VAT on tobacco hits legal wall

It is a blow to Bihar’s legion chewing tobacco aficionados and a double whammy for smokers. A proposal to levy 12.5 per cent VAT on tobacco, part of Bihar Finance Minister Sushil Modi’s 2007-08 budget proposals, is set to send khaini and gutkha on a price spiral. A Union budget proposal for a 5 per cent excise duty hike will make cigarettes even dearer.

But there is a catch to the Bihar’s government move to bolster revenue at the expense of nicotine addicts. As law of the land stands on this day, VAT cannot be levied on tobacco. If anything, a constitutional amendment will be required to facilitate its imposition. It is open to doubt if that will happen in the remaining three weeks of the current financial year.

"Value Added Tax cannot be imposed on tobacco till such time as the Additional Excise Duty (AED) Act is repealed. If any State government levies it before that, the move will be legally untenable," said Udayan Lall, Director of the New Delhi-based Tobacco Institute of India, an authoritative voice on issues concerning the tobacco industry.

Lall said even the 12th Finance Commission had clearly laid down that any kind of sales tax or VAT could not be levied on AED products, comprising sugar and textiles besides tobacco. "I am not aware of any move so far to repeal the AED Act," he said, while responding to queries from Hindustan Times.

When contacted, Modi admitted that there was a legal hindrance in levying VAT on tobacco despite the fact that the Empowered Committee of State Finance Ministers had reached any agreement on its imposition. "The fact is, a constitutional amendment is required to repeal the AED Act," he confirmed.

The Finance Minister said he was not aware of any such move but the Centre was committed to do the needful to enable states to impose 12.5 per cent VAT on tobacco with effect from April 1. "In the worst case scenario, a delay in the required legal measures will mean that we may have to defer the imposition of VAT on tobacco by a few days or weeks," he affirmed.

Modi said Bihar was receiving an extra 1 per cent of central devolution under the additional excise duty head. "Bihar will stand to lose about Rs 300 crore if the AED proceeds are stopped. But the Centre is committed to continue devolving this extra 1 per cent even after the AED Act goes and also to allow us to levy 12.5 VAT on AED items," he explained.