VAT chain gaps worry firms

States opting out of VAT distorting uniformity, say corporates.

With less than a week into the value-added tax (VAT) regime, industry representatives today said there was a clear danger of the VAT chain being broken in states that had not signed up.

Anil Srivastava, vice-president (strategy and business development), Anand Group, said, "If the VAT chain is broken by some states, we may head back to the bad old days where traders will find illegal ways of avoiding higher tax."

He recollected how small Union Territories like Diu, Daman and Pondicherry used to report sales three or four times the demand, while the real consumption was happening in their neighbouring states like Gujarat and Tamil Nadu.

According to SN Rai, head (logistics and commercials), LG India, the biggest challenge faced by companies is to maintain two separate ERP systems for states implementing the VAT and those that are not. He pointed out that several key states like Uttar Pradesh, Gujarat and Tamil Nadu had not implemented the VAT.

However the Rs 50,000 crore consumer durables industry said some confusion regarding the VAT still prevailed at the trade level, which had affected primary offtake of products.

"All the companies are well equipped to integrate with the new system. But there is resentment among dealers and distributors because of low level of understanding. There was confusion over the taxation of stock bought in March but sold in April. That pulled down the offtake in March by almost 30 per cent," said Rai.

"It will take some time for the trade to start invoicing with input credit. The confusion over stock in transition is still there as traders fear that the process of government verifying the buying date of products and providing refunds could take up to six months," said V Chandramouli, vice-president (sales and marketing), MIRC Electronics.

Some players in industries like automobile component manufacturers, which have large retail exposure have also reported a drop in sales ranging between 10 per cent and 15 per cent. Unable to deal with uncertainty, some manufacturers also said the "VAT factor" would play a role in deciding in which state the next unit would be up.

Unlike traders, who have strongly opposed the VAT regime, players in the manufacturing sector have little doubt over the success of VAT. They said non-VAT states would have no choice but to join the bandwagon in the coming months.

Eight states in the country have not implemented VAT.

M K Pajan, advisor to the Ashok Minda Group, said that both retail and OE buyers are now demanding price cuts due to VAT.

"Most of the OE buyers have already written to us asking us to take a re-look at the price since VAT came into force. The same is true for retail sales too," he said.

He added that sales started dropping the January at the rate of 10 per cent every month and would continue to fall for the next few months. "Once the confusion over non-VAT is cleared, we expect sales to stabilise," he said.

K N Memani, president, PHDCCI said that there was still lot of confusion surrounding the VAT, particularly among the small traders and shopkeepers.

"The VAT department must work closely with chambers of commerce and other stakeholders in helping the business community understand VAT. We do not want VAT in 21 states to be withdrawn because a handful of states have not implemented it. It is just a matter of time, may be a year or so the whole nation will come under VAT," he said.

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VAT's in danger

THE STORY SO FAR...

21 states have implemented VAT from April 1

Eight states stay off the new tax

Sales drop since January this year. Trend expected to continue till June

LOOKING AHEAD

Industry worried over VAT chain being broken in some large states like UP, MP and Gujarat

Traders may find ways to beat the system

Industry confident that non-compliant states will fall in line