VAT effect: Industries may shift from Noida

VAT Bill reduces the 10-year tax exemption to five years.

With Uttar Pradesh deciding to implement value-added tax (VAT), industrial units like auto component firms that were attracted to Noida due to sales tax exemptions are likely to be impacted adversely.

A clause in the draft Uttar Pradesh VAT Bill says an industrial unit that is granted exemption or reduction in the rate of tax under the erstwhile law will now be treated as "a unit availing tax deferment".

In simpler terms, this means if a unit has enjoyed a tax break for five years out of the 10-year holiday period, it will have to collect the tax for the remaining five years and pay it after the end of the 10-year term.

In effect, blanket tax exemption to industries in locations like Noida in the state would be cut to half.

One consequence will be that companies may not expand capacity at their existing locations. Noida has become a hub of auto component units due to sales tax exemptions. Industry experts said many units could shift to Haryana or Uttarakhand due to the tax sops offered by these two states.

"Units in Noida are upset about the tax deferment, but it may not be feasible for them to relocate to some other place immediately," said Satya Poddar, partner, Ernst & Young.

The Empowered Committee of State Finance Ministers, an apex body of states on financial matters, is of the view that tax exemptions should be capped and turned into deferred tax.

"The deferred tax arrangement is aimed at ensuring that the VAT chain is not broken," said Subramanian Harishanker, executive director, KPMG.

Reducing exemptions and the expected improvement in compliance under the VAT regime will boost the state's revenues, experts say.

The VAT system will also improve the efficiency of industries in Uttar Pradesh as they will be able to get input tax credit, which industries in neighbouring states like Delhi, Punjab, Himachal and Haryana already enjoy.

"Lack of input tax credit was hurting industry in Uttar Pradesh. With input tax credit under the VAT regime, industrial growth will pick up in the state," said Nihal Kothari of PricewaterhouseCoopers.

Overall, the degree of compliance and administration will improve. The tax rate differentials will be small and price differentials on goods like refrigerator and washing machine will be eliminated, experts say.

The unauthorised trade taking place between Uttar Pradesh and other states will also come down due to uniform tax rates and the availability of input tax credit.

"In the long run, VAT will improve transparency and revenue collections," Poddar said.

Uttar Pradesh was the only absentee in the country's VAT chain. All states have reported around 21 per cent increase in revenue in 2006-07 after implementing VAT.