Inter-State VAT variations are proving to be the chronic ulcer for trade and commerce in the country. And the problems are visible. Will the yet to be implemented GST prove a breather? by Savreen Gadhoke
During the bygone month and a half, Kapil Soni, a resident of Gulmohar Park in New Delhi, has never visited a gas station in the capital city to refill his hatchback’s diesel tank. Not that his hatchback has a mileage that guarantees an on-road time that lasts six weeks, but he prefers to avail of the service rendered by a remote gas station in Ghaziabad (Uttar Pradesh) which falls on his way to office. Reason: The Value Added Tax (VAT) levied on diesel in Delhi was raised from 12.5% to 20%, effective April 1, 2010, which made diesel dearer by Rs.4/litre in Delhi. For Soni, a 33 year-old who belongs to the salaried class, that implies savings in excess of Rs.1,200 a month; talk about precious dimes!
This outflux of diesel buyers from Delhi has cost the petrol pumps in the capital city about Rs.350 million in net earnings within just the first month (April 2010) of the increase in VAT. As industry sources confirm, revenues of diesel sellers have dipped by 40% in Delhi and is expected to fall further by around 80%. Understandably, the worst affected are the oil shops that lie in the border areas of the capital. A field enquiry suggests that those in areas like Ghazipur, Anand Vihar (East Delhi) and Dilshad Garden (North-East Delhi) have seen their monthly revenues fall by as much as 70%.
There is another negative spillover. The month of February 2010 saw the minimum wage levels of unskilled labour being increased by 33.5%. At a time when revenues have fallen, it becomes hard to imagine how the gas station owners can adhere to the rule of wage increase.
So do they have an answer to this bonehead play? The gas station parties believe they do – retaliate. Adopting a demonstrative method, the Petrol Dealer’s Association (PDA) of Delhi and NCR has announced that petrol pumps in Delhi will go on a 24-hour strike every Monday, starting May 14, 2010, so long as the VAT increase is not annulled. As of date, there have been three such day-long shut downs at the pumps – on April 9, May 14 & May 24, 2010. The Association has also threatened to go on an indefinite strike from June 14, 2010, if its demands are not met.
The predicament of the gas station owners in Delhi is just one of such instances, where variable Inter-State VAT is bringing about great inconvenience to trade and commerce. While these variations have negatively impacted businesses in certain states, they have also given rise to smuggling and black marketing. This defeats the intention of introducing the very system of VAT in 2005. It was conceived with a view to make accounting more transparent, to cut trade barriers, curb tax evasion and boost tax revenues. Items were classified into various categories such as essential, nonessential, luxury items with taxes ranging from 1% to 20%. VAT rates for each State is decided by the individual State Governments, and this has led to non-consistency in the taxes levied on similar product categories.
Poultry is one example of how variation in VAT has affected the trade between Kerala and Tamil Nadu. Kerala has depended on Tamil Nadu for poultry supply, for decades. There was no State tax applicable on poultry till Kerala agreed to the VAT regime. Thereafter, consumers buying poultry had to pay 12.5% more on the purchase of poultry in Kerala, while the commodity was kept free of VAT in Tamil Nadu! The effect – during 2004, around 2 million live birds were transported from Tamil Nadu to Kerala, post-VAT, the trade almost came to a halt. This gave rise to smuggling of live birds from Tamil Nadu into Kerala to bypass VAT and earn that 12.5% on bottomlines by the traders. The act has become so severe and organised now that even after the strengthening of check posts on borders by the Kerala government, smuggling continues through parallel roads and country routes.
During the bygone month and a half, Kapil Soni, a resident of Gulmohar Park in New Delhi, has never visited a gas station in the capital city to refill his hatchback’s diesel tank. Not that his hatchback has a mileage that guarantees an on-road time that lasts six weeks, but he prefers to avail of the service rendered by a remote gas station in Ghaziabad (Uttar Pradesh) which falls on his way to office. Reason: The Value Added Tax (VAT) levied on diesel in Delhi was raised from 12.5% to 20%, effective April 1, 2010, which made diesel dearer by Rs.4/litre in Delhi. For Soni, a 33 year-old who belongs to the salaried class, that implies savings in excess of Rs.1,200 a month; talk about precious dimes!
This outflux of diesel buyers from Delhi has cost the petrol pumps in the capital city about Rs.350 million in net earnings within just the first month (April 2010) of the increase in VAT. As industry sources confirm, revenues of diesel sellers have dipped by 40% in Delhi and is expected to fall further by around 80%. Understandably, the worst affected are the oil shops that lie in the border areas of the capital. A field enquiry suggests that those in areas like Ghazipur, Anand Vihar (East Delhi) and Dilshad Garden (North-East Delhi) have seen their monthly revenues fall by as much as 70%.
There is another negative spillover. The month of February 2010 saw the minimum wage levels of unskilled labour being increased by 33.5%. At a time when revenues have fallen, it becomes hard to imagine how the gas station owners can adhere to the rule of wage increase.
So do they have an answer to this bonehead play? The gas station parties believe they do – retaliate. Adopting a demonstrative method, the Petrol Dealer’s Association (PDA) of Delhi and NCR has announced that petrol pumps in Delhi will go on a 24-hour strike every Monday, starting May 14, 2010, so long as the VAT increase is not annulled. As of date, there have been three such day-long shut downs at the pumps – on April 9, May 14 & May 24, 2010. The Association has also threatened to go on an indefinite strike from June 14, 2010, if its demands are not met.
The predicament of the gas station owners in Delhi is just one of such instances, where variable Inter-State VAT is bringing about great inconvenience to trade and commerce. While these variations have negatively impacted businesses in certain states, they have also given rise to smuggling and black marketing. This defeats the intention of introducing the very system of VAT in 2005. It was conceived with a view to make accounting more transparent, to cut trade barriers, curb tax evasion and boost tax revenues. Items were classified into various categories such as essential, nonessential, luxury items with taxes ranging from 1% to 20%. VAT rates for each State is decided by the individual State Governments, and this has led to non-consistency in the taxes levied on similar product categories.
Poultry is one example of how variation in VAT has affected the trade between Kerala and Tamil Nadu. Kerala has depended on Tamil Nadu for poultry supply, for decades. There was no State tax applicable on poultry till Kerala agreed to the VAT regime. Thereafter, consumers buying poultry had to pay 12.5% more on the purchase of poultry in Kerala, while the commodity was kept free of VAT in Tamil Nadu! The effect – during 2004, around 2 million live birds were transported from Tamil Nadu to Kerala, post-VAT, the trade almost came to a halt. This gave rise to smuggling of live birds from Tamil Nadu into Kerala to bypass VAT and earn that 12.5% on bottomlines by the traders. The act has become so severe and organised now that even after the strengthening of check posts on borders by the Kerala government, smuggling continues through parallel roads and country routes.
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Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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