States raising VAT to drive a hard bargain on GST  

With less than a year left for the scheduled introduction of the Goods and Services Tax (GST), most states have increased their VAT (value-added tax) rates. The move is seen as an attempt to extract better compensation from the Centre for loss on account of GST rollout. This will also allow states to negotiate with the Centre for a higher State GST rate.

The industry fears this “blackmailing” by states may delay GST rollout beyond April 2011 and make things more difficult for the Union government when the Centre and states come to the negotiating table. It also fears this would lead to a higher GST rate, which should have been “around 14-15 per cent.”

“Increased rates of VAT in various states would now cause tougher negotiations between the Central government and the states due to their higher compensation claims. We fear that this might further delay the launch of the GST,” said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry.

 

States had not increased VAT rates in the last few years. The trend of increasing the rate caught up only after a task force of the 13th Finance Commission suggested a revenue-neutral GST rate of 12 per cent, much lower than the states’ demand of 18-20 per cent GST. The Finance Commission had also proposed a compensation of Rs 50,000 crore to states in case of any revenue loss due to the implementation of GST. States, however, felt it was too little and increased the VAT rate to allow them a better bargain.

“By increasing the rates states can show higher revenue collection pre-GST. This is similar to what happened before the introduction of VAT. Many states had increased sales tax and it helped them in getting a better bargain,” said Sujit Ghosh, partner, BMR Legal.

Since December 2009, 13 governments — Delhi, Andhra Pradesh, Chattisgarh, Goa, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Maharashtra, Punjab, Rajasthan, Uttar Pradesh and Uttarakhand — have increased the VAT rate by 0.2 per cent to 7.5 per cent. This has diluted the basic essence of VAT, which was to have a uniform rate on the same category of goods across all the states.

Ghosh said states were not legally bound to stick to a maximum of 12.5 per cent VAT. He said by increasing the rate, the states could shore up their revenues from a tax which is already on its way out and has lost significance.

In a recent letter to Delhi chief minister Sheila Dikshit, the Indian Soft Drinks Manufacturers Association had voiced concern on the impact of rate increase on their business, and said the hike would have to be passed on to consumers. The Delhi government has increased VAT to 20 per cent from 12.5 per cent.

“We appreciate and support the need for state governments to collect greater revenues through taxation, but a moderate hike will achieve the necessary objective while protecting the larger legal trade, interests of consumers and national security. We strongly urge policy makers to maintain a conducive taxation environment, which has been a key driver for the phenomenal growth of the sector,” said Ambrish Bakaya, director, Corporate Affairs, Nokia India.

Source: Business Standard, India, dated 15/05/2010