ITC, Godfrey Philips, VST Industries Shares Decline as GST Reforms Keep 40% Levy on Cigarettes
- 18th August 2025
- 01:00:00 PM
- 3 min read
Mumbai | August 18 – Shares of cigarette manufacturers ITC, Godfrey Philips India, and VST Industries slipped in Monday’s trade after reports indicated that the government’s upcoming GST rationalisation will not provide any relief to tobacco companies. The decline came despite firm cues from the broader market, as investors reacted to the continuation of high taxation on the sector.
On the BSE, ITC share price fell as much as 0.65%, Godfrey Philips dropped 5.24% to hit an intraday low of ₹9,648, while VST Industries slipped nearly 1%.
GST 2.0 Proposal: Simplified Slabs, Higher Sin Tax
Prime Minister Narendra Modi, in his Independence Day address, announced the draft framework of GST 2.0, which has been circulated among states for consultation ahead of its proposed implementation by Diwali. The new system aims to simplify the tax structure by moving to just two slabs—5% and 18%—instead of the current multi-rate regime of 5%, 12%, 18%, and 28%.
However, the government has proposed to retain a 40% levy on sin and luxury goods, including tobacco and online gaming. This effectively removes the 28% slab but continues to impose a heavy burden on products like cigarettes, which already face one of the highest tax incidences in the country.
Currently, the total tax incidence on cigarettes is estimated at 48–55% of the maximum retail price (MRP), comprising:
- 28% GST + cess of 5–36% (15–26% of MRP),
- Fixed cess per stick of ₹2.1–₹4.2 (25–30% of MRP), and
- Other central duties such as Basic Excise Duty and NCCD (5–7% of MRP).
The layered taxation structure leaves little scope for any direct benefit from GST rationalisation, keeping sentiment weak for cigarette counters.
ITC: Resilient Operationally, Buy Rating Retained
Despite the taxation overhang, ITC continues to deliver stable operating performance. In Q1FY26, the company reported 6.5% growth in cigarette volumes, with segment EBIT up 4% YoY at ₹51.5bn, although margins contracted to 60.4% due to elevated leaf tobacco prices.
Prabhudas Lilladher (PL Capital), in its latest research note, expects margins to improve in the second half of FY26 as input costs ease and demand trends stabilise. The brokerage retained a ‘Buy’ rating on ITC with a target price of ₹530, citing a favourable risk-reward profile and a healthy dividend yield of 3.7%.
While cigarette makers saw selling, auto stocks gained on expectations of a demand boost from the removal of the 28% tax slab, which currently applies to cars. Analysts believe this could provide a positive trigger for the automobile industry in the festive season.
Outlook
According to Prabhudas Lilladher’s research, ITC’s cigarette business continues to show resilience, with volume growth supported by stable taxation and premium product launches. With GST 2.0 keeping the levy on tobacco unchanged at 40%, the government’s stance signals continued high taxation on cigarettes. However, PL expects margin recovery for ITC in the second half of FY26 as raw material prices cool off, providing some cushion against the heavy indirect tax burden.
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PL Capital
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
