Bengal tax proposal may seek VAT hike on tobacco, spirits

The state’s finance minister Amit Mitra is expected to make the announcement on Monday, when he presents the tax proposals for the current fiscal in the legislative assembly, according to government officials who declined to be named.

Mitra is expected to put cigarette along with other variants of consumable tobacco, such as gutkha and paan masala, under the so-called schedule D of VAT brackets, or the highest one of 30%. This is the first time any product is being put under schedule D.

Besides West Bengal, Rajasthan, Kerala, Assam, Jammu and Kashmir and Tamil Nadu have lately raised VAT on cigarettes. In these states, cigarettes attract VAT of 20-40%, while in other states, the tax is pegged at 12.5%-15%.

Alongside, West Bengal is likely to raise the excise duty on alcoholic beverages—or Indian made foreign liquor in the tax department’s parlance—to 50% from 37%.

Mitra refused to comment on his tax proposals until they were presented in the state assembly.

His statement of accounts presented to the state’s lawmakers on 11 August showed he was expecting sales tax collections in fiscal 2012 to go up by about 28.2% from the previous year’s revised estimate to Rs.17,024 crore. Alongside, excise duty in the current year could go up by 33.4% to Rs.2,418 crore, Mitra had said in his budget estimates.

The state’s own tax revenues are expected to rise 23% from fiscal 2011’s revised estimate to Rs.27,690 crore, with significant increases coming from tax on motor vehicles, stamp duty and registration fees. However, these are unlikely to be raised, said the state government officials cited above.

The country’s biggest cigarette manufacturer ITC Ltd has always maintained differential tax structures across states “encourages unscrupulous tax arbitrage” and leads to “large-scale smuggling”. ITC refused to comment on Mitra’s yet-to-be presented tax proposals.

The sharp increase in VAT on cigarettes may not in the long-run generate more revenues for West Bengal, but it will “surely destroy the legitimate distribution channel”, said the proprietor of a leading distributor of cigarettes in Kolkata. He spoke on condition on anonymity. “This has happened in every state that has raised VAT on cigarettes to 20% or more,” he added. “Such disruptive tax increases only benefit inter-state smugglers.”

While raising VAT on tobacco and spirits, Mitra is expected to announce tax cuts on goods used by physically challenged persons, costume jewellery and some dress materials, according to state government officials.