Corporates face taxing times in VAT regime

Corporates, particularly in the fast-moving consumer goods, pharmaceuticals and consumer durables sectors, will have to rework their procurement patterns for the value-added tax (VAT) because of the continuation of central sales tax (CST) and the non-availability of VAT credit on inter-state transactions.

According to S Madhavan, executive director, PricewaterhouseCoopers, as the 4 per cent CST was not "VATable", corporates, whose vendors were located in another state, would either have to shift their vendors to the state of manufacture or ask them to set up a storage area in the state of manufacture so they could undertake a stock transfer instead of selling raw materials to obtain VAT credit. This might not be viable for smaller vendors, he said.

Similarly, corporates, which have centralised manufacturing, may also resort to increasing the number of local sales rather than selling outside the state since such sales will not get VAT credit.

Madhavan said pricing would be a key issue. "In case the corporates have to bear the CST, they may in some cases pass it on to their customers. Corporates might also decide not to pass on the costs to the customers and instead squeeze the margins of the retailers and the wholesalers, he said.

Madhavan said in some cases like pharmaceuticals, the rates under VAT would come down to 4 per cent from 8 per cent. This should positively impact prices.

He, however, did not rule out the possibility of a marginal increase in prices in the short run.

Bharat Goenka, managing director, Tally Solutions, an information technology company that provides software to implement VAT, is of the opinion that prices will increase in the short run not because of CST but because the government has allowed VAT on operating stocks.

"Once the opening stocks come down, the prices will also come down," he feels.

According to Goenka, most corporates are underestimating the impact of VAT. "Corporates till now are paying a single-point tax. But the price on which the tax is paid includes several hidden taxes paid at earlier stages. Under the new regime, VAT will become transparent. In the long-run, corporates will be better off," he says.

Vivek Mishra of Ernst & Young points out that over a period of time there can be a lack of cohesion between states and they may compete with each other in lowering their sales taxes.

He also says that the absence of a common definition between states of inputs or capital assets will create difficulties under VAT.

Kavita Rao, senior fellow at the National Institute of Public Finance and Policy, wants state governments to use the opportunity of introducing a new regime to re-work their sales tax laws.

"There is a tendency to merely re-work the existing sales tax provision to comply with VAT. They should overhaul the entire sales tax law," she says.