Vipin V. Nair

Kochi, April 1

AS value added tax (VAT) comes into force in Kerala from Friday, rubber trade has moved into a lower tax regime which experts say will benefit growers and user industries alike.

Under the VAT, natural rubber will have only four per cent purchase tax instead of 12.65 per cent that existed till March 31, 2005. This drastic tax reduction is expected to reduce the tendency to import rubber by tyre companies and other consumers, driving consumption in the domestic market.

If the international rubber price is higher by over Rs 2.50 a kg, even duty-free import will become unattractive since the domestic rate plus the four per cent VAT and Rs 1.50 surcharge will still be cheaper than the import price, tyre industry sources said.

In the past, when domestic prices surged, tyre companies found imports more viable in view of the 12.65 purchase tax and surcharge in the local markets.

Rubber growers are set to benefit out of the new tax regime, as with increasing consumption, prices would tend to rise. On the other hand, consumers will pay lower taxes for procuring their raw material.

Although Kerala, which produces over 90 per cent of India's natural rubber, stands to lose over Rs 100 crore because of the lowering of the tax on rubber, VAT will completely eliminate the problem of inter-state smuggling of the commodity.

Because of the higher rate of purchase tax prevailed in the State, rubber used to be smuggled into neighbouring States such as Tamil Nadu and Karnatka where the tax was lower.

Tamil Nadu is yet to adopt VAT, but the eight per cent tax on rubber in the State automatically brings smuggling to an end. Karnataka has switched to VAT.

In the run-up to the VAT regime, rubber industry saw its own set of problems cropping up and disappearing. The State Government's decision to impose 12.65 per cent tax on the closing stock of March 31 made the traders frantically disposing of their stock.

Tyre companies and other consumers too postponed their procurement to April to benefit from the lower rate of VAT. Prices fell sharply.

The Government later changed its mind and announced that only four per cent tax would be levied on the closing stock of March 31. Prices recovered soon after the trade became active.

As a flipside to the VAT, some experts point out that small-time rubber dealers, who had never had to pay taxes as the purchase tax was charged on the buyer at the last point of sale in the State, will now have to keep books and accounts, perhaps for the first time and will suffer from complexities of taxation.

The process of bringing thousands of small dealers under the tax net is a complex affair, they argue. However, the Government has given six-months' time for the traders to get accustomed with VAT.

(This article was published in the Business Line print edition dated April 2, 2005)
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