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Tuesday, Dec 20, 2005


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Industry & Economy - Cigarettes

Tobacco industry seeks exclusion from VAT

G. Srinivasan

New Delhi , Dec. 19

AS the time for review of not imposing value-added tax (VAT) on items currently attracting additional excise duties such as sugar, textiles and tobacco in line with the White Paper on `State-level VAT' of the Empowered Committee of State Finance Ministers is impending, the tobacco industry (including manufactured tobacco) in particular is opposed to bringing tobacco under VAT purview.

Even as VAT is being implemented in most States effective April 1, 2005 with the non-participating BJP-ruled States also recently chiming in to the VAT bandwagon without indicating from when on, the issue of review of items currently attracting additional excise duties (AED) would pop up for VAT inclusion after March 31, 2006.

Sources in the cigarette industry say its 19 organised manufactures and thousands of wholesale dealers contend that as it is cigarettes remain by far the highly taxed product and like any other highly taxed product such as petroleum should not be subject to VAT.

As the primary objective of VAT is to preclude the cascading effect of taxes, this is unlikely to be achieved in the event of cigarettes coming under VAT on the back of the existing central excise of 130 per cent. A levy of 12.5 per cent VAT will, with the multiplier fallout, have an impact of nearly 29 per cent on the value of the product (ex-factory price less excise duties).

They say that in view of the substantial chunk of price that is formed by excise duty and keeping in view the relatively scant trade margins (roughly 10 per cent of wholesale price), there is hardly any scope for taxation of value addition. The 90 per cent of value addition supervenes at the time of manufacture and is already taxed by AED.

Stating that of the balance of 10 per cent value addition in the form of trade margins as much as 7 to 8 per cent is generated by legions of small retailers who in any case would remain below the VAT threshold level, the sources argue that the incremental value addition that VAT might capture could be in the range of only about a meagre 2 per cent. The cost and complexity of collection of such small percentages would be a waste of effort for the tax authorities.

They also point out that historically under the ad valorem excise duty structure, the tobacco industry has been encountering valuation related litigation. More than Rs 1,000 crore excise revenue was locked up for over 17 years in arrears altercation. Under the specific duty excise structure, revenue collections remain buoyant with little litigation and hence imposition of ad valorem VAT would reintroduce litigation and locking up of revenue to the authorities, they say.

There is another fear staring the authorities pertains to the fact that VAT entails registration of dealers across the trade chain. As a result, for the first time, wholesale dealers and large retailers would be subject to tax on cigarettes.

Given the reality that highly taxed goods like cigarettes are prone to evasion, adoption of nefarious tactics like "off the books" cash transactions by some of these dealers might become a distinct possibility, denting the revenue collection drive by the exchequer.

In spite of this if the States adopt different rates of VAT on cigarettes, the resultant tax arbitrage opportunities might put a premium on covert inter-State movement of cigarettes by certain devious sections of the trade. Besides, different rates of VAT would make maintenance of a nationwide fixed consumer price intractable.

With five million Indian farmers engaged in cultivation of tobacco and about 30 million people dependent on the tobacco industry either directly or indirectly, India's repeated emphasis on safeguarding the livelihood concern of 650 million farmers in the WTO negotiations would sound hollow if the tobacco industry is bled black and blue by heavy dose of multiple taxes.

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