Govt smokes out ITC excise relief

Firm has a month to pay Rs 450 crore.

The government has issued an Ordinance amending the excise laws on cigarettes from March 1983 to February 1987, whereby duty will be charged on the sale price if it is higher than the maximum retail price (MRP) printed on the pack.

This has given a new lease of life to the government's excise claim of Rs 800 crore on ITC Ltd, first made in 1987, on the grounds that retailers were selling ITC cigarettes for a higher price than disclosed by the company.

The claim was challenged by ITC on the grounds that retailers sold cigarettes loose and these prices could not be controlled by the company.

In September 2004, the Supreme Court had given its verdict in ITC's favour, ruling that the government cannot go beyond the declared MRP even if it is less than the retail price.

Citing this as an attempt to plug a loophole, finance ministry officials said, "The Ordinance now neutralises the judgment as it makes the actual sale price the basis for collecting excise." The government had to act swiftly in tax matters, he added.

ITC had already deposited Rs 350 crore with the government and was hopeful of getting the money back after the Supreme Court verdict.

But this Ordinance, issued on January 25, has resulted in an additional burden of Rs 450 crore on the company. ITC has up to 30 days to pay the amount, otherwise interest of 15 per cent will be mounted on the claim.

When contacted, an ITC spokesperson refused to comment on the matter. But company sources indicated ITC was preparing to challenge the Ordinance in the Supreme Court.

No other cigarette company, including the Sanjay Dalmia-promoted GTC Ltd and the KK Modi-promoted Godfrey Phillips India is likely to be impacted by the Ordinance. "It is completely an ITC specific case and does not involve the other leading cigarette manufacturers in the country," Dalmia said.

It is worth noting that the government has now shifted to a regime wherby excise is levied on cigarettes on the basis of their length irrespective of the disclosed MRP or actual sale price.

Whiff of trouble

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• Between 1983 & 1987, excise on cigarettes was charged on the basis of the printed price
• In March 1987, the Centre changed the method of levying excise; it imposed a specific duty based on the length of the cigarette
• Problem arose when retailers started selling cigarettes loose; they charged a little more per cigarette than the MRP
• The new Ordinance now changes the excise duty demand for the period 1983-87; it will be based on the final selling price