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Onus on domestic production will bring prices down

Friday, 11 July 2014 - 7:50am IST | Agency: dna
On flip side, FM hikes excise duty on cigarettes, tobacco products and aerated drinks

Giving a boost to domestic production and reducing dependence on imports, finance minister Arun Jaitley introduced various measures to provide parity between domestically produced goods and their imported counterparts. Jaitley used a combination of imposing and exempting customs and excise duty to promote local manufacturing of consumer products like mobile phones, CRT televisions, LED and LCD televisions that measure less than 19 inches, oils, soaps and footwear while also making these products more affordable for consumers, especially the weaker section of society.

Jaitley proposed to reduce the basic customs duty on fatty acids, crude palm stearin, RBD and other palm stearin, specified industrial grade crude oils from 7.5% to nil for manufacture of soaps and oleo-chemicals. Similarly, duty on crude glycerin has been brought down from 12.5% to 7.5% and crude glycerin used in the manufacture of soaps from 12.5% to Nil.

Moreover, a basic customs duty at 10% has been imposed on specified telecommunication products in order to give a fillip to domestic manufacturing.

While personal computers will get cheaper as all inputs/components used in their production have been exempt from 4% special additional duty (SAD), the finance minister has imposed education cess on imported electronic products to help locally manufactured products equal the ground for competition.

Exempting colour picture tubes from basic customs duty will make cathode ray TVs cheaper.

Anirudh Dhoot, president, Consumer Electronics and Appliances Manufacturer Association (CEAMA) and director, Videocon, said that the budget aims to encourage the manufacturing sector as well as TV manufacturing in the country by reducing import duties.

According to Gaurav Gupta, senior director, Deloitte India, said these changes would hopefully lead to better demand along with the incentives to invest in manufacturing.

Attempting to boost SMEs especially in the footwear industry, excise duty has been halved to 6% on footwear of retail price exceeding Rs 500 per pair but not exceeding Rs 1,000 per pair. Footwear of retail price up to Rs 500 per pair will continue to remain exempted.

On the flip side, in a move that is likely to burn a hole in the pocket of cigarette smokers, FM announced a steep increase in the excise duty on cigarettes in the range of 11% to 72%. What this primarily means for a cigarette smoker is that a small filter cigarette measuring 60-64mm in length will now cost him/her almost double the amount as the cost per thousand sticks in this product category now increases by 72% to Rs 1,151 from Rs 669 in FY14. Price hike in the case of regular filter cigarettes measuring 65-70mm is to the tune of 17% to Rs 1,649 for thousand sticks.

Cost per thousand sticks of cigarettes with long- (70-75mm) and king-filters (75-85mm) will see an increase of 11% and 20.7% (on year) respectively. Prices of cigarettes with extra large filters (85-100mm) remains the same at Rs 3,290.

While both the industry and the analyst community have been expecting some increase in the excise duty, the steep hike has come as a big shock. According to The Tobacco Institute of India (TII), the extremely steep excise duty increase on cigarettes coming on the back of sharp increases in the two preceding years, will provide a further fillip to the growing illegal trade in India which is already a significant 19% of overall cigarette industry.

The most impacted due to this excise duty hike, according to analysts, will be India's biggest cigarette maker ITC. Calling it one of the steepest hikes ever, industry experts said the weighted average excise duty hike works out to around 25% for ITC. In fact, according to analysts at PhillipCapital India, the sharp increase in under 64mm products by 72% is a long-term negative for the company.

"The hike will have a bearing on ITC's cigarette volume growth. We expect ITC to take price hikes of 12-13%," said Abneesh Roy, associate director - institutional equities – research, Edelweiss Securities.

Not sparing smokers in the lifestyle segment, Jaitley said that increases are also proposed on cigars, cheroots and cigarillos. Likewise, excise duty has also been increased on other 'injurious to health' products. Accordingly, excise duty on pan masala is being increased from 12% to 16% while on unmanufactured tobacco it has been increased by 5% from the earlier 50%. On products like gutkha and chewing tobacco the excise duty is being hike from 60% to 70%.

Attempting to curb the growing consumption of aerated waters containing added sugar, Jaitley proposed to levy an additional duty of excise at 5%.




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