Associated Chambers of Commerce and Industry of India (Assocham) has urged the Uttar Pradesh (UP) government to iron out ‘wide divergence’ in state Value Added Tax (VAT) rate on cigarettes and fix it at 12.5 per cent.
The body said such tax divergence among states promoted unhealthy trade practices and encouraged smuggling of goods.
UP had recently hiked VAT on cigarettes to 13.5 per cent along with 5 per cent other state levies like octroi. Assocham lamented this was in spite recommendations of the central empowered committee of state finance ministers in January 2005 to maintain a general VAT rate of 12.5 per cent on cigarettes.
“This divergence in VAT rates will lead to large-scale smuggling, evasion of taxes and other criminal activities,” Assocham national secretary general D S Rawat wrote in his letter to chief minister Mayawati.
The chamber has recommended a uniform VAT rate on cigarettes would encourage legitimate sales of cigarettes thereby increasing state revenue. It would also be consistent with the principles of VAT and proposed Goods and Service Tax (GST) regime.
Assocham opined that disparity in VAT rates would distort the market leading to illegal activities like smuggling, tax evasion and breeding ground for the entry of organized crime syndicates.
Illegal cigarettes trade accounts for 16 per cent of the domestic industry and had risen by 58 per cent during 2004-09. Besides, illicit trade of duty evaded cigarettes accounted for 10 per cent of the industry affecting revenue collection by Rs 1,000 crore.
Assocham maintained that high taxation encouraged illegal inter-state trade and due to higher price, consumers were being forced to consume cheap and affordable alternatives like bidis and gutka, increasing overall tobacco consumption, thereby defeating objectives of public health and sub-optimise revenue collections.
