Last-gasp jitters, but states brace for VAT

The Centre's idea of making India "a common market" by implementing value-added tax (VAT) is finally bearing fruit.

Even if eight states stay out, at least the progressive states like Karnataka, Andhra Pradesh, Tamil Nadu, Maharashtra and Pondicherry are ready for VAT.

Even among the converted, however, some are suffering from last-minute nerves as the D-day, April 1, approaches.

In Karnataka, a reiteration of intent in the 2005-06 state Budget, which spelt out the state's VAT preparedness, sent the right signal to both industry and trade.

Declared Siddaramaiah, the state's deputy chief minister and finance minister: "Karnataka is VAT ready and we plan to implement it from April 1, 2005".

Karnataka was in fact one of the earliest to get off the block. It drafted a VAT Bill in 2000 and passed it in 2003. "After the Act came into being, various committees and panels were formed like the VAT Project Cell and departmental VAT committees to determine the tax base, design policy for the new regime, develop business processes and human resources to facilitate a smooth switchover. In addition, the government took technical assistance from consultants in the United Kingdom," said Ashok Kumar Manoli, commissioner, commercial tax department.

Trade and industry chambers in Karnataka have all welcomed the state government's decision to stick to the schedule for bringing in VAT but the satisfaction is not hundred per cent. Much of the grouse centres around what remains to be done in areas like central sales tax and entry tax.

Welcoming the move, KK Swamy, CII-Karnataka chairman and deputy managing director Toyota Kirloskar Motor, said the state was VAT-ready last year itself but it was good that many more states had come forward to implement it.

"With the VAT getting close to implementation, industry's long pending request is being fulfilled, and finally the embedded tax in the cost of products is to be relieved. This had been our request for a long time," he said.

The Federation of Karnataka Chamber of Commerce and Industries (FKCCI) is also concerned about categorisation of goods under the 4 per cent tax rate like industrial inputs, capital goods and IT products.

"The absence of the list has created some confusion among trade and industry in Karnataka," said BT Manohar, chairman state tax committee, FKCCI.

Orissa

Orissa is firm on implementing the VAT from April 1, risking the wrath of the ruling coalition partner, the BJP, and the traders in the state.

"We are not a party to this (BJP chief ministers') decision on the VAT and we are going ahead with the plan to implement the VAT from April 1", said Orissa Finance Minister Prafulla Chandra Ghadai of the Biju Janata Dal, the other partner in the coalition.

The state BJP unit is upset about the finance minister's stand. "The issue needs to be discussed afresh in view of BJP's stand,", said Manmohan Samal, the state revenue minister and deputy leader of BJP legislature party. Interestingly, the BJP was a party to the smooth passage of the VAT Bill in the Assembly in December.

Even as the tension between the two partners brews over implementation of the VAT in the state, the traders have upped their ante against the new levy by threatening to intensify their agitation if the government did not heed to their appeal to stall its imposition.

To press its demand, the All Orissa Traders' Federation had organised a state-wide bandh on March 19.

"The bandh was successful in many places with shops and commercial establishments downing their shutters in protest", said BK Mohanty, general secretary of the federation.

"But if the government still does not listen to us and goes ahead to implement the VAT, we will have no option but to intensify our agitation," he added.

The government, on the other hand is unperturbed. "The Orissa assembly has passed the state VAT bill on December 28, 2004 and it has been sent for presidential assent, which is expected by the end of this week", says Prafulla Ghadei, the finance minister. "After that we will issue the notification for implementation of VAT from April 1", he added.

The state, meanwhile, has launched massive campaigns to allay the fears of traders on VAT and educate themabout its benefits.

"We are already through with campaign meetings with traders at the range and circlelevel and now educating them in small groups at the ward level", says PK Jena, commissioner, commercial tax, Orissa. The state commercial tax department has also imparted training to its staff to make the switch over a smooth affair.

The department has roped in international consultants like Price Waterhouse Coopers (PWC) to train its officers on audit and risk management, detection and prevention of VAT related frauds and attitudinal issues.

Similarly it has requisitioned the services of Administrative Staff College of India to study and suggest measures for reorganization of the manpower and its redeployment.

