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Kerala levy poses threat to national VAT structure
July, 14th 2006

The state level uniform Value Added Tax architecture could come under strain with Keralas decision to impose a 20% tax on a host of luxury commodities, like soft drinks, health drinks, paints, white goods and others.

The empowered committee of state finance ministers will be meeting this week to sort out the problem, as some other states are also getting tempted to impose a higher VAT rate on luxury goods, instead of the uniform 12.5 % agreed upon by all states so far.

Taking note of the developments, the industrial chambers have already approached the committee. But an official source in the committee said it is for the states to roll back the high rates. We have no statutory powers but can only listen to the views of each state, he said.

Industry has said different rates for the same goods would mean retail prices would have to be set separately for each state. This would negate the advantage of a common rate and the move towards a common market within the country.

According to indirect tax expert, S Madhavan, Executive Director, PricewaterhouseCoopers, the differential rates of tax could mark a return to the sales tax days. It would definitely be a retrogade step as the VAT rate of 12.5 % is supposed to be a uniform rate for all states. It cannot be interpreted as a ceiling or a floor rate, he said.

Kerala has imposed the higher rates on white good items such as ACs, refrigerators, washing machines and microwave ovens, building construction materials such as sanitary fittings, tiles, marbles and paints, aerated drinks (coke and Pepsi) and healthdrinks.

Speaking on the implications of the move, Ameresh Bagchi, professor emeritus, NIPFP said the states should have the autonomy to set the tax rates at whatever level they felt was appropriate. But within each state, he said, there should be a single rate of tax. In other words, Kerala should have tried to impose only one VAT rate across all commodities within the state, instead of the differential rates.

Speaking in the same vein, Satya Podder, VAT expert in Ernst & Young said the higher rate would hurt only those states which levy it. But he also acknowledged that this would erode the simplicity of the Vat architecture, which in turn could hamper the move towards developing a common market across the country. The real issue is whether despite the high rates, a state has the ability to charge those tax, he said. In the white goods sector, for example, there could be substantial leakages, he said.

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