VAT to have cascading cost-push effect: Ficci

New Delhi, Jan 25 | Updated: Jan 26 2005, 05:30am hrs
The Federation of Indian Chambers of Commerce and Industry (Ficci) has called in question the claim of the empowered committee of the state finance ministers that prices of goods would soften after introduction of the value added tax (VAT). The VAT structure, as proposed in the white paper, Ficci said, is likely to have a cascading cost-push effect on prices of various commodities.

Ficci secretary-general Amit Mitra, in a letter to Dr Asmi Dasgupta, convenor of the empowered committee, listed 10 areas of concerns which needed to be immediately addressed to ensure a smooth transition to the VAT regime from April 1, 2005. Dr Mitra was responding to the white paper on state level value added tax prepared by the committee.

The white paper, it may be recalled, has emphasised that, with the introduction of VAT... overall tax burden will be rationalised...prices will in general fall. Ficci, however, pointed out that input stage credit, as proposed in the white paper, will be available only in respect of materials purchased within the state. No input stage credit will be available in respect of VAT paid on materials purchased out of the state. This, the chamber said, is likely to have a cascading cost-push effect.

Ficci also criticised the white paper for not providing a definite timeframe for phasing out the central sales tax (CST). The white paper only proposes a review of the CST in 2005-06. The chamber made a strong case for abolition of the CST to make India one common market. In case the government fails to abolish it, there should be full set-off for CST as in case of local sales tax.

Dr Mitra said in his letter, making CST non-vatable is an aberration in the VAT chain and is a deterrent for free inter-state trade and commerce.

Ficci also objected to the clauses in the white paper that seek to continue the entry tax and octroi after introduction of VAT. The chamber suggested that all local taxes including octori and entry tax (instead of making it vatable) should be abolished with the introduction of VAT.

Dr Mitra wrote, we also believe that entry tax imposed in lieu of octori should also be made vatable. Otherwise, such impositions would increase the cost of manufacturing in certain areas as compared to others.