By Subramaniam Sharma, Bloomberg
New Delhi:States may bring tobacco under value-added tax (VAT) next month after they agreed this year to phase out a levy on sales.
“It will be implemented only when the central government direction comes,” Ravi Mittal, commissioner of commercial taxes and secretary to the Bihar government, said today in a phone interview from Patna. “All states will include tobacco under VAT as central sales tax compensation from 1 April.”
A panel of state finance ministers will decide the rate of VAT to be levied, Mittal said. The panel is headed by Asim Dasgupta, the minister of finance, West Bengal government. Investors such as Mahesh Patil said the rate of VAT will determine the impact on companies making tobacco products.
“To some extent, it could affect sales. The question is to what extent they will want to pass it on,” said Patil, who helps manage the equivalent of $3.7 billion (Rs16, 382 crore) in assets at Birla Sun Life Asset Management Co. in Mumbai. “Definitely it will be negative, whatever it is.”
On 22 February, Cabinet approved the reduction of central sales tax to 3 % from 4 % with effect from 1 April. In January, the states agreed to phase out the so-called sales tax. The Finance Minister P Chidambaram proposed a 5 % increase in the excise tax on cigarettes in the year starting 1 April.
India started the levy of VATon 1 April 2005. The tax, a charge on the value that producers, wholesalers and retailers add to goods at each stage of production and distribution, is meant to replace sales taxes and other levies that contribute 60 % of the states’ income.
Except for Uttar Pradesh, all the other 27 states in the country have implemented the levy of VAT.
Taxes on cigarettes, including excise duties, are at almost 130 % of the value of the product, ITC Ltd., India’s biggest tobacco maker, said on 31 January. Cigarette volumes fell by 13 % in the year ended 31 March 2002, when the government raised tax rates by 15 %, the company said.
The company is “studying the situation and has no comment to make,” Nazeeb Arif, spokesman of ITC, said in a phone interview.
Shares of Kolkata-based ITC rose by Rs0.65, or 0.4 %, to Rs172.5 on the BSE today. New Delhi-based Godfrey Phillips India Ltd., the country’s second-biggest cigarette maker, declined Rs27.85, or 2.2 %, to Rs1,217.3.
ITC’s third-quarter profit rose at the fastest pace in seven quarters on higher cigarette sales and rising occupancy rates at its network of hotels. Its profit gained 34 % to Rs7.17 billion. Sales increased 24 % to Rs31.66 billion.
About half of ITC’s net sales come from cigarettes and rest is contributed by paperboards, foods, hotels, agricultural produce, matches, garments and exports.