The government-appointed Arvind Subramanian panel's recommendation of a steep 40 per cent tax on tobacco products triggered a selloff in cigarette makers such as ITC, Godfrey Philips and VST Industries.
The chief economic advisor panel on Friday recommended a high tax rate of 40 per cent for goods such as luxury cars and tobacco, among others. The 40 per cent rate is much higher than the 17-18 per cent "standard" rate that will be applicable for most goods and services.
ITC, India's biggest cigarette maker, fell over 7 per cent and was the top Nifty loser. ITC has substantial operations in apparels, hotels, paperboard and agriculture businesses, but it gets around 80 per cent of its pre-tax profit from cigarette sales.
MS Mani, senior director of Deloitte India told NDTV that there could be additional tax on tobacco once the detailed GST legislation is out.
ITC shares closed 6.57 per cent lower at Rs 313.55, Godfrey Philips shares ended 4.9 per cent lower at Rs 1,490.25 and VST Industries shares closed 2.76 per cent down at Rs 1,640.35. These stocks underperformed the broader Nifty, which closed 0.21 per cent lower.
Some analysts such as Kaustubh Pawaskar of Sharekhan however argued that tobacco companies will have to pay higher taxes. Mr Pawaskar said that it will be too early to comment on the final rate because 40 per cent is a recommendation.
"I believe 40 per cent is inclusive of everything," he said. ITC currently pays 64-65 per cent 'blended' tax rate, he added.
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