The Telegraph
Since 1st March, 1999
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Price-hike jitters over VAT

Calcutta, March 31: Shops were closed today and will also remain closed tomorrow as traders protest against the imposition of value-added tax (VAT).

If this is the first unkind brush of the consumer with this taxation measure that takes hold in most parts of the country from tomorrow, the bigger jolt is yet to come.

VAT was to come into effect in Bengal also from April 1, but the government has said it is awaiting Presidential assent for the measure.

With the introduction of the new system of taxation, prices of many items of daily use will go up in a few months.

Value-added tax is meant to put an end to all other levies — local taxes like purchase tax, luxury tax, and entry tax charged by states —now collected on products people buy.

The system is already in vogue in developed countries because of its simplicity: a uniform rate of tax across the country. States now levy sales tax at varying rates.

“Value-added tax is the only long-term solution to multi-point taxation. The system will surely remove the cascading effect of taxes,” said Deepankar Chatterjee, chairman, eastern region, Confederation of Indian Industry.

However, prices will rise at least in the short term, as the new regime will not fully remove the cascading effect of taxes. Besides, VAT has three rates — 1, 4 and 12.5 per cent — with the highest rate being applicable to most products. Sales tax is now charged at 8 per cent in most cases.

“Almost all branded consumer goods will become dearer as they will attract tax at the rate of 12.5 per cent, higher than the existing average rate of 8 per cent. On top of this, central sales tax — applicable in case of inter-state sales — will continue at 2 per cent,” said an industry observer.

As such, the consumer will have to pay more — be it tobacco or textile, steel products or processed food — as manufacturers will pass on the burden of the increased tax. Staple food items like rice, wheat and pulses could also cost more as the VAT on these at 4 per cent is higher than the existing sales tax (See box).

Products you now purchase carry on the pack the message “Local taxes extra” because these levies vary from state to state. With a uniform rate across the country with VAT, will they now mention the VAT rate so that you know how much tax you are paying'

That is not going to happen in a hurry. “It will take some more time, not less than two years, before we can see a single VAT rate printed on the pack of a consumer good,” said a senior government officer.

This is because VAT is not making its debut all over the country in one sweep. Some states have still not embraced the concept. Besides, a nationwide computerised information network is necessary to track transactions anywhere in the country and verify transactions in case of inter-state sales. Till this is not in place, multiple taxation will continue and the full benefit of a uniform VAT structure cannot be realised.

Bengal has put its information network in place, which can track deals within the state but is now waiting to be connected to a countrywide system. The Centre is way behind in creating this information technology backbone with the first step in the tendering process having been taken only a couple of weeks ago.

The Assembly last week passed the VAT Bill, which was sent to the President for approval on Friday. “We are ready with the preparations at our end and once it’s cleared by the President’s office, VAT will be effective in the state. We expect that the new regime will yield positive results for everyone,” said C.M. Bachhawat, commissioner, commercial taxes.

Preparations are, however, far from “complete”. Confusion about the new system shrouds the commercial tax directorate at Beleghata. “I attended a four-day training session in 2001, but can’t remember what I had learnt,” said a senior tax officer.

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