Remove veil around state VAT on tobacco
By S MADHAVAN, |
Highlights
Historically, tobacco products such as cigarettes have been subject to a very high incidence of excise taxation, given their status as demerit goods whose consumption is discouraged. Indeed, revenues from cigarettes form a significant proportion of excise duty collections.
Given this high rate of excise on cigarettes, the current debate on a possible extension of the State VAT thereto, in addition to the excise duty, becomes important and an understanding of the issues relating thereto is essential. Till the mid-fifties, cigarettes were charged to both excise duty and sales tax.
However, it was realised that given the structural nature of the industry, it would be better for the products to be charged to tax by the Centre alone, in the form of excise duty of various kinds, and for such revenues to thereafter be distributed to the States.
Accordingly, in addition to the excise duty that was then prevalent, additional excise taxes, in lieu of sales taxes, were also levied on cigarettes under the Additional Duties of Excise (Goods of Special Importance) Act 1957. Thereafter, other additional excise duties were imposed on cigarettes so that it became a four-tier structure.
Later, the additional duty under the Goods of Special Importance Act was withdrawn, as a possible prelude to the extension of State VAT on the goods. There is currently a three-tier structure of excise duties, all of which are based on the length of the cigarettes. In value terms, the aggregate duties are significantly in excess of 100%.
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On whether the ad valorem scheme of taxation, as in State VAT, can be applied to cigarettes, the point is that the State VAT and excise operate differently. Excise duty is on manufacture and consequently the problem surrounding the excise valuation of cigarettes is the determination of their value at the factory gate, taking into account the expenses incurred in relation to distribution and selling of the goods, subsequent to removal from the factory. This problem is not relevant for State VAT since it operates as a pure VAT, by allowing all input taxes to be offset against the output VAT, through the netting off method. The problem with regard to cigarettes is that its distribution is multi-layered and across State borders. The challenge is therefore to impose the VAT in a manner that the tax is efficiently collected, without disrupting the physical chain or the underlying economics of the participating entities.
Industry has several apprehensions in this regard. These relate to the rate of VAT (4% vs 12.5%), the manner of determination of the tax in the hands of the manufacturers, the taxation of the distributors/wholesalers, together with their eligibility to avail input tax credits, the manner of functioning of the exemption/composition scheme of taxation, etc.
Independently, the loss of input tax credits on stock transfers and with regard to the Central Sales taxes paid on inter State supplies are two very major concerns, related to the exceedingly high financial impact, in terms of the VAT rates in force. All of these pose obstacles and it imperative that issues are fully thought through before the State VAT is extended to cigarettes.
(The author is indirect tax leader with PriwaterHouseCoopers)
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