The Impact Of Duties On Profitability On The Tobacco Industry Finance Essay

Introduction

1.1 Background of Study

The Tobacco or Cigarette industry is frequently an interesting capable affair to analyze. Over the old ages its merchandise has small alteration and is reasonably understood by all. One of import affair to observe is that, whenever people start to speak about coffin nail the following thing that comes into treatment is the revenue enhancements that it associate with. Tax and responsibilities charged upon productions has become the chief concern for all coffin nail or baccy. Basically baccy industry is well-known to be taxed more than any other industry, particularly to states that have rigorous ordinances of coffin nail ingestion as attempts to keep public wellness, cut downing coffin nails ingestion and besides to raise authorities ‘s province gross. ( Bernama, 2008 )

Cigarettes manufactured in Malaysia are levied at Malayan excise responsibility of 18 sen per stick ; doing responsibility for 20-stick battalion of coffin nails is now increased by 60 sen on budget 2009. ( The Star Online, 2008 ) Harmonizing to OSK research, twelvemonth 2009 will be a ambitious twelvemonth for baccy industry due to the higher excise responsibility, proliferation of illicit coffin nails, wellness pictural warnings and a decelerating economic system.

In twelvemonth 2004 and 2005, the Malayan authorities additions Ad Valorem responsibility for the coffin nail merchandises by 40 % and 13 % , severally, taking to 30 % -38 % addition in the merchandising monetary values. After the crisp excise revenue enhancement addition of 40 % in 2004, the duty-paid industry volume in 2005 declined by 9 % . Based on our projections for 2006, the worsening tendency is expected to go on, ” said by Tcheng. ( Ang, E. , 2006 ) Harmonizing to Anwar Suprijadi, Director General for Customs & A ; Excise Affairs of Indonesia, in 2009 province budget, the authorities was set mark to roll up province gross amounting to Rp48.24 trillion from baccy revenue enhancement responsibilities ( RM1=Rp3.10 ) , doing authorities ‘s gross increased Rp3 trillion to Rp49.49 trillion from Rp45.72 trillion in 2008. ( Bernama, 2008 )

Up to day of the month, British American Tobacco Malaysia Berhad ( BATMB ) and Philip Morris Malaysia Berhad ( PMMB ) are the two Malayan major baccy makers. These two companies have captured about 84 % of the market portion in the state.

By the manner British American Tobacco Malaysia Berhad is the choice of survey in this research. ( National Poison Centre, University of Science Malaysia & A ; ( SEATCA ) , 2008 )

Cigarette manufacturers may look clueless about the impact of revenue enhancement hiking. This is said so because, whenever the authorities proposes an addition in responsibilities, baccy companies begin to panic. Then of course they will get down faulting on revenue enhancement hiking for the diminution of its net income. This, in some sense is rather apprehensible because moderately, the addition of responsibilities would impact baccy company ‘s gross revenues, and draw down its net income. But one should understand that incrimination should non be put wholly on the rise of responsibilities. Since responsibilities and revenue enhancements are apart of baccy industry major ‘cost ‘ concern, it is of import for baccy companies to cognize the extend rise of revenue enhancement and responsibilities could harm on its concern. V

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1.2 Objective of Study

The intent of this research is to analyse and measure the impact of lifting responsibilities on British American Tobacco Bhd ( BATB ) . This survey is to find the extent to which the profitableness of British American Tobacco Bhd is affected by the rise responsibilities. It will besides see other exterior factors that play a portion to act upon the company in times of responsibility hiking. In short the aim of this research is:

to analyze the impact of addition responsibilities towards the profitableness of BATB.

1.3 Significance of survey

This research is seen as critical because it helps to broaden the position of coffin nail companies in the event of lifting responsibilities. Although it is obvious that hiking of responsibilities will draw down net incomes and gross revenues, this survey will analyse the grade to which the companies are affected. This will assist to clearer the misinterpretation that the coffin nail companies might hold about revenue enhancement hiking, whether how much or how small injury of the rise of revenue enhancement can make to cigarette companies

Further more these will traveling to supply an penetration for the coffin nail companies on some exterior factors that could hold a farther influence the impact of the company public presentation. With that, coffin nail companies will so be able to anticipate clearly and have a better apprehension of the state of affairs in effect to the revenue enhancement hiking. Thus attending could be focused on the state of affairs that is unfavourable and that they are prepared before manus so that necessary action could be taken to cut down the hazard of doomed of gross revenues or prevent net income being reduced excessively much and the dropped in the portion monetary value. Besides, it would assist the coffin nail maker to agitate off unneeded concerns over the hiking of responsibilities in future.

