Pull 12.5 pc VAT on cigarettes: ASSOCHAM

New Delhi, Apr 9: Business house Assocham today demanded withdrawal of the 12.5 per cent VAT on cigarettes and tobacco products announced in Budget 2007-08 stating the industry is already over taxed by 130 per cent off the net factory gate price.

In a detailed note submitted to Chairman of Empowered Committee of State Finance Ministers Asim Dasgupta, Assocham President Venugopal N Dhoot said the 12.5 per cent VAT will be equivalent to almost 29 per cent hike in excise duty and put the cigarette and tobacco industry under heavy pressure as the companies' margins would shrink.

Pointing out that one of the objectives of VAT is to remove the cascading impact of taxes, it said in case of cigarettes, the tax component is already very high at 130 per cent of the net factory gate price. Therefore, an ad valorem tax like VAT on cigarettes will be a ''tax on excise'' and not a ''tax on value added''.

In the event that cigarettes are brought under VAT, it is necessary to ensure that VAT is levied on the value, net of excise duty and other taxes, as done under Section 4 of the Central Excise Act. In fact, the 2003 amendment to the Additional Duties of Excise Act limited the rate of sales tax to four per cent on the value net of excise duty and other taxes, said the chamber.

It added that the imposition of a state VAT on cigarettes, without a corresponding downward adjustment in the Central Excise, would adversely impact overall revenue collection.

''If VAT is levied on cigarettes, the absence of a binding legislative mechanism will make it extremely difficult to maintain uniform rates on cigarattes across the states, resulting into large scale illegal inter-state movement of stocks,'' it opined.

The industry body said the central single point taxation to the exclusion of state taxes, is ideally suited for a highly taxed product like cigarettes, and should continue.

A departure from this five-decade old system needs a closer study of all the issues, so as to explore all possible options, it noted.

UNI