New Delhi: The union cabinet on Wednesday raised the tax on import of sugar to 40 percent from 25 percent to check falling prices of the commodity and to enable loss-making mills to clear cane payments arrears.

It also withdrew the Duty Free Import Authorization scheme for exporters.

Besides, acceeding to millers' demands, the cabinet withdrew the excise duty on ethanol supplied for blending.

"It has been decided that ethanol produced from molasses generated during the next sugar season and supplied for ethanol blending would be exempted from excise duty and the price benefit would be passed on to the sugar mills/distilleries," the union food ministry said in a release.

"These measures will significantly improve the adverse price sentiments in respect of sugar and would improve the liquidity in the industry, facilitating the clearing up of arrears of cane dues to farmers," said the cabinet communique.

Last August, the central government raised the import duty on sugar to 25 percent from 15 percent as a measure of relief to millers beleaguered by higher cane prices and surplus stocks.

Prices fell below the cost of production in some states with surplus production for the fourth consecutive year.

Prices of sugar for mills in Uttar Pradesh, for instance, have fallen below Rs.25 per kg, while the cost of production remains at Rs.37 per kg.

Mills in the state, the second biggest producer in the country, owe farmers over Rs.5,000 crore, which they have not paid due to lower sugar prices.

The close to 100 private sugar mills in Uttar Pradesh have been at loggerheads with the state government, which makes the sugar companies pay a premium to farmers over the cane price fixed by the central government.

The central government has recently provided a subsidy of Rs.4,000 per tonne for the export of 1.4 million tonnes of raw sugar to improve the cash-flow of the millers.

Welcoming the decision, the Indian Sugar Mills Association in a statement urged the government "to quickly decide on our request to buy out 10 percent of our current year's sugar production".

"Only this step will help the industry come out of the crisis in the short run and ensure that a major portion of cane price arrears of farmers is cleared before the start of the next sugar season," said the millers' association.

ISMA has been demanding that the government give an export subsidy, create a two million tonnes buffer stock and restructure millers' debts.

"The immediate need is to reduce the surplus of 35 lakh tonnes of sugar blocking almost Rs.10,000 crore of cash flows," it said.

"The credit ratings of sugar companies in Uttar Pradesh are falling and are much lower than those of firms in the west and south, making it difficult to get funds. We face major liquidity problems," said Gursimran Mann, managing director of Simbhaoli Sugars.