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Confusion over VAT hits consumer durable sales

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VAT ALERT: Eating out has become a little more expensive after VAT implementation. Several outlets, like the Wimpy's in Delhi, have chosen to warn customers upfront. Ramesh Sharma
VAT ALERT: Eating out has become a little more expensive after VAT implementation. Several outlets, like the Wimpy's in Delhi, have chosen to warn customers upfront. Ramesh Sharma

Our Bureau

Mumbai, April 6

CONSUMER durable manufacturers in Maharashtra claim to have taken a 30-per cent hit in their March sales, in the wake of confusion over the implementation of VAT.

Expecting a cut in the prices of durables in the post-VAT regime, consumers preferred to rein in their purchases and wait for the transition. This also led to inventory pile-up with dealers, causing some panic in the industry, said a dealer in electronics goods.

Consumers expected a fall in prices as the VAT rate of 12.5 per cent is lower than the sales tax of 15.8 per cent in Maharashtra. But now, six days after Maharashtra joined the VAT club, consumers have begun to realise that the new tax regime will not impact the prices of durables in any way.

"In the first place, the confusion could have been avoided (by the Government). Now that the VAT picture is more or less clear, I think the inventory levels (with dealers) will return to normal in the next few weeks," says Mr D. Shiv Kumar, President of Consumer Electronics and Television Manufacturers Association (CETMA) and Executive Director (Consumer Electronics) of Phillips India.

Meanwhile, two leading FMCG companies here confirmed that they have not marked down the maximum retail price of their products following the switchover to VAT in select States. "This is a transition phase," one official said, pointing to worries stemming from the lack of uniformity in the current pattern of VAT implementation.

Neither company wished to be named. But, according to their officials, the acceptance of VAT by only some States hampered the original intent behind the tax reform. Further, even among those States which went in for VAT, there are disparities in the tax schedule, with the same product classified differently across State boundaries.

One product category in which the implementation of VAT has got off to a rather smooth start, particularly in Maharashtra, is medicine.

The State Government has agreed to VAT on the MRP at first point, a plea from the traders associations. With the average sales tax on medicines across the country being about 8.5 per cent, the implementation of VAT at 4 per cent would in effect mean that the price of medicines would come down. However, a host of other government directives may end up neutralising this benefit.

But the transition period from the previous tax regime into the VAT system is not without its hiccups. Pharma companies complain that the trade has been going slow in purchasing stocks. Also, for medicines purchased at the old tax rate, the trade has asked pharma companies to either take back these goods or compensate the traders.

According to Mr Daara Patel of the Indian Drug Manufacturers' Association (IDMA), transition pangs would dent the revenues of pharma companies by as much as 25 per cent.

(This article was published in the Business Line print edition dated April 7, 2005)
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