ITC Ltd., Asia’s second-largest cigarette maker by market value, shut its cigarette factories in protest against a new government rule mandating bigger health warnings on its packs.
ITC, part-owned by British American Tobacco Plc, said it was compelled to close the plants as of Friday because it didn’t have enough time to implement necessary changes amid legal challenges and potential modifications recommended by a parliamentary committee.
The Kolkata-based company is requesting clarification on what it called the “current uncertain state” of the rules, according to a statement to the stock exchange.
India’s tobacco industry and the government are tussling over the regulations, which require that health warnings cover 85 per cent of a pack’s surface, up from 40 per cent of just the front panel. The government has also raised taxes and barred smoking scenes in films as it seeks to reduce tobacco use and fight related illnesses that kill one million Indians annually.
“This is only a bargaining game,” Chokkalingam G., managing director at Equinomics Research & Advisory Pvt. in Mumbai, said in a phone interview. “Having invested so much money in the business and employing so many people, they can’t just shut it permanently. The company is in a better position at bargaining because cigarettes remain one of the major sources of taxes for any government.”
Daily Loss
In a separate statement on April 1, The Tobacco Institute of India, an industry body, said its members will halt production of cigarettes. The move will result in a loss of 3.5 billion rupees ($53 million) per day for the industry, it said.
Calls made to the offices of Godfrey Phillips India Ltd., the local unit of Phillip Morris International Inc., VST Industries Ltd. and Golden Tobacco Ltd. outside business hours were unanswered. Manisha Verma, a spokeswoman for India’s Health Ministry, declined to comment.
Taxes constitute as much as 60 per cent of the selling price of cigarettes in India, making tobacco companies sensitive to levies. Local administrations have been planning additional regulations, such as banning sales of loose cigarette sticks. The government typically raises taxes as a public health measure.
In December, a panel headed by chief economic adviser Arvind Subramanian recommended a “sin, demerit rate” of 40 per cent on luxury cars and tobacco products as part of a proposed national sales tax intended to unify a patchwork of local state taxes.
ITC Diversification
ITC, whose brands include Gold Flake and India Kings, has tried to reduce its reliance on cigarettes over the past decade, diversifying into other consumer products such as soaps and snacks. While it has emerged as the nation’s second-biggest consumer-goods maker, it still relies on tobacco for earnings.
ITC’s profit, which has been little changed in the previous two quarters, is estimated to climb 16 per cent in the March quarter, data compiled by Bloomberg show.
The government’s move for a larger pictorial warning will hurt tobacco farmers, "further penalize" the cigarette industry and boost illegal trade in cigarettes in the country, the Tobacco Institute statement said.
The Tobacco Institute of India’s members account for more than 98 per cent of the country’s domestic sales of duty-paid cigarettes, according to its website.
News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.
