The Hindu Business Line : `Don't bring cigarettes under VAT regime'

Ahead of the next meeting of the Empowered Committee of State Finance Ministers on Value-Added Tax (VAT) on January 3, tobacco growers of Andhra Pradesh and Karnataka have sought the Centre's intervention against bringing cigarettes under the VAT regime.

The issue

"We are raising the issue before the Prime Minister, Dr Manmohan Singh, the Finance Minister, Mr P. Chidambaram, and also the Chairperson of the United Progressive Alliance, Ms Sonia Gandhi. Any move to introduce VAT on cigarettes will affect around two lakh growers and another five lakh workers on our farms," the General Secretary of the Tobacco Growers Welfare Association, Mr Sivaram Prasad, told presspersons here on Friday.

Currently, the States are not allowed to tax cigarettes and other tobacco products (besides sugar and textile products), in lieu of which they are entitled to an extra one per cent of the Centre's total shareable tax proceeds.

Proposal

There is now a proposal to permit the States to levy VAT/sales tax on these hitherto exempt items, with cigarettes to attract rates even above 12.5 per cent in view of it being a `non-merit' item.

The proposal is likely to be taken up at the January 3 meeting of the Empowered Committee under the West Bengal Finance Minister, Dr Asim Dasgupta.

"If States are given freedom in determining VAT rates, we will be hit because in our areas (Prakasam, Guntur, Krishna and Nellore in AP and Mysore, Hassan and Shimoga in Karnataka), there is no other viable crop that is as employment-intensive as tobacco. It takes 260 man-days to grow an acre of tobacco, whereas you need only 60 man-days in the case of pulses," Mr Prasad claimed.

The country produces roughly 700 million kg of tobacco annually, of which cigarette-grade or flue-cured Virginia (FCV) tobacco accounts for 240 million kg. Of the latter, about 145-150 million kg is grown in Andhra Pradesh and 85-90 million kg in Karnataka.

Roughly 70 per cent of FCV tobacco is exported, with the rest being bought by domestic cigarette manufacturers. Average auction prices in 2006, at about Rs 51 per kg, have been higher than Rs 39-40 per kg range of the last couple of years.

"Just when conditions have improved, we are now being threatened by the imposition of VAT. So far, unlike cotton farmers, our growers have not had to commit suicide because tobacco is a hardy crop in even drought conditions," Mr Prasad added.

He said that cigarettes were already over-taxed, contributing some Rs 8,500 crore to the Central revenues. While the total excise incidence on beedis were Rs 7-17 per 1,000 sticks, the same ranged from Rs 160 to Rs 2,060 for cigarettes.