If there is any further doubt that inter-state demand can be tax-inelastic, consider this. According to a recent study initiated by the empowered committee on Vat, 49% of Keralas Rs 6,800-crore tax revenue (Vat plus minor taxes like entry tax etc) emanates from just three commodities, liquor (mostly from Karnataka and Maharashtra), petroleum products including aviation fuel and automobiles (from Delhi, Pune or Chennai).
In liquor, factoring in excise duties, Kerala taxes are as high as 98%. Petroleum products incur tax in the 24-28% band. Transition to the Vat fold has brought down the automobile sales tax from 17%, but is still in the highest slab of 12.5%. Despite all this, in liquor and petroleum products, Kerala is Indias highest per capita consumer. Census 2001 says that Keralas motor density is the highest in the country.
Why has the state emerged as a captive destination for construction marbles from Rajasthan, textiles from Gujarat, white goods from Maharashtra and automobile ancillaries from Coimbatore The easiest rationale is the manufacturing vacuum in Kerala, says KN Harilal, fellow, Centre For Development Studies (Thiruvananthapuram). The fag-end of a long supply chain from other parts of India, Kerala had been pegging its SSI-driven manufacturing base (rubber reclaim units, food processing etc) on export-oriented demand, where it enjoys comparative advantage.
Kerala spends an estimated Rs 1,000 crore annually, on buying vegetables and eggs from neighbouring states for internal consumption. Ironically, it also exports vegetables from its own farms, to the tune of Rs 200 crore aircargo every year, to West Asian countries.
There are entry tax hassles in Kerala too. But if all documents are legal and above board, the registered dealer can claim set-off for the entry tax as input tax, under the Vat system.
At the same time, when taxes secretary P Marapandian claims there has been a phenomenal boom in trade volumes in the states Tamil Nadu and Karnataka interface, the question iswhy is this not reflected in the Vat tax revenue-growth Tax revenues have barely grown, at 4%, over a six month period in Kerala. Vat has failed to influence inter-state goods traffic in terms of a price fall too. This starkly shows up in construction industry sectors like cement with private trade cartels in play. When tax rates on cement fell from 12% to 4%, post-Vat prices climbed from Rs 165 per bag to Rs 195 per bag.
Beyond policy, the biggest hidden deterrent to selling in Kerala is the procedural wrangle at its checkposts. Very recently, the customs commissioner of Bangalore had forwarded to Kerala government a grave complaint of Karnataka-Kerala traders that the Walayar checkpost (North Kerala) had been detaining even customs-sealed export consignments. The National Transportation Planning & Research Centre estimates that over 22,000 passenger vehicles and 8,000 cargo vehicles per day enter Kerala through 12 checkposts. In low-shelf life commodities, the red tape at checkposts could be costly. And, going by the traders feedback, Walayar checkpost, more economically buoyant than any manufacturing base in Kerala, hardly shares the gung-ho hospitality of the states average consumer.