Date:14/05/2005 URL: http://www.thehindu.com/2005/05/14/stories/2005051406361600.htm

Business

VAT not inflationary so far, says government

Special Correspondent

Clarifies confusion relating to maximum retail price

NEW DELHI: Asserting that it has not noticed any inflationary pressure due to the introduction of value-added tax (VAT) by a majority of States, the Union Government on Friday sounded a word of caution saying that the new tax could lead to price rise if manufacturers do not pass on the benefits of input credit to the next stage. It also clarified that the confusion relating to the maximum retail price (MRP) maintaining that MRP was inclusive of VAT, except in the case of pharmaceuticals.

"MRP will be and should remain VAT inclusive except for pharma", Partharsarthy Shome, advisor to the Finance Minister, said while interacting with media persons on the sidelines of a Confederation of Indian Industry (CII)-organised seminar on VAT.

Referring to the ongoing confusion as understandable as it was a frictional period, he said the confusion would settle down soon and "as it (VAT) is not a static concept but a dynamic one, the empowered committee should be seen as a continuation process of VAT."

"The Finance Ministry has not seen any inflationary pressure due to VAT." If manufacturers do not pass on the benefits of input tax credit to the distribution stage, VAT could lead to an increase in prices, he made it clear.

Even as the wholesale price-based inflation rate fell by 0.24 percentage point to 5.67 per cent in the week ended April 30 after rising for four consecutive weeks and touching 5.91 per cent on April 23, the Empowered Committee Secretary, Ramesh Chandra, said that all increase in prices after April could not be linked to VAT. There were other factors such as surging oil prices, he said.

Mr. Shome pointed out that VAT rates on industrial inputs had been lowered to four per cent against around eight per cent in the sales tax regime and input credit was also given on them.

Prices, therefore, should fall at the manufacturing stage itself.

If this benefit was not passed on to the next stage — distribution — then VAT would turn out to be inflationary, he added.