UP govt's duty on cigarettes worries industry

Cigarette manufacturers across the country are worried that the excise duty of 32.5 per cent levied by the Uttar Pradesh (UP) government will lead to a rampant increase in smuggling of cigarettes into the state. The resultant revenue losses, on account of unpaid duties and forex outflow, are estimated at around Rs 1,500 crore.

"Uttar Pradesh has a peculiar problem, which is its long border with Nepal. This is bound to lead to an inflow of smuggled cigarettes into the market," said industry sources. They warned that tax levy on domestic brands would push up the prices for local manufacturers and create an arbitrage opportunity for smugglers. The estimated value of smuggled cigarettes sold in India was Rs 2,000 crore in 2005-06. Smuggled cigarettes reportedly account for 5-7 per cent of the domestic market.

There are also fears that profit margins of domestic cigarette companies will be severely hit. India's loss could be China's gain. "The brands flowing in from Nepal will most likely be from China, which is a major global producer of cigarettes," according to sources. Compared with an estimated 109 billion sticks produced by India in 2006-07, China produced 1,942 billion sticks.

UP earns Rs 487 crore annually from cigarette taxes in lieu of additional excise duty from the proceeds of the shareable Central taxes. The excise rate increase applies to both, manufactured and imported cigarettes.

In a statement, PHD Chamber of Commerce and Industry (PHDCCI) urged the Uttar Pradesh government to roll back its recent decision to hike the tax on cigarettes to 32.5 per cent. It said the state's unilateral move did not conform to the decision of the empowered committee of state finance ministers on Value Added Tax (VAT) to levy VAT on cigarettes at a uniform, maximum rate of 12.5 per cent. Moreover, other states have withdrawn the entry tax levied on cigarettes, against VAT, to keep the total incidence at 12.5 per cent.

The industry chamber feels UP will sooner or later switch over to a VAT regime. Excise duties and other taxes account for almost 150 per cent of the ex-factory value of cigarettes.

The state also levies an entry tax of 5 per cent. Since the sale of cigarettes is highly price-elastic, even a slight increase in the price will adversely affect the revenue collection, further leading to a decline in demand, PHDCCI feels.