With states set to levy a 12.5 per cent value added tax on tobacco from April, the price of cigarettes and other tobacco products are likely to rise.

At present, the Centre imposes 4 per cent additional excise duty on tobacco, sugar and textiles.

The AED collections are treated as the Centre's own tax revenue and shared with states. In lieu, states do not impose sales tax on these three items.

The finance ministry, in consultation with the empowered committee of state finance ministers, has worked out a compensation formula for the "notional losses" suffered by states arising from the transition to the VAT regime.

According to this, states will be allowed to tax services and levy VAT on the three AED items. This is in addition to the monetary compensation promised by the Centre.

The Centre will also amend the Additional Duties of Excise Act, 1957, to empower states to levy VAT on these three items.

The state panel has decided to tax tobacco at the general VAT rate of 12.5 per cent, while sugar and textiles would be subject to a 4 per cent VAT.

In addition to the VAT imposed by states on these three items, the Centre could still retain the option of levying an excise duty on them, officials said.