If the experience of other countries in introducing the value-added tax is any indication, both states and consumers have no reason to fear the new tax regime.
According to an International Monetary Fund publication, except Norway and the UK, all the 36 countries that implemented the value-added tax, mopped up higher revenues after the transition to the new regime.
Of these, 17 countries did not witness any immediate price hike attributable to the new tax, while the remaining countries experienced only a minor increase in prices. The change in prices were calculated after factoring in inflation.
The only notable exceptions were Uruguay, where prices rose 53 per cent, Peru (13.5 per cent) and New Zealand (6.5 per cent). Experts, however, feel these are only some stray instances because most of the 120 countries that shifted to VAT did not see any major price hikes.
Back home, a study commissioned by Karnataka in February 2002 revealed that prices of commodities were unlikely to increase despite a higher rate of taxation under the new tax regime, indicating that retail margins might be squeezed.
The study, which took into account the prices of about 12 items of common consumption, concluded that prices would be neutral on a basket of commodities largely because of the removal of the cascading effect of input taxes.
The study, which was based on the value-addition by a cross section of dealers, input producers, manufacturers, wholesalers and retailers, could apply to most other states since their sales tax rates were comparable to Karnataka's commercial tax rates.
In fact, value-added tax is not really a new concept in India. Several states have tried their hand at implementing the tax. Andhra Pradesh introduced the tax on some select items on April 1, 1995, only for resellers, with a 4 per cent input tax applicable to all manufacturers. Kerala also levied VAT on select commodities for resellers, which was later withdrawn and replaced with a double-point sales tax.
Madhya Pradesh introduced VAT on April 1, 1997, for dealers with a turnover higher than Rs 1 crore (Rs 10 million). However, except Maharashtra, no state has implemented the tax in the manner it has been planned now.
Maharashtra implemented VAT in October 1995 on certain items and provided set-off on input tax to manufacturers paying sales tax above 4 per cent. The state, however, withdrew the value-added tax and replaced it with a first-point sales tax on April 1, 1999, largely due to non-economic considerations, analysts said.