New Delhi: Imposition of 12.5% VAT on cigarettes and tobacco products from current fiscal will kill the industry as it is already over taxed by 130% off the net . According to industry chamber Assocham, this is a factory gate price and therefore levy should be withdrawn with immediate effect.
In a detailed note submitted to chairman of the empowered committee of state finance ministers, they argued that in actual terms, 12.5% VAT would be an equivalent to an increase of almost 29% in excise duty. This would place cigarette and tobacco industry under heavy pressure, shrinking margins substantially.
One objective of VAT is to remove cascading impact of taxes. In case of cigarettes, tax component is already high at 130% of the net factory gate price. Therefore, an ad valorem tax like VAT on cigarettes will be a ‘tax on excise’ and not ‘tax on value added’, and will lead to cascading impact. VAT at the rate of 12.5% then would be equal to an increase of almost 29% in excise duty.
In the event that cigarettes are brought under VAT, it is necessary to ensure that VAT is levied on value, net of excise duty and other taxes, as done under Section 4 of Central Excise Act. The 2003 amendment to Additional Duties of Excise Act limited the rate of sales tax to 4% on the value net of excise duty and other taxes.
High taxes on cigarettes provide attractive arbitrage which, coupled with ease of transportability, explains why they are one of the most smuggled items. A global problem, cigarette smuggling causes huge revenue losses to Governments and has lately been linked to criminal activities like terrorism.
Also, imposition of a state VAT on cigarettes, without a corresponding downward adjustment in central excise, would adversely impact overall revenue collection. 15% increase in cigarette excise in 2001,in the form of NCCD, resulted in a steep drop of 12% in cigarette volumes and 1% in cigarette excise revenue.
Cigarette companies have so far maintained uniform MRP across the country. However, if VAT is levied, the absence of a binding legislative mechanism will make it extremely difficult to maintain uniform rates across states.
A central single point taxation, to the exclusion of state taxes, is ideally suited for a highly taxed product like cigarettes, and should continue. A departure from this five-decade old system needs a closer study of all issues in order to arrive at an option that is acceptable to all players.