ITC shares climbed 3.5% to Rs 425.70 following the government's announcement of a GST restructuring that could benefit the tobacco industry. The GST Council approved simplifying the tax structure from four slabs to two main rates of 5% and 18%, while creating a new 40% category for sin goods including cigarettes.

Key Changes in GST Rates

• Currently, tobacco products face 28% GST plus compensation cess
• Under the new structure, tobacco products will shift to a flat 40% rate once state revenue shortfall loans are repaid
• GST on daily essentials reduced to 5%
• Stationery items reduced to zero GST

Potential Benefits for ITC

Jefferies estimates this change could reduce ITC's effective tax burden by approximately 5 percentage points. This reduction could potentially allow the industry to:

• Lower prices
• Compete better against illicit products
• Reduce policy uncertainty for ITC

ITC operates in both FMCG and paper segments through stationery items, which could benefit from the reduced rates on these products.

Implementation Timeline

The broader GST changes are set for September 22 implementation. However, the timing for tobacco-specific changes remains unclear.

Stock Performance

Despite the recent gain, ITC's stock has shown volatility:

• Current price: Rs 425.70 (3.5% increase)
• Year-to-date performance: 13.7% decline (as per previous data)

The market's reaction to the GST reforms appears to be positive, as investors weigh the potential benefits from reduced rates on some products and the possible reduction in the tobacco tax burden.

Conclusion

While the GST reforms bring potentially significant changes for ITC's diverse portfolio, particularly in the tobacco, FMCG, and stationery segments, the full impact remains to be seen. Investors will be closely monitoring how these changes affect ITC's overall performance in the coming months, especially once the tobacco-specific changes are implemented.

ITC , a leading Indian conglomerate with significant tobacco interests, has announced a substantial capital expenditure plan while navigating a complex landscape of tax uncertainties and industry challenges. The company's shares have shown limited growth over the past two years, primarily due to investor concerns surrounding GST uncertainty, cess changes, potential BAT stake sale, and competition from Marlboro.

₹20,000 Crore Capital Expenditure Plan

ITC Limited has committed ₹20,000 crore in fresh capital expenditure to expand its FMCG portfolio, strengthen agriculture linkages, and scale paperboard operations. This significant investment demonstrates the company's confidence in the Indian market and its commitment to diversifying its business operations.

GST and Taxation Structure

Jefferies expects the government to maintain revenue neutrality for the tobacco industry during the upcoming GST Council meeting. The current tax structure for cigarettes includes:

• 28% GST
• Compensation cess ranging from ₹2.10 to ₹4.20 per stick based on length
• Additional ad valorem components

Tobacco taxation comprises 55% of ITC's cigarette consumer prices, with 12% channel margins and 23% profit margins.

The compensation cess is scheduled to end in March 2026, adding another layer of uncertainty to the future tax structure. Jefferies notes that the current tax structure is composed of two-thirds specific taxes and one-third ad valorem, with specific taxes providing pricing leverage as they don't increase with price hikes.

Potential GST Reforms

ITC Chairman and Managing Director Sanjiv Puri has expressed optimism about potential GST reforms. He believes that the government may move from the current four tax slabs to a simplified two-rate structure of 5% and 18%. Puri suggests that this GST simplification could lead to several benefits:

1. Reduced consumer costs
2. Easier business compliance
3. Boost in consumption
4. Cost reduction for businesses
5. Formalization of the economy
6. Simplified operations for corporates and MSMEs

Market Performance and Challenges

Despite these potential positive developments, ITC faces several challenges:

• BAT stake overhang
• Market share losses to competitors like Godfrey Phillips India
• Weak consumption due to high costs, external shocks, and food inflation

Currently, ITC trades at 23x forward PE. The company's shares closed 1.19% higher at ₹411.50, showing a slight positive response to recent announcements.

Agricultural Investments and Economic Outlook

ITC is investing in agriculture through resilient supply chains, digital agri-platforms, and value-added products. The company sees favorable conditions with easing inflation, softer interest rates, and improving farm incomes. India's retail inflation dropped to 1.55% in July, the lowest since June 2017, which could potentially revive consumer spending.

Cautionary Note on Cigarette Taxation

Puri cautioned against higher levies on cigarettes, stating that past hikes have increased illicit trade. He argued that historical data shows additional levies often fail to protect revenues and can encourage illicit market activity.

As the situation develops, the full impact of these potential tax changes on ITC and the broader tobacco industry will become clearer. ITC's substantial capital expenditure plan and its CMD's optimistic outlook demonstrate the company's commitment to navigating these challenges while pursuing growth opportunities across its diverse business portfolio.