SAPs differ from state to state and are related to the levy prices of sugar, which also differ from state to state. There are generally considerable differences between the CACP recommended prices, the SMPs and the state SAPs. Khandsari and gur producers are in practice exempt from both the SMP and the SAP and from all other regulations.

The _levy price of sugar_ is determined by the Union government every year based on cost schedules prepared by Bureau of Industrial Costs and Prices (BICP). The BICP takes into account the SMPs in each region, sugar recovery rates from the cane and conversion costs. Since the prices actually paid for cane by the mills are determined by the SAPs, which generally are considerably higher than the SMPs , the mills incur losses on their sales of levy sugar. They are supposed to offset these losses by their free market sales.

_Thefree market price of sugar_ is indirectly regulated by the central government by changing the free sale ratio, and on a month to month basis by mill-level controls over the amount of levy sugar and free sale sugar that can be sold, as well as controls over sugar inventories held by individual mills and traders. Levy sugar prices have usually been much lower than the free market price. Figure 8 shows the weighted average'<sup>4</sup> levy and free market prices for UP, Maharashtra and Tamil Nadu between 1965 and 1993. Except in the years when there was no levy and all the sugar was sold on the free market (1965-67,1972 and 1978) the free market price always exceeded the levy price. However the premium varied enormously, from 24 paise per kg in 1969 to Rs 3.49 per kg in 1990.

In addition to indirectly influencing the free market price by changing the free sale ratio, the government influences the price received by the mills by varying the excise tax rate. Annual average excise taxes on free sale sugar for the period 1965-94 are given in Annex 5. The rates per quintal varied every year until 1984 when a specific tax or Rs 50/quintal was set, until it was increased to Rs 70/quintal in 1992. Since the quoted free market prices include excise taxes and marketing and traders' margins, these have been deducted from the annual average free market prices to give the estimated average free market prices received by the mills. There are also excise taxes at considerably lower rates on levy sugar, but these are added to the levy prices paid to the mills and are not allowed for in calculating the average ex-factory realization of the mills, which is a weighted average of the levy price and the net price they receive from their free market sales. As well as excise taxes, there is a cess on mill sugar production, and varying state purchase taxes on cane. The sugar mills in UP and a number of other states are also required to pay commission to the sugar cane growers unions in their areas.

Before 1985, khandsari units were subject to excise taxes, but at substantially lower rates than the excise taxes on mill sugar ( see Annex 8). During the 1970s - apparently to deal with evasion - there was also a supplementary excise tax based on the capacity of their centrifuges. Khandsari excise taxes were abolished in the March 1984 budget. Khandsari units have not been required to pay grower commissions, and have not been subject to cane purchase taxes , except for a number of years in the 1970s (see ISMA, _Indian Sugar Year Book_ 1991/92 p.148).

> 14 The averages are weighted by state production valued at importable reference prices. See Annex 2. 23