Consumers will be required to pay at least 50 paise more on purchase of every Rs 100 worth of goods from August 1

The trade and industry representatives have expressed disappointment over the sudden mid-course correction in the Value Added Tax (VAT) rates carried out by the state government. The government has imposed a 0.5 per cent increase in VAT rate thereby effecting an increase from 5 per cent to 5.5 per cent, and from 14 per cent 14.5 per cent with effect from August 1, 2012.

The Bangalore Chamber of Industry and Commerce (BCIC), said, The 0.5 per cent hike may ex-facie look minuscule. But on the larger canvas if one analyses, over the last few quarters the industry has been reeling under pricing pressure resulting in quarter revenues either moving into negative or showing flat trends. With the fresh 0.5 per cent increase in the VAT, the industry will further suffer growth prospects and will affect people at large as they are already challenged in sustaining monthly budgets.
P V Srinivasan, Chairman, Indirect-State Taxes Expert Committee, BCIC, said: It is surprising that the government has increased the VAT rates mid-way through the year and that too giving a very short notice as the revised rates are with effect from August 1, 2012, itself. This will dampen the demand for several consumer goods including electronic items at a time of the year when the trade looks for seasonal pickup in sales adding to the woes of already sluggish demand.

S Venkatramani, co-chairman of Indirect and State Taxes Expert Committee-BCIC, said, there are a number of States where the rates of taxes are still pegged at 4 per cent and 12.5 per cent as against the 5.5 per cent and 14 per cent in Karnataka. Therefore, service providers who do not avail input tax set-off may find it cheaper to procure goods from outside the state.

This will certainly result in flight of trade and a huge loss to the exchequer. We fondly hope that the government realises this possibility and withdraws the proposed increase in taxes.

Meanwhile, BCIC apprehends that the higher revenue mobilisation on account of the higher rate will be offset by lower tax collection on account of lower sales.

The micro, small & medium industries which are already crippled with high VAT rates are now being squeezed further to bail out the farm sector, said A Vijayendranath, President, Karnataka Small Scale Industries Association (Kassia), the largest representative body MSMEs in the state.

The hike in VAT rates means, in effect, the consumers will be required to pay at least 50 paise more on purchase of every Rs 100 worth of goods from August 1. The third hike in VAT slab in the last four years will cover a wide range of commodities and categories such as industrial inputs, electronic goods, readymade garments, edible oil, construction materials, medicines, motor vehicles, IT products, and more. In other words, it would extend from a four-wheeler to daily groceries.

To cushion the blow, the chief minister has assured that the new rates would be in effect for only a year but there are few takers for this given that tax hikes are rarely restored. Putting the issue in the right perspective, Vijayendranath stressed that the 0.5 per cent hike may sound meager in numbers, but in reality it would hit the people hard, as it would result in the people paying more on every purchase every day as it targets purchases.In a minor concession extended to the textile industry, the government also proposed to withdraw 5 per cent VAT levied on plas tic monofilament used as fibre in the manufacture of textiles from August 1, 2012.

B P Shashidhar, Vice President, Kassia, said the hike in VAT slab intended to fund the loan and interest waiver scheme for the farm community was a disingenuous move as it showed lack of concern for the long suffering MSME sector even while responding to the concerns of the farm sector. The small scale industries are themselves are in need of a helping hand and instead of coming to their aid the Government has thought it fit to burden them further to bail out the farmers.

Kassia has appealed to the State Government to reverse the proposal with immediate effect or else the MSMEs would be compelled to go on an agitation, Vijayendranath, said.