CII for phased implementation of VAT in Tamil Nadu

The Tamil Nadu government must adopt an innovative approach for the smooth introduction of value added tax (VAT) in the state.

It should consider providing total tax exemption or introducing a low tax rate of 4 per cent on certain items to avoid an inflationary impact on the local economy, according to a study undertaken by the Confederation of Indian Industry (CII) called 'Imperatives for Implementation of VAT in Tamil Nadu'.

The government should bring traders under the VAT regime in a phased manner to give more time to small traders to improve their book keeping capabilities, the study says.

The CII report notes that the loss in revenue incurred due to tax exemption or lower tax rates will be balanced by the revenue gains from better tax compliance and a wider tax net.

The proposed VAT system for Tamil Nadu will ensure that there is no increase in prices as it proposes to have 1 per cent, 4 per cent and 12.5 per cent tax rates, as against the eight different tax rates envisaged in the present General Sales Tax Act, the study points out.

The system also proposes total exemption for around 46 essential commodities including rice. Besides, over 88 commodities will have a lower tax rate of 4 per cent. Petrol, diesel, kerosene outside the public distribution system, sugarcane will be totally outside the system of VAT.

In order to give small traders more time to improve their book keeping capabilities, CII suggests that the state government can include the larger traders in the first year, and gradually include more traders in the VAT regime.

The CII report also points out that the proposed VAT system for the state has set the registration turnover limit at Rs 5 lakh, as against the Rs 3-lakh limit set by the present Tamil Nadu General Sales Tax Act. This will benefit about 76,000 small dealers.

CII notes that since Uttar Pradesh, Tamil Nadu and the Union Territory of Pondicherry are yet to adopt VAT, the problem of incomplete implementation of the VAT system persists.

The different commercial tax rates prevailing among the states that have implemeted the VAT system and those have not, leaves scope for gainful discrimination.

The report observes that if Tamil Nadu doesn't implement VAT, companies will be forced to move to other states and the state will be deprived of a major chunk of its revenue.

Companies with pan national operations are unable to fully utilize the tax set-off facility offered under VAT, since input tax credit is available only to the extent of sales within the state from where the inputs are sourced.

On the specific disadvantages faced by the industry in Tamil Nadu on account of non-implementation of VAT, CII says that the cascading nature of taxes in Tamil Nadu could result in a cost disadvantage over other competing states such as Maharashtra, Karnataka, Gujarat, Andhra Pradesh and Haryana that have implemented VAT.

Auto and auto components, textiles and sugar are some of the key sectors that could be affected by the cost disadvantages, the study says.