Envisaged as a tool to curb smoking in the state and to increase the revenue, recent mammoth hike in value added tax (VAT) on sale of cigarettes in Punjab is proving dear to the state revenues.

Expecting voluminous increase in taxes from cigarette sales, the state government in its budget for the current fiscal had increased the VAT on fags by 144%. With 55% VAT, Punjab is charging the highest rate on cigarettes among the north Indian states.

However, despite huge hike in VAT, the tax returns are likely to remain nearly the same in the current fiscal against last financial year as the product is being diverted to the neighbouring states where VAT is lower and also due to increased chance of smuggling, revealed the officials.

"We had collected around Rs 100 crore as VAT from the sale of cigarettes in the state during the last fiscal. However, only over Rs 38 crore has been collected in five months of the current financial year. Despite huge increase in VAT, the tax collection is likely to remain nearly similar as that of last year," said sources.

Finance minister Parminder Singh Dhinda, while presenting the budget for the current fiscal, had increased VAT on fags to 55% from 22%.

Senior officials in the head office of excise and taxation department said import of cigarettes from manufacturing states to Punjab has significantly come down due to the hike in VAT.

"Since the neighboring states are charging VAT around 20-22%, there is scope of tax evasion with dealers showing sales in neighbouring states while smuggling the same into Punjab," officials added.