Neha Kaushik
Sindhu J. Bhattacharya

New Delhi, March 27

IF you are living in the South of the country, your household expenses may just get reduced post-April 1, thanks to the new VAT regime coming into force across 21 States.

But in the North you may not be so lucky. Though individual States are yet to come up with specific rules with regard to VAT, a preliminary analysis shows that implementation of the value-added tax (VAT) regime may actually result in a cut in prices of products such as refrigerators, air conditioners and some FMCG items such as soaps and shampoos in the Southern States.

The reason being that the current sales tax levels in the South for most consumer items are higher than in the Northern markets. In Karnataka for instance, there is a sales tax of 20 per cent on refrigerators and air conditioners and 16 per cent on items such as soaps/shampoos and television sets. This would be reduced to 12.5 per cent post-VAT.

Similarly, in neighbouring Kerala, refrigerators and washing machines attract 16 per cent sales tax, while shampoo and cosmetics manufacturers pay 20 per cent. This too would come down to a level of 12.5 per cent after April 1.

In contrast, most Northern States have a lower level of sales tax (less than 12.5 per cent) for consumer goods. In Delhi, for instance, the sales tax on consumer durables and electronics and a few FMCG items (including cosmetics) is 12 per cent and the increase would be negligible to 12.5 per cent. The scenario is similar in other Northern States including Himachal Pradesh.

"While the increase in tax may not seem significant for consumer goods in the Northern States, the impact may be more due to cost pressures arising out of implementation of VAT, including issues related to supply chain management," says an industry player.

Though the fine-print of the new tax regime is yet to be made clear, the exact impact of VAT on prices may not only vary from State to State but from one company to another. Functions such as procurement would have to be restructured, since companies will be compelled to source materials locally.

"A company whose suppliers are based in the State where its manufacturing facility is also located would benefit more under VAT. The cost impact would depend on how and from where the company is procuring its materials," points out an official from the Consumer Electronics and Television Manufacturers Association (CETMA).

However, a Dabur India spokesperson said that overall, there could be an increase in input costs "because of the hybrid tax structure, where sales tax and VAT will co-exist". Another FMCG industry expert said that only those companies that have created dummy intermediaries to pay lower sales tax would be hurt in the new regime or companies that fall under the 10 per cent sales tax bracket at present. But on the whole, the VAT regime is being seen as a welcome step in simplifying the tax maze.

(This article was published in the Business Line print edition dated March 28, 2005)
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