The Hindu : Confusion over VAT continues

Online edition of India's National Newspaper
Thursday, Mar 20, 2003

Southern States

Southern States - Andhra Pradesh-Hyderabad

Confusion over VAT continues

By P. Vikram Reddy

HYDERABAD March 19. With Value Added Tax (VAT) all set to make an entry from April 1, everyone -- from the common man to traders are curious and perhaps a little confused still. Reports pouring in everyday on the effects of VAT on various segments of the economy are only causing further apprehensions.

Over the last decade, the very talk of VAT has met with objections from traders, on several counts -- some feared it for its transparency, some felt it would be too complicated, some objected for its seemingly cascading effect on prices.

But it may not be presumptuous to say trade and business were afraid of it more for reasons related to business and accounting form than for reasons of public welfare. For one, evasion will become that much more difficult, say experts.

Hundreds of meetings between the Government and traders and industrialists paved the way for a consensus. But are they prepared sufficiently to implement it without flaws? What the common man is interested in is to know prices of how many goods and commodities will go up and how many may come down?

For example, the Government has clarified that the price of items like `branded salt' will be subjected to VAT and `unbranded' salt is exempted. What proportion of consumers will be affected by this single isolated example -- given the consumption pattern of branded and unbranded salt in the State or Country for that matter. How many people still consume `unbranded salt'-- say in urban and semi-urban areas? Perhaps people can draw heart from a recent study of the Karnataka Government which felt that prices of commonly consumed items are unlikely to rise after VAT is implemented.

The study, according to reports, covered items from wheat flour, pulses and edible oil, to readymade garments, toilet soaps and textiles. Perhaps the Andhra Pradesh Government can undertake a study to back up their stand.

The Empowered Committee has exempted 36 items from VAT. There are to be two rates of tax, but effectively there will be more, as gold and jewellery have been subjected to one per cent, and there is a list of goods subjected to `special rates' like the 70 per cent on all liquors, 32.55 per cent on petrol and aviation motor spirit and 21.33 per cent on diesel oil. The special rates will be at the point of first sale in the State.

The exempted items range from agricultural implements like manually operated or animal driven to unbranded bread and salt, and "water other than aerated, mineral, distilled and water sold in sealed container.''

The inference is obvious -- all packaged water and what is sold as mineral water will be taxed, just as all branded salt and branded bread.

This list essentially leaves out all "unbranded stuff,'' whether it be fruit and vegetables or meat, fish, prawn or milk, curd and butter milk. It does sound ironical that anything branded is being brought under VAT, against the background of Governments propagating the use of processed food and fruits. In fact this has been identified as an area of huge potential by even consultants like McKinsey. But then the argument has been that these fall under the `value added' products category.

Then there is a list of goods under 93 categories subjected to 4 per cent. Goods other than those specified in these schedules are taxed at 12.5 per cent or what is called standard rate or `revenue neutral rate (RNR)'.

What effect will VAT ultimately have on the economy? States claiming `implementation losses' will be clamouring for more compensation from the Centre.

Andhra Pradesh, for example has claimed a loss of roughly Rs. 750 crores, comprising Rs. 450 crores input rebates, Rs. 200 crores for reducing tax rates (as compared to the A.P. General Sales Tax regime), and Rs.100 crores in the export segment. While the Centre indicated a fund of about Rs. 3,000 crores to compensate the States, the latter are demanding a much bigger fund of up to Rs. 12,000 crores.

Reports continue to pour in of how different segments of economy will be affected by VAT.

A recent report on a study conducted by UTI Securities says VAT could lead to price rise in several sectors like cement, fast moving capital goods, petrochemicals, and consumer durables.

Streamlining of the distribution network is expected to lead to higher prices. Segments like automobile have to be analysed company-wise, as some manufacturers may be affected (those who source from outside their State), the reports say.

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