With the decision to increasing basic VAT (value-added tax) rate drawing flak from the public and political parties, the Andhra Pradesh Government has begun a fire-fighting exercise.

On Thursday, the Government issued a statement arguing that it would lose financially if it failed to increase the rate to 5 per cent from 4 per cent. It put the loss at Rs 2,000 crore annually. “The Union Government has been compensating the States for the loss of revenue on account of reduction in the rate of Central Sales Tax from 4 per cent to 2 per cent. In order to reduce its burden, the Government has been advising States to raise the floor rate of VAT to 5 per cent,” a statement from the Chief Minister, Mr N. Kiran Kumar Reddy's Office said.

Following the Centre's advice, as many as 11 States including Tamil Nadu, Karnataka, Maharashtra, Gujarat, Orissa, Madhya Pradesh, Uttar Pradesh, Rajasthan and Karnataka, have raised the basic VAT rate to 5 per cent.

Andhra Pradesh, it pointed out, had kept the rate at 4 per cent ever since it was imposed first in April 2005. The Centre informed that the quantum of compensation would be lesser if the State continues to keep the floor rate at 4 per cent.

As a result, the Centre had deducted about Rs 1,089 crore during 2010-11. An equal amount was lost within the State for keeping the rate lower.

Effectively Andhra Pradesh has been losing over Rs 2,000 crore a year.

FICCI demand

Meanwhile, the Federation of Indian Chamber of Commerce and Industry (FICCI) has joined Confederation of Indian Industry and Federation of Andhra Pradesh Chamber of Commerce and Industry (Fapcci) to oppose the move to increase the tax rate.

“This could immediately reflect on the increase of inflation, especially on the essential commodities.

"The Government should remove new VAT structure on the essential commodities, foodgrains, and medicines,” Ms Sangita Reddy, Chairperson (AP) of FICCI said.

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