CII seeks withdrawl of VAT on MRP by Kerala Govt

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The Confederation of Indian Industry (CII) has written to Dr Asim Dasgupta, Convenor and Mr. Satish Chandra, Member Secretary of the Empowered Committee of State Finance Ministers on VAT seeking intervention of the Empowered Committee to persuade the Government of Kerala to withdraw the proposed amendment of the Kerala VAT Act which provides for imposition of VAT on MRP.

 

The Circular by Kerala Government dated 30^th March 2007 introduces a provision in Kerala VAT Act, 2003  provides for payment of a first point tax calculated on MRP printed on the packaged commodities covered by the Standards of Weights and Measures (Packaged Commodities) Rules, 1977.

 

Terming this proposed Amendment as 'going against the spirit of VAT', CII said that this does away with the concept of collecting tax at each point in the value chain, based on the value added at each point. CII added that it threatens to cause undue hardship to both industry and trade, apart from violating the basic principles of a Value Added Tax.

 

In its letters to the Member Secretary and Convenor of the Empowered Committee of State Finance Ministers on VAT, CII has raised 7 issues opposing this move: 

• The proposed amendment is a major deviation from the VAT structure agreed between the States.   
• The new provision attempts to levy the tax on a notional amount rather than on the actual sale consideration.  The current retail trade environment across the country is highly competitive which has enabled consumers to pay prices substantially lesser than the printed MRP.  Levy of tax on MRP would therefore encourage dealers to sell products only at MRP to the detriment of consumers. 
• The Kerala VAT Act provide for exemption from levy to dealers with annual sales turnover lesser than 10 lacs and a flat compounded levy of 0.5% of turnover in respect of dealers with annual sales turnover lesser than 50 lacs.  If manufacturers / importers pay the first point tax on MRP, the burden would eventually fall on the small retailers who are otherwise exempt from the tax.
• The proposed amendment, when read along with Sections 8 & 11 of the Kerala VAT Act, would result in denial of Input Tax Credit on inputs used for manufacture in Kerala.  This would be against the spirit of VAT as well as discourage manufacturing operations in the State.  For example, the small manufacturers buying their industrial inputs such as ball bearings, welding electrodes, hand tools etc. in a packaged form within the State would not be able to avail of the credit of input tax included in the price. 
• The proposed amendment substantially relaxes documentation requirements for the subsequent dealers in the chain of distribution and this may encourage non-accounting of transactions. 
• It must be noted that in relation to several products and in particular FMCG products, even after the first or second sale is made and the goods enter the stream of trade, a retail sale may never actually take place.  This is so in the case of market returns due to damages, seasonal product take-backs (winter cosmetics / ice creams / squashes etc.), slow moving stock take-backs etc.
• The concept of MRP is applicable only for the retail trade and has no relevance for sales to institutions, CSD canteens, business organizations. 
• One of the guiding principles of VAT introduction was to usher in uniform practices across States in the areas of processes, tax rates, procedures etc.  This recent amendment in the State of Kerala would go against this principle by creating a "unique" fiscal environment in one State alone and lead to unaccounted stock flows across State borders, which will also result in lower tax revenues for the State Government.  This will also encourage unscrupulous manufacturers to bring in counterfeit products to fill in for the genuine tax paid products.

CII has further stated in its letters, that at a time when the country is poised for a transition into GST, this recent amendment in Kerala is a retrograde step in the context of the ultimate shared goal of a unified tax system across the country. "The recent amendment of MRP based first point tax does not benefit any stakeholder such as the State exchequer, trade or the consumers", said the CII

 

This provision has been made optional.  However, owing to various factors operating at the ground level, this option is more notional than real with the result that intense pressure is being brought upon the manufacturers / importers to pay the tax on the MRP.  This has led to an impasse in the State creating a stock out situation in the case of many goods.

 

Through the letters to the Empowered Committee of State Finance Ministers on VAT, the CII has sought its intervention by persuading the Government of Kerala to withdraw the amendment and restore status quo ante in the interests of revenue, trade and consumers in the State.

 

Earlier, a delegation of FMCG members of CII in Kerala met the Finance Minister of Kerala Dr Thomas Isac. The delegation was led by Mr P Ganesh, Chairman, CII Thiruvananthapuram Zonal Council. The minister responded by asking CII to organize a meeting of distributors and dealers to understand the matter better and has promised to study the impact of the tax on MRP on manufacturers and dealers. 

  

Sourced From: Confederation of Indian Industry