The Hindu Business Line : TN budget presented — Switch to VAT after consensus

THE Tamil Nadu Government will seek a broad consensus on switching over to a Value Added Tax system before it introduces a Bill for that purpose, according to the Finance Minister, Mr C. Ponnaiyan.

Presenting the budget for 2005-06, he said that VAT is expected to replace sales tax, which is well within the domain of the State. Tamil Nadu's view is that there will be significant net loss of revenue as a result of shifting over to VAT. Though the Centre has indicated that it would compensate for the loss fully in the first year and 75 per cent and 50 per cent in the second and third year, it continues to be a worrisome aspect, he said.

Being a major tax reform with far reaching implications, it is important that all sections of the trade and manufacturers support the change. He wanted members to discuss the new system during the general discussion on the Budget to arrive at a consensus. It has to be kept in mind that Kerala, Karnataka, Andhra Pradesh and Pondicherry are going ahead with implementation of VAT, Mr Ponnaiyan said.

The State Government has tried to protect the small dealers from the book keeping and assessment under the VAT system. It has hiked the registration limit to Rs 5 lakh from Rs 3 lakh under the general sales tax system. This will involve a revenue loss of about Rs 55 crore a year but will benefit 76,000 dealers who will be outside the tax net.

In addition, under a compounding scheme resellers with a turnover not exceeding Rs 50 lakh a year can pay one per cent of total turnover as tax. This will benefit over 74,000 dealers who will be given simplified system under VAT. All dealers can avail of a self-assessment facility, which would make it easier to comply with the tax system, he said.

Elaborating on the mechanism of VAT, Mr Ponnaiyan said that although there has been a determined effort to arrive at a national consensus on shifting over to VAT, there are apprehensions on its impact. With all inputs that have been taxed being given a set off and the abolition of additional sales tax, surcharge, and resale tax there will be a considerable loss in revenue.

It may be recalled that in 2003, the Tamil Nadu Government had pegged the loss in revenue at Rs 2,500 crore.

The tax rates will include a 4 per cent slab on essential and agricultural commodities, 12.5 per cent for all other goods and a special rate of one per cent on bullion and jewellery. Fuel and Indian Made Foreign Liquor will also come under a special category outside the purview of VAT.

There is also a limited list of exempted commodities with State Governments allowed to choose 10 items out of 46 commodities listed. In Tamil Nadu many items exempted under the general sales tax could not be included in the exempted list under the proposed VAT system. Though Tamil Nadu insisted that rice be brought under the exempted list, the Empowered Committee had agreed in January 2005 that State Governments would be given the option of giving tax exemption to foodgrains for one year followed by a review.

Tamil Nadu fears that there will be substantial revenue loss by switching over to VAT. It is estimated that the loss could be as much as Rs 1,400 crore, which it now gets through additional sales tax and surcharge. Both these components would have to go once VAT is implemented.

The State is also not convinced that just because VAT has resulted in increased revenues in Haryana, the same could hold true here. Gujarat and Maharashtra, both with large manufacturing bases, have also expressed similar fears. In fact, even smaller States that had expressed their intention to switch over to VAT from April 1, are waiting for the larger ones like Tamil Nadu, Maharashtra and Gujarat for a direction.

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