Literature Review

2.1 Introduction

Looking at it as a whole, rise of responsibilities at times may hold impact small on baccy industry and at times may impact badly. Harmonizing to World Health Organization ( WHO ) model on convention on baccy control 2003, it is recognized that monetary value and revenue enhancement steps are an effectual and of import agencies of cut downing baccy ingestion. ( World Health Organization, 2003 )

When authorities enforce a revenue enhancement hiking, the baccy companies have two options, that is, either they absorb the cost by themselves or reassign the addition to its clients by marking-up the monetary value of the beer to retrieve the cost. ( Southeasterly Asia Tobacco Control Alliance ( SEATCA ) , 2008 ) Either manner would ensue some psychiatrist in the net income and gross revenues but in most instances the excess cost is pass on to clients.

2.2 Studies on the Impact

In one point of view, the baccy industry is believed to be unaffected by revenue enhancement hiking or any slack in the economic system. In India, although high revenue enhancement on coffin nails has been worsen the coffin nail demand in the state in the period 1997-98 to 2001-02 about 19 % , but the heavy excise responsibility did non convey any injury to the baccy industry and baccy ingestion in that state. ( The Financial Express, 2003 ) A new Fitch study in 2002 about “ U.S Tobacco industry-litigation, excise revenue enhancements and lower profitableness cloud hereafter ” , shows that, the coffin nails monetary values additions resulted from the hiking in excise revenue enhancement has decrease the profitableness of the major baccy houses in short-run and drive weaker participants to lose a stuff sum of market portion that negatively affect their hard currency flow and operating net incomes. ( Business Wire, 2002 )

In coffin nail concern major purchasers are the heavy addicted tobacco users. Due to the habit-forming quality of baccy, the addition in excise responsibility on coffin nail could coerce tobacco users to cut down ingestion of other goods to maintain disbursement or keep the same degree of coffin nail ingestion and it could besides be that tobacco users are rational in their determination to smoke. ( Sylvain, S. , 2007 ) Having said so, the addition of responsibilities will non do a large impact to the manufacturer ‘s profitableness.

Besides, The Czech Republic ‘s English-language newspaper ( 2009 ) states that, the Czech Republic ‘s largest baccy company, Philip Morris saw 2008 unconsolidated net net income bead 36.7 % twelvemonth on twelvemonth to 1.5 billion KA? , and the company has seen two back-to-back old ages of worsening net incomes, after a loss of 14 % in 2007 due to the double blows from baccy revenue enhancements, which have doubled since 2004. This had persuades many tobacco users switch to purchase cheaper trade names and illegal baccy due to the rise in coffin nails monetary value in Czech Republic. Rising baccy revenue enhancements will worsen the net incomes for legal baccy company, but increase trading or benefits to the net incomes of those forgeries and illegal baccy companies. ( The Prague Post, 2009 )

On one juncture, Jack Bowles, Managing Director of BAT Malaysia, ( a baccy company in the Malaysia that produces about half of the Malaysia baccy market ) , claims that “ legal baccy industry volumes continue to be depressed, since the big baccy tax-led monetary value additions in July 2007 as higher coffin nail monetary values further encourage consumers to down-trade to illegal coffin nails thereby drive BAT Malaysia ‘s net income before revenue enhancement for the first nine months of 2007 diminution about 4.4 % compared to the same period in 2008. ( British American Tobacco Malaysia ( BATM ) , 2007 ) Evident that shows baccy ‘ profitableness is independent of the coffin nail monetary value.

Higher revenue enhancements discourage coffin nail gross revenues, a Nobel economic expert, Gary Becker pegs the long-term monetary value snap of demand for coffin nail at 0.8 – i.e. , a 10 % addition in monetary value causes and 8 % diminution in unit gross revenues. For illustration, the Obama revenue enhancement hiking translates into 13.3 % addition in the mean battalion monetary value, which implies a 10.6 % diminution in unit sales-which the National Tax foundation of U.S. has calculated adds up to a $ 1 billion overall gross loss for distressed provinces. ( Schiller, B. , 2009 ) This shows lifting strike revenue enhancement on coffin nails gross revenues will minimising the net income of baccy maker.

Still, another mark of surveies have shown that, the additions of coffin nail revenue enhancements cut down the Numberss of tobacco users and smoking related deceases. This is because the monetary value additions induce some tobacco users to discontinue and forestall others from going regular or relentless tobacco users and besides cut down the figure of ex-smokers returning to coffin nails and this had cut down the ingestion among go oning tobacco users. Models developed for this study show that increases that would raise the existent monetary value of coffin nails by 10 % worldwide would do 40 million tobacco users alive in 1995 O quit and prevent lower limit of 10 million tobacco-related deceases. ( The World Bank Group, 2001 ) Hence, cut down in coffin nail ingestion will cut down the gross revenues volume which could reasonably act upon the profitableness of baccy ‘ manufacturer.

