May 25, 2012

Below text (Only on the cigarette business) is verbatim from ITC’s press release announcing its fourth quarter and Fy12 results.

The Cigarettes industry in India continues to be impacted by an environment of rapidly escalating challenges and discriminatory taxation. The steep increase in the tax rates on cigarettes, both at the Central and at the State level, has led to the undesirable consequence of shifting consumption patterns to lightly taxed or tax evaded tobacco products besides fuelling the rampant growth of illegal cigarettes. In effect, the spiralling tax rates have only led to sub-optimising the revenue potential from this industry without achieving the stated objective of a reduction in overall tobacco consumption.

The steep hike in Excise Duty rates announced in the Union Budget 2012 will further exacerbate the problem of discriminatory and high taxation on cigarettes within the tobacco industry.

The accelerated tax increase on cigarettes relative to other tobacco products has shifted tobacco consumption to cheaper, lightly taxed or tax evaded products like Bidi, Khaini, Chewing Tobacco and Gutkha which are the most dominant forms of tobacco consumption in India and constitute as much as 85% of total usage. The objectives of revenue maximisation and tobacco control have been severely compromised by this lopsided tax policy on Cigarettes which now contributes over 74% of tax revenue, whilst accounting for less than 15% of tobacco consumption.

The domestic legal cigarette industry is faced with the growing menace of illegal cigarettes. Independent research indicates that, in India, whilst there is a fall in volumes of ‘duty paid’ cigarettes by 4.4% during the period 2005 to 2010, the ‘duty-not-paid’ volumes grew by 49.3% during the same period. India has now been recognised as one of the leading destinations for Illegal cigarettes.

Attractive tax arbitrage opportunities, due to high level of taxes on the legal domestic Cigarette industry in India, incentivises illegal flow of cigarettes into the country, especially of internationally advertised and known brands. Coupled with our porous borders, cigarette imports under Open General License (OGL) make it extremely difficult to monitor and regulate the inflow of illegal stocks. Further, with the domestic Cigarette industry being strictly regulated, including compulsory licensing under the Industrial (Development & Regulation) Act, 1951, a liberal import policy is contrary to the Government’s tobacco control policies. This is also detrimental to the interests of Indian tobacco farmers, as it directly impacts the demand for indigenous tobacco by the domestic industry.

The demographic construct of India’s population calls for multiple price points to meet the needs of the country’s diverse consumer segments. The growth of illegal cigarettes is also aided by the vacuum created at lower price points, where legal industry has been unable to operate, due to a disproportionately high tax burden. Further, the lacunae in the provisions of the Industrial (Development & Regulation) Act, 1951 encourages ‘fly by night’ operators to manufacture illegal cigarettes without obtaining requisite licenses and clandestinely clear them without payment of taxes.

The Company, along with other stakeholders and industry bodies continues to represent to the regulatory authorities seeking a non-discriminatory tax and regulatory policy on tobacco products in the interest of the Government exchequer, domestic farmer community and industry.

Despite a difficult operating environment in the market place, it is gratifying to report that the business further improved its market standing during the year. The business’s uncompromising commitment to continuous and consistent offerings of value-added, world-class products has been reinforced through innovations in product development and launch of differentiated offers. The portfolio has been strengthened through strategic investments in product quality and technology.

A premium line of hand-rolled cigars launched in 2010 under the brand name ‘Armenteros’ has gained significant consumer franchise, competing against world renowned Cuban and other cigar brands. The Armenteros range of cigars is now available in premium outlets across key cigar markets and is expected to further consolidate and grow its franchise.

The Cigarette business faces the daunting challenges of an unprecedented high incidence of taxation, complex tax structure, rising illegal trade and a discriminatory regulatory climate. Despite these challenges, the relentless pursuit of excellence in building robust, world-class brands and innovation in processes and investment in appropriate state-of-art technologies will enable it to further consolidate its market standing.