TAX THE ORIGINAL SIN

Markets discount everything according to Random Walk theory. But the side-effect is that markets have knee jerk reactions also as seen yesterday with respect to tobacco companies. ITC fell 6% whereas Godfrey Phillips and VST Industries tumbled 4% on Monday. GST report presented by our CEA scared the investors as 40% tax has been recommended which will affect profits of these companies. Really,  Is this going to happen. Well no.. revenues are increasing even after the tax increase in the recent budget. Revenues from cigarette /tobacco has increased 4% (QOQ) for ITC after the budget. Even the net profit for the company rose 7% in QOQ. Even if we consider ITC as diversified company, Godfrey Phillips has also improved its bottom-line by 53% in the current quarter compared to the same period previous year. So where is the HIT!!

Indian taxes are amazingly manipulative and for this tobacco industry is not be blamed. Taxes levied on cigarettes in India are on the basis of length and filter, thus providing enough room to avoid taxes. If demand of cigarette has to be curtailed, a single high tax rate on all lengths of cigarettes needs to be adopted. Can this be done? Just apply a single sin tax on tobacco. May be the government is following the Hebrew meaning of the word sin which means ‘forgetfulness’.