Cigarette companies like ITC, VST Industries, Golden Tobacco, Godfrey Philips India and New Tobacco Company will feel the heat of the VAT increase by 10% in West Bengal, since the 1,500-odd cigarette dealers have refused to pay for the retrospective effect.

West Bengal chief minister Mamata Banerjee, in a move to create a R500 crore corpus to refund depositors trapped in Saradha?s ponzi scheme, has increased VAT on cigarettes to 35% from 25%.

While the government issued the notification on May 6, it gave a retrospective effect from April 25. Dealers have made clear they would not be able to pay for the retrospective effect since it was impossible to collect from the retail end.

Most cigarette retailers were tiny. Realising the extra VAT from retailers for the period between April 25 and May 6 was impossible. In such a situation, if the companies asked the dealers to pay for the retrospective effect, many dealers would have to shut down their shops, Amitabha Mallick, a VST dealer told FE.

?All the companies have already come together to discuss the issue with the dealers. The companies have in principle agreed to bear the cost of extra VAT for the twelve-day period,? Mallick said.

However, ITC would have to bear the major cost since the company supplies four out of every five cigarette sold in India. In West Bengal it has an above 80% market share.

ITC chairman YC Deveshwar did not want to comment on the issue after meeting the chief minister, however informed sources said that he had made a submission in terms that increase in VAT rates would bring down sales, in turn affecting total revenue.

With the 10% increase, West Bengal?s VAT rate on cigarettes (35%) has become the second highest after Rajasthan, which imposes 65%. Uttar Pradesh had a 50% VAT rate but the state had brought it down to 25% last week.

The retrospective increase would have R12-14 crore impact on ITC in the first quarter of FY14 but the larger impact would be in terms of sales reduction. ITC?s cigarette sales dipped 3% between FY12 and the first quarter of FY 13 until it launched the smaller and cheaper 64-mm cigarette.