Replacing AED on cigarettes with VAT can hit many States Fall in revenue seen in 44-88 per cent range; consumers may pay more for a puff

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Mohan Padmanabhan

Kolkata, Jan. 24

INDIRECT tax experts and taxation managers in industry have cautioned that many States would actually lose substantially if additional excise duty (AED) on cigarettes is replaced by VAT.

It is further pointed out that scrapping of AED on tobacco products like cigarettes may mean that States would be free to impose a tax of any rate, not just 12.5 per cent, making the consumer pay much more for the puff.

It is estimated that nearly 80 per cent of the AED collection can be attributed to cigarettes.

Even if a uniform VAT rate among States is assumed, the resultant fall in revenue for the States could range between 44 per cent and 88 per cent.

Experts say that if these affected States were to attempt to recoup the lost revenue, it would mean levying varying rates of tax on this commodity of special importance, going up to over 100 per cent, which clearly indicates that uniform rates are an impossibility.

Explaining how many of the States will lose out in terms of their share of the collections, if VAT replaces AED, experts told

Business Line

that distribution of AED proceeds among the States is made on the basis of the State's population and not on consumption.

As per the existing system, the proceeds of AED from tobacco, sugar, and textiles form part of the Consolidated Fund of India, and an amount equivalent to one per cent thereof (in addition to a general allocation of 29.5 per cent) is allocated and distributed among the States on AED account.

It is stated that as a result, Uttar Pradesh, Bihar, M.P., Rajasthan, Orissa, Jharkhand, Chattisgarh, Gujarat, and Assam have been getting over 60 per cent share of the allocation to the States on account of AED. "However, since cigarette consumption is far less than commensurate with the population in these States, VAT at a uniform rate of 12.5 per cent on the end price of cigarettes consumed in these States would be far less than their respective AED share."

It is pointed out that for a large State like U.P., which enjoys 19.2 per cent share of AED collected (an amount of Rs 480 crore), the revenue receipt on 12.5 per cent VAT (collected on a consumer spend of Rs 1,043 crore) could be only around Rs 130 crore.

If AED goes, the shortfall for the State could be to the extent of nearly 73 per cent, according to industry watchers.

(This article was published in the Business Line print edition dated January 25, 2006)
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