Consumers will gain from VAT in the long run: FM

The burden on consumers on account of value-added tax in the long run will be lower than what is imposed by sales tax. But, the VAT can cause inflation if manufacturers do not pass on the benefits of input tax credit to the next stage of trading.

Replying to a question in the Lok Sabha today, Finance Minister P Chidambaram said the single-most important advantage of VAT was that it was non-cascading since it provided for a set-off.

Speaking at a seminar on VAT, the finance minister's adviser Parthasarathy Shome made the same observation and said so far, the government had not observed any inflationary pressure because of VAT.

"There is no theoretical reason why prices should increase. The manufacturing sector must pass on the benefits of input tax credit to the next stage, so that prices do not escalate," said Shome.

He tried to clear the confusion over maximum retail price. He said MRP was inclusive of VAT in case of every item, barring pharmaceuticals. Shome said prices should fall at the manufacturing stage as VAT rates on industrial inputs had been lowered to 4 per cent, compared with around 8 per cent in sales tax, and that there was hardly any distortion at this stage.

Shome said the empowered committee of state finance ministers had directed states to set up VAT monitoring cells that would assess changes in the general price level.

Asking traders to shun protests against VAT, Chidambaram said the manner in which VAT was implemented was no different from excise duty.

He said a number of state level taxes like state sales tax, turnover tax, purchase tax, additional sales tax, surcharge and entry tax would be subsumed in VAT in accordance with the decisions taken by the empowered committee.

On the VAT rates across states, Shome denied there were huge variations. "They have to give some breathing space to goods of local importance," he said about states whose taxes on certain commodities were lower than those imposed by other states.

On phasing out the central sales tax, Shome said the government would have to figure out how it would make up for the Rs 25,000-30,000 crore in revenue it raised from the tax if it was obliterated.

He said VAT forms and return-filing procedures needed to be simplified in some states and that all states should adopt uniform procedures to help inter-state trade.