The Bangalore Chamber of Industry and Commerce (BCIC) has expressed disappointment over the sudden mid-course correction undertaken by the state government by way of a 0.5% increase in VAT rates. The new VAT rates effective August 1, 2012, will be 5.5% and 14.5%.

The industry body said: "The 0.5% 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." BCIC said that the increase in VAT will dampen growth prospects and affect people at large as they are already challenged in sustaining monthly budgets.

PV 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 itself. This will dampen the demand for several consumer goods, including electronic items, at a time when the trade looks for seasonal pickup in sales, thus adding to the woes of an already sluggish demand."

S Venkatramani, co-chairman, indirect and state taxes expert committee, BCIC, said: "There are a number of states where the rates of taxes are still pegged at 4% and 12.5% as against 5.5% and 14.5 % in our state. Therefore, service providers who do not avail input tax set-off may find it cheaper to procure goods from outside the state." Such a scenario, Venkatramani said, could result in flight of trade resulting in a loss to the exchequer.

BCIC said: "The higher revenue mobilization on account of the higher rate will be offset by lower tax collection on account of lower sales."