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Who benefits from VAT?

Salil Panchal / Morpheus Inc in Mumbai | April 14, 2003

There are conflicting studies and reports of which sectors will benefit and which stand to suffer when the Value-Added Tax regime comes in; whenever it does.

According to a senior economist with a leading state financial institution: "The trading community has a fear that this regime will increase their liabilities, while consumers are also apprehensive that prices will rise. However, from an administration point of view, if implemented well, the trading community will find it easier to do business in India."

Auto, energy sectors stand to gain

A latest J M Morgan Stanley report says that the impact of VAT is likely to be mixed for various sectors.

The automobiles and energy sector could stand to gain while the consumer goods sector may appear to be negative.

"The impact on cement, metals and pharmaceuticals will probably be neutral," it adds.

In consumer goods, the research house estimates that there is likely to be an increase in sales tax of 2-3 per cent.

Automobile and auto parts will attract VAT at the standard 12.5 per cent, while under the current tax system, companies pay duty ranging from 8-15 per cent and a central sales tax of 4 per cent on inter-state transfer. CST will come down from 4 to 2 per cent.

The auto manufacturer will be eligible for sales tax paid on inputs purchased within the state for credit, the report states.

In the case of cement, "If exemptions are withdrawn, Gujarat Ambuja's costs could increase, shaving off close to 35 per cent of its estimated fiscal year 2003-04 profits. This calculation assumes that the current mix of production and sales is maintained and VAT is implemented from the beginning of fiscal 2004," the report says.

Oil refining and marketing companies will get some benefit from marginal incremental tax rebates, the J M report says. Oil companies could further benefit if they are allowed rebates on the import parity pricing on crude oil, which is based on import tariff protection.

Over the past few weeks, the pharmaceutical, consumer goods and telecom industries have been hit due to the trading community not lifting stocks (following protests) over VAT.

Leading companies had reported 30-35 per cent lost business opportunities as a result of traders not lifting stocks.

The shift to VAT will impact not just government revenues, tax administration, the industry and trade, but also the common man.

The purchase of almost every product -- from sunglasses to a refrigerator, and televisions to laptop computers to jewellery --will not be possible without paying tax.

Under VAT, tax evasion will become difficult as there would be a streamlined accounting and audit trail and also because the dealer will not be able to claim tax credit for any tax paid on his inputs unless he collects tax on his sales.

What will the government gain?

The key issue to be understood is that several previous governments have pressed for the introduction of VAT, but have faltered in implementation and planning.

The political wrangles show that some states stand to gain in a major way.

While no clean figures have been placed at the table, it is clear that over the years there has been a huge amount of tax evasion across the trading community in several states.

"Even if one talks of 50,000 traders who have used loopholes in the system to evade tax payments of approximately Rs 10 lakh (Rs 1 million) annually, the sums expected to be brought back into the system runs into thousands of crore (billions)," an industry analyst says.

As stressed earlier, the VAT regime, if correctly implemented, could bring in huge revenues, which would actually reduce the fiscal deficit burden.

The government's borrowing programme could then ease and certainly the financially affected states could later focus on issues like poverty, healthcare and power transmission.

The only cause for worry is that fact that VAT is now a political issue and thus the deadlines may not be met.

Just how will VAT be implemented and will the deadlines be met? We will review this in the following article on Tuesday.

Part I: What is Vat? And why VAT

Part III: VAT deadline may extend to July

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