Inter-State VAT variations are proving to be the chronic ulcer for trade and commerce in the country. And the problems are visible. Will the yet to be implemented GST prove a breather? by Savreen Gadhoke
Kerala’s coconut farmers also faced troubles when the State Government levied 12.5% VAT on copra and other coconut products. Subsequently however, the government was forced to waive-off the tax to support exports to Tamil Nadu.
While Tamil Nadu levies a VAT of 12.5% on automobiles, marbles, tiles, refrigerators, ACs and timber, the State of Puducherry charges just 4%. So why would you buy your next car or your new twin-door refrigerator in Tamil Nadu? A VAT of 12.5% is levied on silk in Karnataka, J&K and Maharashtra, while in Delhi, Punjab, Himachal Pradesh, West Bengal, Andhra Pradesh, Goa, Bihar & Uttaranchal, the tax applicable is just 4%. Tyres and tubes attract 8% VAT in Haryana, while in Delhi they attract 4%. The stark difference shows up as on as much a burger at Kentucky Fried Chicken (KFC). Delhi levies a tax of 12.5% on a KFC snack, while the hungry buyers end up shelling out 13.5% more as tax in UP! Naturally, these differences in VAT hamper sales of certain commodities in select States. “Traders are at a disadvantage due to variations in VAT. If any commodity is charged 12.5% somewhere and the neighbouring states charges 4%, certainly, the higher VAT state will lose. And, if that commodity is a high value product, the difference is much. So, obviously the buyer will get it from the adjoining state,” says D. P. Nag, Secretary, Bengal National Chamber of Commerce and Industries. The culprit – the Constitutional Right that the States have, exercising which, they can to charge VAT. And this causes discrepancies in prices, despite there are friendly treaties and trade agreement between neighbouring States.
Be that as it may, VAT, which was implemented with a view to simplify the taxation structure has had negative impacts on certain businesses. However, efforts are being made by various State Governments to keep the VAT rates in sync with the neighbouring States. For instance, the Chief Ministers of Delhi, Haryana and UP are soon scheduled to meet to mull over how to reduce variations in VAT levied on diesel, so as to save the aggrieved diesel retailing lot of Delhi. But the truth is: despite efforts on the part of the State machineries, uniform tax remains the only working hypothesis. There is some hope with the Ministry of Finance’s target of implementing Goods & Services Tax (GST) by 2011, which will impose uniform tax rates at a national level. But as market experts believe, it seems a far-fetched dream for now. “At this juncture, no state can be tamed. The GST regime is showing some hope, but the road to that is not as easy as we have a Quasi-Federal Constitution. Under this, states enjoy some autonomy, particularly in List II, where states enjoy full rights to tax as per their whims. Will any state want to lose that autonomy?” questions Ramendra Nath Ganguly, Former Assistant Commissioner – Sales Tax, Ministry of Finance.
A uniform GST is a dream. The asymmetrical VAT is reality. Simply said, the answer lies in market economics, and only the simple Marshallian Law of Demand and Supply can perhaps wipe off what the traders hate for now.
With regional inputs from N. Asokan (Chennai), Anu Warrier (Kerala) and C. S. Bhattacharjee (West Bengal)
For more articles, Click on IIPM Article.Kerala’s coconut farmers also faced troubles when the State Government levied 12.5% VAT on copra and other coconut products. Subsequently however, the government was forced to waive-off the tax to support exports to Tamil Nadu.
While Tamil Nadu levies a VAT of 12.5% on automobiles, marbles, tiles, refrigerators, ACs and timber, the State of Puducherry charges just 4%. So why would you buy your next car or your new twin-door refrigerator in Tamil Nadu? A VAT of 12.5% is levied on silk in Karnataka, J&K and Maharashtra, while in Delhi, Punjab, Himachal Pradesh, West Bengal, Andhra Pradesh, Goa, Bihar & Uttaranchal, the tax applicable is just 4%. Tyres and tubes attract 8% VAT in Haryana, while in Delhi they attract 4%. The stark difference shows up as on as much a burger at Kentucky Fried Chicken (KFC). Delhi levies a tax of 12.5% on a KFC snack, while the hungry buyers end up shelling out 13.5% more as tax in UP! Naturally, these differences in VAT hamper sales of certain commodities in select States. “Traders are at a disadvantage due to variations in VAT. If any commodity is charged 12.5% somewhere and the neighbouring states charges 4%, certainly, the higher VAT state will lose. And, if that commodity is a high value product, the difference is much. So, obviously the buyer will get it from the adjoining state,” says D. P. Nag, Secretary, Bengal National Chamber of Commerce and Industries. The culprit – the Constitutional Right that the States have, exercising which, they can to charge VAT. And this causes discrepancies in prices, despite there are friendly treaties and trade agreement between neighbouring States.
Be that as it may, VAT, which was implemented with a view to simplify the taxation structure has had negative impacts on certain businesses. However, efforts are being made by various State Governments to keep the VAT rates in sync with the neighbouring States. For instance, the Chief Ministers of Delhi, Haryana and UP are soon scheduled to meet to mull over how to reduce variations in VAT levied on diesel, so as to save the aggrieved diesel retailing lot of Delhi. But the truth is: despite efforts on the part of the State machineries, uniform tax remains the only working hypothesis. There is some hope with the Ministry of Finance’s target of implementing Goods & Services Tax (GST) by 2011, which will impose uniform tax rates at a national level. But as market experts believe, it seems a far-fetched dream for now. “At this juncture, no state can be tamed. The GST regime is showing some hope, but the road to that is not as easy as we have a Quasi-Federal Constitution. Under this, states enjoy some autonomy, particularly in List II, where states enjoy full rights to tax as per their whims. Will any state want to lose that autonomy?” questions Ramendra Nath Ganguly, Former Assistant Commissioner – Sales Tax, Ministry of Finance.
A uniform GST is a dream. The asymmetrical VAT is reality. Simply said, the answer lies in market economics, and only the simple Marshallian Law of Demand and Supply can perhaps wipe off what the traders hate for now.
With regional inputs from N. Asokan (Chennai), Anu Warrier (Kerala) and C. S. Bhattacharjee (West Bengal)
Savreen Gadhoke
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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