Kolkata: The West Bengal government on 16 March imposed a value-added tax (VAT) of 12.5% on tobacco and tobacco products to shore up losses in revenue from the Centre. The move is likely to eat into the earnings of India’s biggest tobacco company, ITC Ltd, which sells the Wills brand of cigarettes and already incurs an average of 130% excise duty on its tobacco products.
Bidis, or hand-rolled tobacco in tendu leaf, a cottage industry, has been spared the levy. ITC Ltd, which has been bracing itself for the tax, said it’s yet to calculate its impact.
The tobacco giant is still unclear on what the tax will be imposed—the maximum retail price or the price at which it leaves the factory.
“The Taxation Laws Amendment Bill 2007 has just been handed to the Standing Parliamentary Committee on Finance for further scrutiny. We will not be able to comment before we see what comes of it,” ITC spokesman Nazeeb Arif told Mint.
The Bill, when cleared, will empower the Centre to reduce the central sales tax (CST).
Tobacco has been outside the purview of state-level taxation, being a major revenue earner for the Union government.
However, ITC has complained of levies such as octroi, cess, carriage tax and toll tax, or taxes that it pays to move goods around, imposed by various states.
But a decision to phase out central sales tax, which will shrink the flow of tax revenues from the Centre to the states, has led to alterations in tax laws, enabling state governments to impose a tax on tobacco and tobacco products to make good their losses.
In the Union Budget 2007, finance minister P. Chidambaram proposed that CST will be brought down from 4% to 3% with effect from 1 April 2007, as a first step towards phasing it out.
In line with this, West Bengal has imposed VAT on tobacco products. However, it remains to be seen if the Bill will get implemented now that it has been referred to the standing committee, say industry sources who did not want to be identified.
While West Bengal has been quick to cash in on this new source of tax revenue, it remains to be seen if other states too follow suit and what rates of levy they will impose.
The third-quarter results of ITC had argued against the imposition of VAT on cigarettes, given that it is one of the highest-taxed products in the country.
It cited the example of the 2001 Budget, when tax rates were pushed up by 15% resulting in a 13% fall in volume of cigarettes sold.
This in turn led to a fall of excise revenue for the government, they said.
However, the West Bengal government is looking forward to a windfall in its revenue collection.
“It is expected that imposition of value-added tax on tobacco and tobacco products (excluding bidi) will generate an additional revenue of Rs50 crore during the next financial year, after compensating for the loss on account of reduction of central sales tax from 4% to 3%,” West Bengal finance minister Asim Dasgupta said in his state budget speech.