Vat at what price

The Week - Economy :: By P. Sreevalsan Menon: New tax regime might benefit consumer in the long run

"Traders have been saying that the VAT regime, as envisaged now, will only make tax assessing and paying more cumbersome; the trader has to self-assess the tax, keep invoices, cash memos and bills. Then there is the fear of a visit from the �unfriendly� taxman."

Taxation experts, however, say VAT is good for the consumer as household expenses will come down by 4 to 8 per cent in the long run. This is based on the hypothesis that most people in the tax chain will bargain with each other for maximum benefits. The experts say consumers will start getting the full benefit of VAT a year after its implementation.

Before the advent of VAT, a manufacturer who made a product for Rs 100 sold it to the first dealer for Rs 112, inclusive of a 12 per cent sales tax, which he remitted to the government. He himself took the impact of the tax on raw materials. The first dealer then added his margin money, say Rs 20, and sold it to the retailer for Rs 132. The retailer would add his own margin, say Rs 30, and sell the product to the consumer at Rs 162.

The VAT regime is more transparent and documented. Under it, the input vendor charges local sales tax on goods sold to the manufacturer, who gets the same refunded against input and capital goods. He sells the finished article to the first dealer for Rs 104 inclusive of LST. The first dealer gets set off against the Rs 4 LST, but adds a margin of Rs 20 and pays VAT for it, which comes to 80 paise (4 per cent of Rs 20). The retailer adds his margin of Rs 30 and pays VAT of Rs 1.20 and the tax amount adds up to Rs 6. The final price, which the consumer has to pay, is Rs 156. The tax percentage varies between 4 and 12.5 per cent in the VAT regime.

So why are the traders upset? At each stage, the sale should carry an invoice. Thus, the manufacturer can monitor the selling price and can interfere if the traders inflate it. The consumer stands to benefit from the competition. In the VAT regime, the dealers will not be able to swallow any set-offs from the previous dealer.

The regime envisages documentation to plug tax evasion. That is what seems to be worrying the traders, who will have to keep tax invoices, cash memos or bills. Every registered dealer should issue to the purchaser serially numbered tax invoices and keep a counterfoil or duplicate of it duly signed and dated.

Traders are sceptical about the regime’s ability to curb corruption. "Look at the swoop down on corrupt tax officials in Delhi," said Vijay Goel, president of CAIT. "Revenues are bound to fall and the government will crack down on traders."

The Empowered Committee of State Finance Ministers on VAT had foreseen a problem specific to India: 94 per cent of the traders in rural India have a turnover of Rs 50 lakh or less. There is a compensation scheme for them: they are required to pay only 1 per cent composition tax and need not pay VAT or file returns. However, they cannot claim set-offs on the previous sale.

One immediate benefit is that a product will be available for the same price across the country. The prices of common goods will either stabilise at current levels or drop. The government has notified 550 commodities in the VAT list in two slabs. As many as 270 items including medicines and fast moving consumer goods attract only 4 per cent VAT and the rest 12.5 per cent. Two key areas, food and petroleum products, are out of VAT.

VAT will benefit the unorganised sector in special economic zones and export-oriented units since they will be granted either exemption from input tax or refund of the same within three months. Traders in this sector with an annual turnover of less than Rs 5 lakh are exempted from paying VAT. There are more sops in the offing. There are plans to raise the minimum turnover limit to Rs 10 lakh.

In Andhra Pradesh, the first state to endorse VAT, chemists and druggists downed shutters for a day as a mark of protest. In the melee, no one is telling the biggest player in the VAT episode about its benefits. The result: the consumer is keeping quiet whereas the traders, whose stake is smaller, are threatening to block the implementation of VAT.

Even before the Value Added Tax (VAT) regime came into being on April 1, India’s political heartland opted out of it. With BJP chief ministers of Madhya Pradesh and Jharkhand and Mulayam Singh Yadav of the vast Uttar Pradesh and J. Jayalalithaa of Tamil Nadu declaring ‘secession’ from the common market, it is clear VAT is not what it promised to be."