Vat: resolve inter-state transactions

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: We manufacture products for the defence ministry, and supply to ordnance factories in our state, Maharashtra. We pay 4% tax against Form-H, plus the turnover tax and a surcharge. The state has abolished Form-H under the new Vat regime from April 1, and imposed 12.5% Vat on our products. Our competitors in other states could supply to the ordnance factories by charging 4% tax on Form-D, while being in the same state we will have to charge 12.5%. As the orders placed by the factories are on the basis of landed cost inclusive of taxes, we have become un-competitive in our state.

— Shanti Arms-Tech Pvt Ltd; Miltech Industries, Dhruv Containers, Priya Preci Comp; Shanti Metal Feb: Nagpur

The anomaly is not just Maharashtra specific, but prevails in most Vat states. This has arisen because of non-clarity on inter state tax / central sales tax. The first problem, as described by you, occurs when a unit, if supplying an item imposed with 12.5% Vat to infrastructure utilities and government agencies in its own state, would be at a disadvantage with units in other states, as the these consumers could buy the product at 4% CST. It would have trade diversions across the states with repercussions for large number of industries.

Second, the present CST rates in the Vat regime are set to increase the divide between the poorer, in particular, the Bimaru states and industrialised states. Most units in poor states buy their inputs from industrialised states and sell their output to them. With no set-off available for their input tax, they are likely to become un-competitive by 4-8%. Unfortunately, Vat has been implemented without resolving the complex issues of inter state transactions. Each state defines products differently. Convergence of Vat rates is still far away. The recent clarification that states have agreed to put same Vat rate on industrial input will not solve the problem because any product can be an input for another industry. It would start another debate as to what constitutes ‘input’, and what ‘output’. And, for the CST phase out, the central government has indicated a road map of two years. Two years could prove too long a period, for small industries to withstand the adverse inter- state trade flows.