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M.R. Subramani

CHENNAI, March 23

THE introduction of the value-added tax (VAT) system in the next few days has the tea and coffee growers and consumers wear a worried look.

"Though VAT system promises to revolutionise tax structures, coffee and tea, common man's beverages, are likely to be seriously affected by significant rise in end-consumer price," industry sources told Business Line.

Under the VAT system, essential products such as petrol, milk and vegetables fall under slab 1, attracting revenue neutral rate (RNR). Semi-essential products such as bread, edible oils and salt would attract 4 per cent levy, whilst non-essential products such as liquor will attract 20 per cent levy. Other products will attract 12.5 per cent levy.

"It is surprising that tea and coffee falls under other products. Currently, tea and coffee attract 8 per cent sales tax in most of the States. Placing it in the 12.5 per cent slab and VAT structure will push the total tax component to around 15 per cent," the sources said.

For example, if a tea packet has a notional sales value of Rs 100, it currently attracts sales tax to the tune of Rs 8.30. After the introduction of VAT, the tax component will increase to Rs 16.

Similarly in coffee, the current tax structure is Rs 5.20 for a packed with notional sales value of Rs 100. Under VAT, the component will almost treble to Rs 15.

"Inclusion of tea and coffee in the 12.5 per cent VAT slab will drastically affect its affordability among all segments. Consumers will have to shell out more for these essential daily cups," the sources said.

The structure will also have a bearing on the efforts of the plantation sector, which is striving to innovate in marketing its products, according to the sources. "For example, we are making available tea in 25 paise packs which helps the lower strata. What will happen to such efforts once VAT comes into effect?" the sources wondered.

Stating that the tea and coffee markets have been declining and undergoing tremendous pressure, the sources said the industry would not be able to draw any advantage from the input credit system that would form a critical component for VAT's successful implementation.

"Credit from input taxes can only be offset in States where the products are manufactured. Production of tea and coffee are restricted to a few States only whereas the consumption is nation-wide," the sources said.

While this is one of the grey areas of the proposed system, the other is how the level of documentation of billing of each transaction would be handled.

The sources also pointed out to a recent survey that showed 45.3 per cent of households with income less than Rs 3,000 a month and 69.4 per cent of households with income between Rs 3,100 and Rs 5,000 consuming packaged tea.

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