JT international Malaysia Berhad, one of the 3 major Tobacco makers in Malaysia, was besides holding a small impact from the hiking of coffin nail excise responsibility. Based on the quarterly study of the company on 30Th September 2007, for the one-fourth under reappraisal, the Group registered gross of RM 234.6 million as compared with RM 22.40 million in the same period a twelvemonth before this. Net income before revenue enhancement in the one-fourth under reappraisal was lower at RM 37.7 million as compared with RM 43.8 million in the same period a twelvemonth earlier. ( Yiew. W. C, 2007 ) Increase in grosss was significantly driven by higher coffin nail monetary values which cause by hiking in excise responsibility and offset partly by lower gross revenues volume. ( Yiew. W. C, 2007 ) Net income before revenue enhancement was lower chiefly attributable to higher selling and operating outgo. ( Yiew. W. C, 2007 ) Another prove, that shown hiking in baccy excise responsibility, would affected the profitableness of Tobacco Company.

2.3.0 Other Exterior Factors

For truth of judgement on the impact, some related exterior factors that influence the impact such as forgery or illicit coffin nail, in writing wellness warnings on all coffin nail battalions by authorities and all must non be ignored.

2.3.1 Percentage Rise of Excise Duty

Harmonizing to ECM Libra investing research ( 2008 ) and BAT Malaysia ( 2008 ) one-year study, when coffin nail excise responsibility was RM 81 per 1000 sticks in twelvemonth 2004, BAT Malaysia achieved both gross and net net income at RM 3,263,725 and RM 782,084. When excise responsibility boost 35.8 % from old twelvemonth in 2005, the gross was increase 9.2 % to RM 3,564,215, but the net net income was dropped 24.3 % from 2004 to RM 592,802. The bead in net net income was chiefly causes by the 35.8 % higher addition in excise responsibility. But, from twelvemonth 2006 to 2008 the company net net income does non drop, although the excise responsibility on coffin nail continues to boost twelvemonth by twelvemonth, but this doing BAT Malaysia net net income addition in a slower rate, whereby the improve of net net income from 2005- 2006 was increase 21.4 % , 2006-2007 addition 1.7 % and 2007-2008 addition 10.9 % , when excise responsibility boost 63.6 % from RM110/ 1000 sticks in 2006 to RM180/ 1000 sticks in 2008. Statistic showed that the lifting in excise responsibility would hold impact on the profitableness of baccy maker, whether the impact is doing the profitableness bead or growing slower.

Diagram 1:

Excise responsibility on coffin nails with BAT Malaysia Net Profit & A ; Revenue of 2004-2008

Year

Excise responsibility

BAT Malaysia

Net Net income

BAT Malaysia

Gross

2004

RM81 per 1000 sticks

RM782,084

RM3,263,725

2005

RM110 per 1000 sticks

RM592,802

RM3,564,215

2006

RM120 per 1000 sticks

RM719,678

RM3,612,482

2007

RM 150 per 1000 sticks

RM731,931

RM3,830,869

2008

RM180 per 1000 sticks

RM811,683

RM4,135,220

Beginning: ECM Libra investing research 2008

British American Tobacco Bhd 2008

3.0 Research Methodology

3.1 Theoretical Model

Theoretical model merely means unified informations and information gathered to steer research being conducted to do certain it is in the right way. The independent variable for this research would be the rise of baccy revenue enhancement while the dependent variable is the impact on baccy ‘s profitableness as shown in Figure 1. Basically this is taking to turn out the significance of influence that the rise of baccy revenue enhancement would hold on baccy ‘s profitableness.

Figure 1

Independent variable Dependent variable

3.2 Data aggregation

The aims of the survey suggest the usage of secondary informations. Data will be obtained from British American Tobacco Bhd ‘s one-year study and the company ‘s web site for analysis of its profitableness. Particularly, net income figures for the past five old ages will be taken from its income statement from fiscal twelvemonth 2004 until 2008 for intense analysis. Besides, digest of revenue enhancement rate alterations in Malaya over the past five old ages, from twelvemonth 2004 to 2008 will besides be collected to complement the analysis. The advantage here for utilizing secondary informations is that it is inexpensive and is normally readily available in the cyberspace. The lone deficiency of it is that it is that it may non be much updated. However, this is non the instance in this research.

3.3 Data Analysis

After roll uping the informations through cyberspace, newspaper and diary, the findings will be measured utilizing comparing technique. Year to twelvemonth comparing of net income and gross revenues gross will be made to see British American Tobacco Malaysia Bhd fiscal public presentation. Fiscal study of BATMB will be studied. Each twelvemonth net net incomes will be traced and fit to the addition of responsibility. Heavy analysis will be made upon fiscal study of twelvemonth 2004 – 2008 due to its handiness and sufficiency of informations.

3.3.1 Regression Test

Based on the nature of this research, additive arrested development will be used to prove the relationship between the two variables that was mentioned above. Linear arrested development is a trial in which used to analyse the relationship between two variables, X and Y. X and Y linear arrested development will demo the best consecutive line through the informations. Linear arrested developments purpose is to apportion the most accurate predicts for Y from X. This arrested development assumes that the information is additive and finds the incline and intercept to do a consecutive line which best fits the information and it does non prove whether the information is additive ( Graph Pad Software 1999 )

Number of words: 2240 words

July 14, 2017