Within three weeks of switching to the value-added tax regime, Delhi has lost 50-60 per cent of commercial vehicle tyre business, 70-80 per cent of bullion trade, 60-70 per cent of weights and measurements and half of the plywood market to neighbouring states like Haryana, Uttar Pradesh and Rajasthan.
These states either have lower VAT rates or lower sales tax on such commodities.
The Crisis Over VAT: Complete Coverage
Situated close to states that have not implemented the VAT -- Rajasthan, Uttar Pradesh and Uttaranchal -- and two other states that have different VAT rates on several commodities -- Haryana and Punjab -- Delhi is seeing more diversion of trade than any other state in the country.
Taking advantage of the varying tax rates, traders with multiple sales tax numbers in the neighbouring states are booking orders wherever the tax is lower.
"I am selling more in Haryana and Uttar Pradesh. Even in case of goods sold in Delhi, the billing is done from Haryana," said a prominent hardware dealer.
Thus, within two weeks of the VAT regime coming into being, 50-60 per cent of commercial vehicle tyre sales that should have been recorded in Delhi have moved to Haryana. This is because a VAT of 8 per cent in Haryana is below Delhi's 12.5 per cent.
While tyre sales are moving to Haryana, the jewellery trade is going to Jaipur. Before the VAT was implemented, around 1000 kg of gold and 3-5 tonnes of silver were traded daily in Delhi resulting in a turnover of Rs 10,000-15,000 crore (Rs 100-150 billion) a year.
"The bullion trade here has come to a standstill after the VAT was implemented. We have stopped imports and most of the trade is happening through Jaipur," said Prem Prakash, general secretary of the Delhi Bullion Traders' Association.
This is because the VAT on jewellery is one per cent in Delhi, while it is 0.25 per cent in Rajastan. "It is low volume but high value business, hence the 0.75 per cent difference is substantial," Pravin Khandelwal, secretary-general of Confederation of All India Traders, said.
The Delhi hardware market was valued at Rs 25 crore (Rs 250 million) a month. But, after the VAT was introduced on April 1, it has posted a turnover of just Rs 50 lakh (Rs 5 million). The reason: as compared with a VAT of 12.5 per cent in Delhi, the sales tax rate in Rajasthan and UP is just eight per cent.
Rajesh Bansal, president of Indian Hardware Manufacturers' Association, said: "We are getting orders only from our dealers in Noida or Rajasthan. There are no significant orders from our wholesale dealers in Delhi."
The Delhi plywood market that is worth Rs 200 crore (Rs 2 billion) a month has lost half its business to Haryana.
"All bulk purchases have now shifted to Haryana. The only people coming to us are people who want goods on credit," said Narinder Gupta, president of Paharganj Plywood and Timber Dealers Association.
The Rs 100-crore (Rs 1 billion) per month tools, weights and measures trade, too, is suffering. Sales have slumped by 60-70 per cent in the last 15 days.
Traders from other states, who were earlier coming to Delhi as it is a centre of distribution, are now sourcing products from Kolkata, and local buyers are preferring Haryana to Delhi.
Owing to the tax difference, Delhi is fast losing its status as the centre for distribution of plastic goods and traders are finding it beneficial to source directly from Gujarat.
