaul

The GST Council, in its 56th meeting, approved a plan to simplify the indirect tax structure from four slabs—5%, 12%, 18% and 28%—to just two rates of 5% and 18%. A new 40% slab has been proposed for a small category of items including luxury cars, tobacco and cigarettes.Sitharaman said that for now, tobacco and related products will continue to be taxed at 28% plus a compensation cess until loans taken to cover states’ revenue shortfall are fully repaid. Once that obligation is cleared, the levy will shift to a flat 40% GST slab.

Why is the market optimistic?

Brokerage Jefferies said the new regime could turn out to be favorable for ITC. “Tobacco/ITC could potentially benefit, as the shift to ad-valorem rate of 40% (likely by year-end) implies a ~5ppt tax cut. Also, the regime potentially removes tax uncertainty, a positive for ITC,” it said.Tobacco is currently taxed at 28% GST plus a cess that mixes specific and ad valorem duties. The proposed structure would instead impose a 40% levy on the retail selling price, with no compensation cess. Jefferies added, “Even if NCCD continues at the current rate, the total tax incidence on cigarettes will be lower by about 5%, based on our understanding.”The brokerage said, “If revised lower tax is confirmed, we expect the tobacco industry to take down prices which would make them competitive against illicit competition and help gain share.”

Timing in focus

While the government has set September 22 as the implementation date for the broader GST changes, Jefferies pointed out that the benefits for ITC depend on how quickly the shift to the new regime is executed and whether any fresh levies are introduced to offset the revenue impact.

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