The Karnataka government’s sudden decision to increase two rates of value added tax will kill consumer demand for goods and lead to lower tax collections for the State, the Bangalore Chamber of Industry and Commerce has said.

It has urged the State to withdraw the proposal that, it said, would defeat its very purpose of mobilising more taxes from these segments.

The move, the Chamber said, came at a time when the industry is reeling under pricing pressure and showing flat or lower quarterly revenues. With the latest increase, the industry’s growth prospects would further suffer and affect consumers, it said.

Last week, the State raised the VAT rate by 0.5 per cent for two goods slabs with effect from August 1. The new rates apply to goods that fall in the slabs of 5 per cent and 14 per cent.

The rates were increased for a year to raise Rs 1,000 crore to ease the burden of Rs 3,200-crore shortfall on the exchequer likely to be caused by the loan waiver scheme for the State’s drought-hit farmers.

The 0.5 per cent hike looked deceptively small but would have a relatively big impact, said P.V. Srinivasan, chairman, Indirect State Taxes Expert Committee. Any higher revenue mobilisation from the higher rate would be negated by lower tax collection due to lower sales, he said.

“It is surprising that the government has increased the VAT rates midway through the year and at a very short notice. This will dampen the demand for several consumer goods including electronic items at a time of the year when the trade looks for seasonal pick-up in sales adding to the woes of already sluggish demand,” Srinivasan said.

S. Venkatramani, co-chairman of the committee, said, “A number of other States have the rates of taxes still pegged at 4 and 12.5 per cent. Service providers who do not make use of the input tax set-off may find it cheaper to procure goods from outside the State. This will certainly result in flight of trade and a huge loss to the exchequer. We hope that the government realises this possibility and withdraws the proposal.”

(This article was published on July 29, 2012)
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