The Hindu Business Line : TN trade, industry keeping fingers crossed over VAT

As the April 1 deadline, agreed upon by the States at meetings of an empowered committee, nears for switching over to value-added tax (VAT), will Tamil Nadu enact a legislation on time to facilitate the shift is what the trade and industry are worried about.

Their fears have not been allayed even after the Finance Minister, Mr C. Ponnaiyan, replied to the general discussion on the 2005-06 Budget. Presenting the Budget, the Minister had sought a consensus on this issue before the Government could move further. In his reply, the Minister laid down more conditions for the State to switch over to VAT.

The State wants to be compensated in full for the loss in sales tax revenue and from abolition of Central Sales Tax if it switches over to VAT. The State estimates that the revenue loss could exceed Rs 3,000 crore a year. The Minister also wanted higher devolution of funds from service tax revenue.

Manufacturers and traders were optimistic of VAT being implemented as the Governor's address to the Assembly had mentioned introduction of a VAT Bill.

However, they want the Government to put an end to the ambiguity and state in clear terms whether the new system will be in place and, if so, when. For, they need time to put in place systems in their organisations to conform to the new requirements.

Tamil Nadu's case is that it stands to lose out substantial revenue when the Central Sales Tax and additional surcharge on sales tax are abolished once VAT is in place. Moreover, it feels that the Centre is reluctant to share more of its revenues with the States.

For instance, Tamil Nadu contributes about Rs 27,000 crore to the Central exchequer but gets only a fraction of this in return. Tamil Nadu feels that other States such as Maharashtra and Gujarat, also with large manufacturing sectors, are also worried about the revenue implications of VAT.

The business community feels that the State Government is using this opportunity as a bargaining platform to seek a larger share of the Central revenue pie.

Those in the know are optimistic that the Centre will hit upon a compromise with the States. With Tamil Nadu seemingly slowing down on VAT implementation a number of States, including Maharashtra and Gujarat, are waiting and watching. As it is only a handful of States have tabled legislations on VAT. All this is bound to bring pressure on the Centre.

The industry and trade are keeping their fingers crossed, hoping that the State Government and the Centre reach a happy mid-point and pave the way for implementing VAT. This is not a hope nurtured by just the large players but also the mid-level and small traders.

A section of the small traders have expressed concern on shifting to VAT - concerns not always directly related to VAT, but sparked by fears of what the paper work could involve, possibilities of being caught in the income-tax net and harassment by tax officials.

Manufacturers and large traders point out that they cannot see this issue from just their point of view. Their businesses are propped up by hundreds of small traders in the retail chain.

A problem that affects the small traders affects the large ones too.

Ideally, they would like to see that the retail chain is left unruffled.

The Centre is even willing to exempt traders with incomes up to Rs 10 lakh from the VAT system.

Tamil Nadu simply cannot afford to hold back as Karnataka and Andhra Pradesh have expressed an intention to shift to VAT.

Not following suit will result in Tamil Nadu losing out with manufacturing shifting to either of these two States, where the VAT chain will make it more attractive.

However, trade and industry sources point out that substantial spadework has been done on having a VAT system and, hence, it will not require much time for the Government to enact a legislation and still adhere to the deadline.

A draft VAT bill is also ready and with the Assembly session likely to go on till mid-April, trade and industry sources hope that there will be some clear progress in the next few days.

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