A nationwide value added tax regime from April 1 may have come under a cloud with Kerala joining Delhi in deferring its scheduled implementation, one thing is, however, sure: VAT will not lead to a huge increase in retail prices.
Consumers in most western and southern states can actually look forward to a reduction in the prices of some goods. In other states, including Delhi which is most vociferously opposed to VAT currently, any increase in some product categories will be marginal.
Why? Under the new tax regime, most items will attract a general VAT rate of 12.5 per cent. This means that nearly all the items that currently fall in the sales tax brackets of 8 and 12 per cent will be reassigned the 12.5 per cent VAT rate.
Also, all industrial inputs and essential goods will attract a 4 per cent VAT, a rate that is roughly similar to current rates for most items.
Consequently, the only worry should be for those commodities that are in the 8 per cent bracket since these would be taxed at 12.5 per cent after April 1. These include milk products, tea and coffee, electric bulbs and toothpaste.
Analysts, however, say that despite this, there is a strong possibility of prices being largely stable following the transition to VAT.
Here's why. The 8 and 12 per cent sales tax are only the minimum stipulated (or floor) rates. Most states actually levy sales tax at far higher rates.
Also, since VAT is expected to subsume a variety of imposts -- sales tax, work contract tax, lease tax, entry tax, purchase tax, turnover tax and additional excise duty -- the final incidence of tax on most commodities would not be substantially different when the effect of all these taxes is discounted.
Southern and western states are the ones that tax goods at rates higher than the minimum sales tax rates. For instance, Gujarat levies a 12 per cent sales tax on milk products, 15 per cent on tea and coffee and electric bulbs and Maharashtra levies a 13 per cent tax on bulbs and tubelights. All these items are supposed to be taxed at 8 per cent under the existing sales tax regime.
Similarly, Andhra Pradesh and Kerala levy a 20 per cent tax on toothpaste and Tamil Nadu imposes a 16 per cent tax on the item. Since toothpaste will now be taxed at 12.5 per cent under VAT, prices are bound to drop.
In most states, the actual sales tax is much higher even for commodities like calculators, typewriters, kerosene.
For example, states like Delhi, Haryana, Madhya Pradesh, Punjab, UP and Rajasthan tax calculators and typewriters at 12 per cent. For non-rationed kerosene, Delhi charges 12 per cent, Haryana and UP 10 per cent while Punjab charges an outrageous 20 per cent.
These items would strictly attract a rate of 4 per cent after VAT, which is a sure sign of which way the prices would go.
On the whole, Delhi consumers are expected to be major beneficiaries for two reasons. One, Delhi's sales tax rates are mostly close to the floor rates.
Second, because manufactured goods largely come into Delhi from outside and the halving of the Central sales tax from 4 to 2 per cent would ensure that the actual increase in retail prices is marginal.
Overall, analysts believe that for commodities for which the VAT rates are no different from the present sales tax rates, there could be a decline in retail prices because the cascading effect of taxes is plugged.
Also, VAT will do away with the price cushioning that is implicit in the current minimum retail price system. This is because the incidence of taxes paid in the entire retail chain would be clearly documented, giving manufacturers little leeway to increase retail prices by manipulating the incidence of tax.
