'Direct selling set to get big boost'

VALUE ADDED TAX/ About 70% of total revenue expected to come from VAT assessees

With the new value added tax (VAT) regime set to come into effect from April 2005, debates galore on the perceived advantages and disadvantages to the states as well as the businessmen.

Also, the impact of the new regime on the commodity market is also emerging as an interesting topic. Direct selling "" the trend that is already visible in the FMCG sector "" is expected to receive a big boost with the introduction of VAT.

However, the larger picture still remains elusive, even for the Commercial Taxes department. With the Union government promising 100 per cent compensation for the anticipated loss of revenue on account of the new tax system in the first year, Andhra Pradesh "" with a projected loss of about Rs 1,300 crore revenue in the first year "" is fully geared up to switch over to the new method of taxation.

Highlighting the advantages of VAT in an interview with Business Standard, T Vivek, joint commissioner of the state commercial taxes department, who deals with VAT and other policy issues pertaining to the state taxes, allays fears among the business community over the new system. Excerpts.

What will be the tax scenario in the state after VAT comes into force from next April?

Today we roughly have four lakh dealers: out of which around 85,000 to one lakh assessees are expected to join the VAT regime (including the voluntary options) as per the three-tier norms fixed by the Empowered Committee of state finance ministers constituted by the Centre.

According to these norms, the businessmen whose turnover comes under the first slab of up to Rs 5 lakh would not be touched at all. The middle level businessmen whose annual turnover ranging from Rs 5-40 lakh would have to pay only the turnover tax of one per cent. Their number is roughly about 1.75 lakh.

Nevertheless, they have a choice to opt for the new tax system. Only those assessees whose turnover levels are beyond Rs 40 lakh will have to comply with the VAT norms.

Why VAT then, when both the state and the businessmen feel that the new system affects their interests?

It will take at least two to three years for the state revenues to stabilise and adjust to the new system. Coming to the apprehensions of the businessmen, in fact it would actually help them take credit for the taxes already paid (within the state) by them for the inputs bought, including the taxes paid for their machinery.

It is actually meant to eliminate the cascading effect of the tax burden on the end product. Due to the present single point taxation, the downstream commercial activity has not been monitored or made accountable.

This will be corrected. Transparency, self-policing, reduction in tax collection costs, elimination of unproductive paperwork is some of the other greatest advantages from the VAT.

Introduction of VAT is the need of the hour as our goods need much more competitiveness, especially with the WTO regime poised to further push the market economies towards the free movement of goods and services from 2005.

How would the market respond to the new tax system?

It is still to be seen. However, the direct selling mode is expected to get a big boost from the new tax regime. The MNCs already favour reaching out directly to the customers by eliminating about two to three middle levels of buying and selling.

Therefore, factory outlets or company showrooms will grow in number. The direct selling trend is especially expected to grow in the FMCG segment.

Since we are going to bring down the present 15-slab tax system to just two slabs of four per cent and 12.5 per cent, the highly taxed commodities like cement, which attracts 20 per cent sales tax, will greatly benefit out of the new tax structure.

How prepared is your department to implement the new system?

Our department has already completed a thorough exercise and studied the implications. The department has already got the new software compatible with the new tax system.

Tata Consultancy Services (TCS), as part of the Department for International Development (DFID) funding, developed the software. Now we are planning to incorporate the necessary changes to the software, as the new developments warrant. In addition, we are bringing the two international VAT consultants back to the state this month.

As the DFID stopped the funding, the department is bearing their costs. We are converting the existing dealer service centres operational in all the 25 divisions in the state to VAT counseling centres.

Both the Union government and the state government very soon will launch a media advertisement campaign aiming to educate the businessmen on the new tax system. As 70 per cent of the total revenue is expected to come from the VAT assessees, the department has set up Large Tax Payers centres for better coordination and assistance.