Entry barriers burn cigarette makers

After having waited 13 years to exhale, it was an all-too-brief a tryst with victory for India's cigarette companies. On January 20, a five-judge Constitution Bench, headed by Chief Justice RC Lahoti, decided in the drawn-out case that states did not have the right to impose luxury tax on tobacco products, leading to celebrations within the industry.

However, even as the gutkha kings were mulling their next Maybach purchase and the stocks of the cigarette companies were tracing their way up, the Rajasthan government stubbed out the celebrations a week later by increasing entry tax on cigarettes from 1.5 per cent to 16 per cent.

Interestingly, the Rajasthan government's move comes at a time when there is an ongoing case in the Supreme Court, which challenges the imposition of entry tax by states.

The move has left the tobacco companies worried, as they fear more states could emulate Rajasthan. Before the Supreme Court handed out its landmark judgment, the total tax on tobacco products in the state was 9.5 per cent, which included an entry tax of 1.5 per cent and a luxury tax of 8 per cent.

On top of that, the central government charges cigarette manufacturers an additional excise duty in lieu of sales tax and other taxes.

However, many state governments had over the past decade imposed fresh taxes on the cigarette manufacturers in the form of a luxury tax or entry tax or a combination of both. For instance, West Bengal used to levy a 10 per cent luxury tax on tobacco products.

Most cigarette companies in India, like ITC, have contested this imposition in the high courts and also won a stay. But since they had no idea as to the outcome of these cases, they had to provide for these taxes in their account books.

The Delhi-based Tobacco Institute of India has long been seeking the continuation of a single-point taxation for the tobacco sector through a specific duty structure and the imposition of the additional excise duty.

Says, Udayan Lal, director, TII, "Such a high increase in taxes will work against the revenue interest of the state as it forces consumers to shift to cheaper and revenue inefficient forms of tobacco consumption like gutkha and bidis."

Lal's statement should be seen in the context that on average the total tax on the ex-factory value of cigarettes is between 130 per cent and 140 per cent more than on other tobacco products.

In its pre-Budget memorandum, TII, which represents the organised segment of the industry, has called for the need to reduce the duty differential between cigarettes and other tobacco products and the exemption of the sector from the value-added tax for some time.