VAT punch floors trade

Trade volume slumps on rate confusion.

The prices of essential commodities like flour and vegetables have flared by 18-20 per cent in Delhi as wholesale trade has slumped to a third ever since the state switched to the value-added tax (VAT) regime on April 1.

Readymade garment prices are up by 20 per cent, while prices of industrial tools have risen by a quarter.

Although organised trading is carrying on as before, small traders have curtailed their activities in most of the 19 states that have decided to implement the VAT from April 1.

The worst affected are commodities, where the VAT is higher than the earlier sales tax. In Delhi, for instance, trade in leather belts and footwear of less than Rs 300 has come to a virtual standstill because of the rise in tax.

However, there is evidence that prices of electrical items, refrigerators and televisions have softened slightly in the southern states except Tamil Nadu, which has not implemented the VAT.

"The going seems to be smooth for the VAT in the south," Assocham President MK Sanghi said.

Traders have voiced their concern over the lack of uniformity in the VAT rates among different states. The VAT rate on key commodities like grain, petrol and tea differ from state to state.

Praveen Khandelwal, secretary general of the Confederation of All-India Traders, said after studying the VAT Acts of 15 states, he found that no two states had the same rates on all commodities. "The empowered committee on the VAT had talked of 553 items, but no state has all the items in its list," he said.

At the same time, trading in some commodities is expected to shift to states that have not signed up the VAT as the sales tax in these states is lower.

Spices and dry fruits, for instance, attract a sales tax of 4 per cent in Uttar Pradesh and Rajasthan, while the VAT rate in Delhi for such goods is 12.5 per cent. Similarly, opticals are taxed at 2.5 per cent in Rajasthan and 5 per cent in Uttar Pradesh, while in Delhi the VAT rate is 12.5 per cent.

Traders also point out various procedural problems they are facing under the new regime.

To begin with, traders are unsure of the documentation that needs to be done in the new regime. Most of them need to do it manually as they do not use computers. There are about 30 million small traders in the country and only 10-15 per cent of them use computers, according to the Confederation of All-India Traders.

Two, several states levy an entry tax or an octroi that is yet to be integrated into the VAT structure.

Three, most of them are unsure when the state sales tax department will refund their VAT credit and their money may get stuck for long.

"Every trader knows that taking refund from the government is not easy," Naren Bhikhu Ram Jain, President of the Federation of All-India Traders' Association and Convenor of the Bharatiya Udyog Vyapar Mandal. However, the Delhi government has said traders can claim interest if their refunds are stuck for more than a month.

Four, traders are soon expecting a backlash from customers as the VAT has to be paid over and above the printed MRP. "Earlier, the MRP used to include all taxes, including sales tax. The consumers are not prepared to pay more," said MM Agarwal, president of the New Delhi Traders' Association.

At the moment, many traders are holding back in the hope that that the VAT regime will be rolled back. The Delhi government's decision to alter VAT on 190 items has given them reason to believe that more respite may come soon.

Meanwhile, the Bharatiya Udyog Vyapar Mandal has called for a countrywide bandh on April 29. Traders are planning to go an indefinite strike in Maharshtra on April 15. On the very next day, April 16, around 10,000 traders have decided to hold a demonstration in Delhi.

To tackle the problem, the empowered committee has asked states to give details about their respective rate lists as several representations have been received about different rates being imposed on similar items by different states.

The panel's chairman and West Bengal Finance Minister Asim Dasgupta will meet tax commissioners of states tomorrow followed by a meeting with finance ministers the day after.

Finance ministry officials said though a review of the existing three VAT rates of 1 per cent, 4 per cent and 12.5 per cent was not on the agenda, the matter could be taken up at the meeting of the empowered committee if the states decided to raise it.

States like Delhi have already said they want inclusion of an 8 per cent VAT rate.

Confusion Rules

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• The VAT rates differ from state to state
• No deadline for states to refund VAT credit
• Trade may migrate to non-VAT states with lower sales tax
• Entry tax yet to be integrated with VAT
• Customers will resist VAT over and above MRP