The finance ministry has mandated that pan masala manufacturers must apply for registration under the health and national security cess law immediately after it comes into effect from February 1. This new regulatory framework introduces significant compliance requirements and operational changes for the industry, as outlined in the latest FAQ issued by the finance ministry.

Registration Requirements and Process

Manufacturers operating machines across multiple factories must obtain separate registration for each facility through the Automation of Central Excise and Service Tax (ACES) portal. The registration process includes several critical steps and timelines that businesses must follow strictly.

Businesses must specify machine parameters including maximum rated speed and weight of specified goods in their declarations, as these factors are relevant for cess computation. The registration certificate becomes effective from February 1 for existing manufacturers, coinciding with when cess liability begins.

Cess Payment Structure and Compliance

The new law establishes a machine-based cess system calculated monthly based on the number of packing machines installed and their maximum packing speed. This cess applies on top of the existing 40.00% Goods and Services Tax rate, maintaining the total tax incidence at the current level of 88.00%.

Manufacturers can utilize temporary registration numbers to pay cess liability while their registration certificates are being processed. For new machines installed mid-month, the full monthly cess must be paid within five days of installation.

Monitoring and Documentation Requirements

The regulatory framework includes stringent monitoring provisions to ensure compliance and prevent tax evasion. Manufacturers must install comprehensive CCTV systems covering all packing machines and manual process units throughout their facilities.

Key monitoring requirements include:

• CCTV coverage of all packing machines and manual process units
• Footage preservation for 24 months
• Provision of footage to officers within 48 hours upon request
• Regular compliance verification through physical inspections

Implementation Timeline and Industry Impact

The finance ministry notified the rules under the Health and National Security Cess Act on January 1, with the law becoming effective from February 1. This timeline provides manufacturers with a limited window to complete registration and establish compliance systems.

Existing manufacturers who already own or control machines on February 1 can begin cess payments using temporary registration numbers while their certificates are being processed. The automatic approval mechanism ensures that applications are deemed approved if tax officers fail to take action within seven working days, preventing unnecessary delays in the registration process.

The new cess system aims to enhance tax compliance in the pan masala sector while maintaining the existing overall tax burden. The machine-based calculation method and enhanced monitoring requirements represent a significant shift toward more transparent and accountable manufacturing practices in the industry.

Cigarette stocks continue trading under severe pressure as ITC shares extend their decline for a second consecutive day following the government's steep excise duty hike. ITC shares are down 3.40% to ₹351.40, building on Thursday's 4.38% plunge to ₹347.90, while Godfrey Phillips India and VST Industries remain under pressure as the market digests the impact of significantly higher cigarette costs.

Sector-Wide Selloff Intensifies

The Finance Ministry's announcement of excise duty hikes ranging from ₹2,050 to ₹8,500 per thousand sticks has triggered widespread selling across tobacco stocks. The new levy combines with existing GST to create a substantial tax burden on cigarettes, replacing the compensation cess currently imposed on tobacco products.

The selloff has been amplified by at least seven brokerage downgrades issued since morning, with sharp cuts to price targets reflecting concerns about the operational impact on cigarette manufacturers.

Massive Retail Investor Base Affected

ITC's extensive shareholder base is feeling the impact of the two-day decline. The company has nearly 36 lakh retail shareholders holding up to ₹2 lakh in authorized share capital, collectively owning an 11.20% stake in the company. This represents an increase from 34.90 lakh retail shareholders with 11% stake in the previous year.

Institutional Holdings and Market Impact

Mutual funds have increased their stake in ITC over the past 12 months, rising from 12.80% to 14.30%. Major mutual fund stakeholders include SBI MF with 3.26%, ICICI Prudential MF at 2.28%, and Nippon Life India MF holding 1.36%.

The Life Insurance Corporation of India, as the largest public shareholder with a 15.86% stake, has seen the value of its ITC holdings drop by ₹11,000 crore during this two-day decline.

Tax Structure Creates Pricing Challenges

The new excise duty structure varies significantly across cigarette categories, with longer and premium variants facing the steepest increases. For ITC, where the cigarette division contributes 45% of total revenue, the tax hike represents a significant operational challenge requiring substantial price adjustments.

Analysts warn of significant volume and earnings impact, with projections that ITC might need to implement price increases of at least 15% to offset the tax burden. The company's diverse shareholder base, from retail investors to large institutions, continues to monitor the stock's recovery attempts as it trades near multi-year lows.