UP government decision to increased the Value Added Tax (VAT) on cigarettes from the earlier 17.5 per cent to 50 per cent has led to the inter-state smuggling of cigarettes.
Neighbouring states of Delhi, Uttarakhand, Haryana, Madhya Pradesh, Bihar, Jharkhand and Chhattisgarh have VAT rates of average 20 per cent. According to reports, inter-state smugglers are having a field day as they are able to transport cigarettes, hoodwinking the state authorities, and make huge illicit profits in the bargain.
UP traders' associations have been appealing to the state government drawing the government's attention to the rampant inter-state smuggling, and seeking the review the VAT hike decision which is giving greater power to inter-state smugglers who are ruining the environment of a legitimate business activity.
It is estimated that almost 25 per cent of the cigarette market has been captured by these illegal manufacturers. Their business growth spells more revenue loss for the UP government. This revenue loss, due to illegal manufacturing, runs into hundreds of crores, say industry observers.
No amount of VAT hike can substitute this revenue loss to the State Exchequer due to illegal manufacturing. As per the latest Euromonitor data, illicit trade in cigarettes has been steadily increasing in India.