Effect of Taxes and Government Laws on Cigarette Industry in India

Abstract

Taxes and Government Laws in any economy play a huge role on the cigarette industry worldwide and hence this paper is an attempt to analyze the effects of the government policies and literacy rates on the cigarette industry in India. Trend of the industry over the past fifteen years is analyzed and the effect of government policies of 2003, 2008 and 2013 is studied using the benchmark analysis via comparison with industrial average. DuPont 5 point ratios are being used to compare the companies with the market trends. Also Regression analysis has been performed to comprehend the relative impact of all the five DuPont ratios on return on equity. The study shows that the policies of 2008 and 2013 has helped the government of India to generate more revenue, resulting in the rise in cigarette prices and hence reduced relative consumption. The policies of 2003 resulted in reduced shareholder’s equity and as the tax increased in the next decade the tax burden ratio also decreased in 2008 and 2013. The study also shows that the operating profit ratio has decreased as the profit to the company has reduced in comparison to the sales made. As per the normal convention, with increase in literacy rates, the sales of the cigarette industry should decline, however we found out that the sales of cigarettes has increased with time at almost the same rates which has been proved via DuPont ratios.