The Rajasthan government’s change in taxation methodology for cigarettes, made effective from September last year, is benefitting large cigarette manufacturing companies, while not necessarily increasing revenue for the state, according to an analysis by The Indian Express.
The VAT on cigarettes in Rajasthan, under the government’s new methodology, ranged from 10.75 per cent to 24.44 per cent. Again, the reduction of VAT on tobacco products from 65 to 45 per cent via a government notification on June 2 and 12 this year had led to an outrage, given tobacco’s adverse impact on public health.
Last year, a government notification (dated September 24) changed the way cigarettes are taxed. Under the new methodology, a fixed rate of VAT would be levied on 1,000 cigarettes based on their length. This is in the nature of a specific excise duty as against ad valorem rate, based on value.
According to the latest June 2 revision in this specific tax, cigarettes between 75 to 84 mm length would attract a VAT of Rs 1,650 per thousand pieces, effectively meaning a tax of Rs 33 for a pack of 20 cigarettes.
For example, a pack of 20 Hawk Eye cigarettes (manufactured by Godfrey Philips), selling for Rs 340, now fetch Rs 33 in VAT to the government.
Under the uniform 65 per cent VAT in force earlier, the same pack would get the government Rs 134. Similarly, a pack of 20 Marlboros or Classic Milds (ITC), selling for Rs 218 each, yield a VAT of Rs 33, compared to Rs 85 earlier.
Not only does this mean a drastic reduction in government revenue, it also means that cigarette companies are making more revenues-as much as Rs 101 more per pack-since there has been absolutely no change in retail prices of cigarettes despite the tax cuts.
In fact, the controversial June 12 notification reducing VAT on tobacco products-that drew outrage from across the nation-did not even apply to cigarettes.
The order lowered VAT on “tobacco and its products”—which include cut tobacco, chewing tobacco etc-from 65 per cent to 45 per cent and left the VAT on bidis unchanged at 65 per cent.
“Yes, the VAT was first amended in September 2014 by fixing it along the lines of excise duty, which is a certain tax rate per 1,000 cigarettes,” Aditya Pareek, Joint Secretary, Finance told The Indian Express.
“The reason was that higher VAT was leading to cigarettes being smuggled in from other states resulting in huge revenue losses for the government. So rationalization of VAT rates in line with other states was done to secure government revenue,” he said.
However, revenue from cigarettes has not been a factor of rate of VAT and has consistently increased-except in 2013-14-despite successive tax hikes.
The new tax regime also clearly benefits big tobacco companies, particularly two major corporations that account for the largest chunk of market share.
For example, a Nagaur-based local company, which sells a pack of ten cigarettes for Rs 10, has to pay tax equal to its selling price.
“It clearly shows that the government’s intention is to benefit two major corporations while emptying out its own coffers.
If they have to reduce VAT to prevent tax evasion and smuggling, why don’t they reduce VAT on diesel,”said Satyen Chaturvedi of the Rajasthan Voluntary Health Association.