Cigarette prices will go up marginally following the hike in tax provision in the Union budget, belying the fear of a sharp increase.

Finance minister Nirmala Sitharaman proposed the National Calamity Contingent Duty (NCCD) on specified cigarettes be revised upwards by about 16 per cent. The government did not increase this particular tax in the last three years.

Even as the announcement was initially seen as negative for the cigarette makers, analysts tracking the sector later opined that the companies would not have to increase tax by not more than 2-3 per cent.

“A 16 per cent hike in NCCD on cigarettes in the budget is a step in the right direction as this shall lead to a nominal overall tax increase and implies stability in taxation. The increase is lower than the street’s expectations, and we expect legal cigarette players to gain share from the illegal ones,” Abneesh Roy, executive director & head of the research committee, Nuvama Institutional Equities, said in a note.

Analysts believe cigarette companies would not find it difficult to pass on the meagre cost bump to the customers as prices have not increased much in the last two years.

The stock market and the tobacco companies were hoping to have a stable tax regime that allows the established players to gain volume from illegal, non-tax-paid cigarettes which continue to corner a part of the Indian market.

According to one estimate, one-fourth of the market is cornered by illegal, non-taxpaid cigarettes. “We expect legal cigarette players to continue to gain market share from illegal players with ITC leading the pack. This lends greater visibility to its higher volume growth in FY24,” he said.

The Nuvama report pointed out that tax revenue from cigarettes increased at a rate of 4.7 per cent CAGR from FY13 to FY17 when the duty on cigarettes increased sharply at a CAGR of 15.7 per cent.

Thereafter, relative stability in taxation was observed until January 2020, revenue collections grew by 10.2 per cent, it added.

ITC stock reacted positively after an initial fall following the budget announcement. The stock went up by 2.57 per cent or Rs 9.05 to close at Rs 361.4 even as NIFTY 50 closed with a cut of 0.25 per cent.