The Centre may raise the excise duty on sugar output and levy a moderate export duty if it decides to lift controls on the commodity.

This will help the Union government to reduce the financial burden of selling sugar at subsidised rates to poor families after buying it at market rates from sugar companies.

Currently, mills have to sell 10 per cent of their total production (termed levy sugar in government parlance) to the government at Rs 19.04 per kg as against the wholesale market price of Rs 31 per kg.

The government then sells this sugar at Rs 13.50 per kg to 6.52 crore poor families for public distribution through ration shops bearing a subsidy of Rs 2,300 crore - Rs 2,500 crore a year.

"We are discussing various measures to meet the additional financial burden likely to come after the removal of levy obligation on mills. We are considering an increase in excise duty or levying a nominal export duty (5-10 per cent) to recover part of the cost," said a food ministry official.

Food minister KV Thomas recently told ET the government needs to take a cautious approach on removing levy sugar obligation. "We are discussing on ways we can manage if levy sugar obligation is removed," he had said.

At present, the excise duty on sugar is 71 paise per kg. The government distributes 27 lakh tonne sugar through ration shops. The financial implication of removing the levy obligation on mills is around Rs 2,700 crore over and above the current subsidy paid for the difference between the levy and the issue price and costs of distribution.

"The government will have to levy an additional excise duty of Rs 1.15 per kg to recover Rs 2,700 core on a production of 23.5 million tonne. But it will end up increasing retail prices. So we may not increase the duty to such an extent," the official said.

The government may also impose a moderate duty on export after a nominal increase in excise duty. The Rangarajan committee, set up last year to study sugar decontrol, has recommended levying an export duty to recover the financial implication following the removal of levy obligation.

"Going by export figures in the recent years and the current market prices, an annual export of around 2 million tonne on the average would translate into a revenue stream of around Rs 300 crore - Rs 600 crore annually," the committee led by C Rangarajan, the influential head of the Economic Advisory Council of the Prime Minister, has said in its report.

The government may earn another Rs 500 crore - Rs 600 crore if it uses the Sugar Development Fund (SDF) to meet a part of levy sugar procurement cost. SDF is raised by levying a cess of Rs 24 per quintal of cane for providing soft loans to sugar factories for cane development, modernisation, cogeneration and ethanol project.

"Once the levy obligation is dismantled, SDF may be used to fund sugar procurement and its distribution through ration shops," the official said.