The state-owned Orissa Computer Application Centre (OCAC) has been engaged to impart training to the state commercial tax officers on use of computers. Meanwhile, the pilot VAT software developed by Mumbai based Mastek Ltd has been successfully tested, Jena added.

Orissa has about a million traders of which only 64,000 are registered. As per the state VAT bill, traders with less than Rs 2 lakh turnover are not required to be registered.

Traders with turnover between Rs 2 lakh and Rs 10 lakh are put under the composition scheme in which traders will be given seven digit Small Retailers Identification Number (SRIN), though they are not required to maintain meticulous transaction records.

Traders under this scheme can chose not to pay VAT and claim input credit while being required to pay levies at the flat rate of one per cent tax on their turnover.

However, the traders with turnover of over Rs 10 lakh will have to pay VAT compulsorily. They will be allotted taxpayers' Identification Number (TIN), a unique number for administration of CST, VAT and entry tax at the range level.

To facilitate VAT administration for the high value traders, the department is setting up large traders' units under senior officers, Jena said.

But the traders complain that the process of account keeping will be too cumbersome to follow. "Think of a small medicine dealer being asked to keep the input tax and out tax records of 6000 products, manufacturing batch wise", says Prabir Das, general secretary of Utkal Chemist and Druggist Association.

Again, the price of products to the consumer will vary depending on the transportation and handling cost of the dealer; not to speak of the differential selling price of traders covered under VAT and those outside it, he added.

This will lead to unfair competition, Das said. Stating medicine is one commodity whose MRP is fixed by the government, he said, if at all, the government intended to levy VAT on it, they should collect the same on MRP at the first point, that is the stockist, instead of resorting to multi-point taxation.

Das, who is also the organising secretary of All India Organisation of Chemists and Druggists, claimed that his association has successfully lobbied with the governments of West Bengal, Rajasthan and Haryana in making VAT a first point tax in those states. Negotiations are now on with other state governments for similar measures.

"If it does not succeed, we have decided to stop all purchases from the whole sellers from April 1 and further intensify the agitation later", Das warned.

Shankarlal Bhoot, the chief of VAT committee of the Utakal Chamber of Commerce and Industry, feared that the prices of goods will go up following the implementation of VAT. The levy will be collected at several points before any product reaches the consumer.

Though there is only three tax slabs of one, four and 12.5 per cent and provision of set-off credit for the tax paid at the earlier stage, the whole seller will accrue the benefit of set-off credit without passing it on to the consumer, he said.

So the tax to the consumer will be much more than what it seems, he added. Bhoot questioned the wisdom of implementing VAT when the state's sales tax collection otherwise has shown a steady growth.

The sales tax collection in 2004-05 is expected to be over Rs 3,000 crore as against a target of Rs 2,700 crore. On an average, the ST revenue has gone up by 22 per cent over the last three years.

Orissa being a consuming state, 75 per cent of the tax is collected from the goods imported from outside. The state is expected to lose about Rs 165 crore towards the collection of surcharge on ST and luxury tax due to abolition of these two levies following implementation of VAT.

Besides, there may be some more loss due to reclassification of tax slabs for some items, said state commercial tax commissioner PK Jena.

"But the loss is expected to be made up with the widening of tax net and plugging of revenue leakages in the VAT regime", he observed.

Of the 550 items of trade, while 46 items are exempted from the purview of VAT, jewellery and bullion have been put in the one per cent tax slab, 50 essential commodities including medicine and industrial commodities in the 4 per cent slab and the rest items in the 12.5 per cent slab.

In Orissa, the high turnover traders, who constitute 15 per cent of the ilk, account for 85 per cent of the state's ST revenue. "The maximum resistance to VAT has come from these high value traders", Jena said and added, "surprisingly, during interactions it is observed that small traders have no complain about the new levy once explained about its nitty gritties".

Meanwhile, the commercial tax department has earmarked a budget of Rs 79 lakh to mount a media campaign to make people aware about the benefit of VAT over next couple of months. The funds for this are being provided by the UK government's DFID and the government of India.