Cigarette firms will have to ‘rework’ supply chain under goods and services tax regime

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Cigarette manufacturers such as ITC, Godfrey Phillips and Golden Tobacco will have to ‘rework’ their supply chain when the GST is implemented in the country…

Change in the tax implications on cigarettes and other tobacco products will be higher compared with other products, as at present, cigarettes are subject to excise duty, VAT (value-added tax) and entry taxes, and GST will subsume all indirect taxes to create one rate, according to analysts. Currently, overall indirect tax incidence on tobacco products varies across different states, making it a complex tax structure.

“Under a national-level tax system under GST, tax implications of bringing in raw materials and equipment from other states to the state where cigarette is being manufactured will undergo a significant change, “ M S Mani, senior director, Deloitte India, told FE.

According to Mani, the unmanufactured tobacco, actually an agricultural product, was also subject to certain indirect taxes. “So, tobacco companies now need to rework their supply chain. After the roll-out of the GST regime by the government, tobacco firms will have to re-evaluate transportation costs and work on logistics management,” he said.
For cigarette makers, logistics management is very important as high moisture content affects the products. Tobacco moisture is one of the important factors in smoking quality.

Mani said the tobacco firms would benefit if the Centre scraps the tax of 1% on the inter-state movement of goods. Chief economic adviser Arvind Subramanian-led panel on GST rates has suggested that the 1% inter-state tax be done away with.

The Subramanian panel has recommended a 40% ‘sin tax’ on tobacco products based on the current tax structure.
According to Mani, currently it would be premature to comment on change in actual indirect tax incidence on cigarette companies, as the rate of 40% mentioned for the demerit goods would be considered by the GST council while determining the rate of GST for tobacco products.

While commenting on his panel’s recommendations on GST rates on tobacco products earlier this month, Subramanian said some of these goods were taxed at close to what the panel suggested. “We have not recommended anything at all to suggest increases in any of these rates. We are just codifying what the status quo is,” he has added.

According to Sachin Menon, head of indirect tax, KPMG in India, overall indirect tax incidence on cigarettes would be “more or less” the same compared with the current rates if the government accepts the panel’s proposal. “The Centre may also use top-up excises over and above the GST, if it feels that there is a deficiency in the taxation,” Menon added.

Edelweiss head of research Vinay Khattar said the sentiment of the tobacco industry will be down on the back of a high ‘sin tax’, as the industry was already facing volume degrowth in cigarette business.

“Smoking is down in the country because of a variety of reasons, including health concerns and high incidence of taxation. The government’s primary aim is to reduce smoking levels, and the higher sin tax is a step in this direction,” Khattar added.

During the second quarter of this fiscal, the cigarettes business of ITC remained muted due to taxation and regulatory headwinds. The India’s largest cigarette maker had said the operating environment for the legal cigarette industry in the country was rendered even more challenging with two rounds of sharp increase in excise duty — in July 2014 and February 2015.

New rules
* Change in the tax implications on cigarettes and other tobacco products will be higher compared with other products, as at present, cigarettes are subject to excise duty, VAT and entry taxes, and GST will subsume all indirect taxes to create one rate, according to analysts
* For cigarette makers, logistics management is very important as high moisture content affects the products. Tobacco moisture is one of the important factors in smoking quality

Source:http://www.financialexpress.com/article/economy/cigarette-firms-will-have-to-rework-supply-chain-under-goods-and-services-tax-regime/183906/

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