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Mohan Padmanabhan

Kolkata , Jan. 10

INDIRECT tax experts, especially those connected to the industry, are of the view that if the Additional Duties of Excise (Goods of Special Importance) Act 1957, as applicable to tobacco products, is repealed, it will effectively stop any share of the AED (Additional Excise Duty) revenue to the States, and neither the Centre nor the States would benefit. They feel only certain unscrupulous segments of the trade may benefit.

In such a scenario, the net realisation by several States on this item could be substantially less than their share of Central revenues under the AED regime.

And removal of restriction on the States' power to levy VAT/sales tax, in an AED set up, it is feared, may lead to illegal movement of stocks between State borders, especially of a product such as manufactured tobacco, resulting in substantial loss of revenue.

Experts say "it is precisely to avoid such a situation that the uniform AED in the manufactures' hands was introduced in the first place, eliminating the scope for tax evasion and illegal movement of stocks between States."

And the Centre too can exercise better control on the total incidence of commodity taxation in an AED regime.

According to corporate watchers in the tobacco sector, if AED on cigarettes is scrapped to make way for VAT, what might happen is that from a foolproof system that assures substantial revenue without any cost of administration, the States could be changing over to a system of elaborate collection administration which also yields far less revenue.

Additionally, it is pointed out that consumers may have to pay a higher price for cigarettes, since the MRP needs to factor in the VAT element. States may not adhere to a uniform rate of duty, thus leading to illegal inter-State movement of stocks.

Under any case, it is highly unlikely that the manufacturers' total excise liability on the product would stand reduced, since the AED portion would be treated as basic excise duty by the Centre, said one tax expert.

The AED law was enacted, following a Constitution amendment in 1956, declaring tobacco, sugar and textiles as goods of special importance in inter-State trade, and providing for the levy of additional excise on the said three products.

According to an industry expert, the objects and reasons for the Act echoed the unanimous agreement between the Centre and the States at the NDC meeting in December of 1956, that sales tax levied in States on mill-made textiles, tobacco including manufactured tobacco and sugar should be replaced by a surcharge on the Central Excise duties on these items.

As per the accord, the income derived there from will be distributed among States on the basis of consumption, subject to the then income derived by States being assured; the Second Finance Commission determined the proportion in which the proceeds of AED should be distributed among States.

The Fourth Finance Commission (1965), experts aver, had clearly stated that the rationale behind the scheme of additional excise duties was that if the tax is levied at the first point, the chances of leakage and evasion would be minimised, and it will also suit the trade, industry and the consumer, as it would save all from the administrative complexities involved in the collection and payment of sales tax.

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