The Tobacco Institute of India on Sunday said the decision by the governments of Delhi and Maharashtra to increase the value added tax to 20% on tobacco products may encourage tax-evading tactics leading to revenue loss to the exchequer.
The potential revenue loss could be as high as Rs3,000 crore annually, the institute said.

...on all India basis, it is estimated that the illegal cigarettes (smuggled foreign cigarettes and tax evaded domestically manufactured) account for as much as 10 per cent of the industry, TII Director Udayan Lall said in a written response to a query.

The consequent revenue loss could be estimated between Rs2,500 to Rs3,000 crore, he said.

Recently, Delhi and Maharashtra governments has increased the VAT rates to 20% from 12.5% on tobacco products and according to experts, this may encourage other states to follow the suit.

This would also encourage retailers to purchase cigarettes and other tobacco products from wholesale dealers in the neighbouring states and smuggle them in the state without paying taxes.

Higher tax rate may further increase the evasion as the incentives become bigger, Ernst &Young Associate Director Tax and Regulatory services Vivek Sharma said.

Cigarettes accounts for around 15% of the total tobacco products but in terms of revenue as it contributes to 85% of the total taxes collected on tobacco products.