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Knowledge centre for MBA students. |
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VAT to have a detrimental effect on
tea, coffee prices & inflation rate October
2004 The much
awaited tax regularization system, VAT (Value Added Tax), which envisages
levying of taxes at every step of the products journey from supplier to
consumer, comes into effect across the country soon. While VAT
promises to revolutionize tax structures, one essential commodity - the
common mans beverage - threatens to be seriously effected by its introduction
through a significant rise in end-consumer price. The VAT system
has been designed to levy taxes on various product categories in four
segments. Slab I includes essential products like petrol, milk and vegetables
where no VAT would be applicable. Semi-essential products like bread, edible
oils and salt would fall into Slab II, where VAT of 4% would be levied.
Non-essential product categories like liquor fall into a de-merit category
where states will have the flexibility to apply a VAT rate and all other
products fall into a Revenue Neutral Rate (RNR) category where the VAT would
be 12.5%. It is
surprising, in this context, that tea and coffee, the common mans lifeblood
have been placed in the 12.5% category. Presently, sales tax levied on tea
and coffee is around 8% in most states. Placement of tea and coffee in the
12.5% category and the structure of VAT will influence the tax component,
pushing it to upwards of 15%. A significant part of this enhanced tax pay-out
is a result of the taxation of trade margins. It is
surprising that while other items of mass consumption including flour, pulses
and salt have been classified in the 4% category, tea and coffee find no
mention in this category. What makes this fact even more surprising is that
some items of niche interest such as raw cashews have been classified under
the 4% category, while tea has not. This
development is likely to have a drastic impact on the inflation rate since
tea forms one of the items on the Wholesale Price Index. A raise in prices of
tea & coffee would imply that the inflation rate would go up further. The tea and
coffee industries, just about stabilizing after a huge downturn, are still
facing challenges and battling crises on a variety of fronts. The plight of
the plantation workers, lakhs of who are facing challenges because of ailing
plantations, is a major problem that the industry is facing. This move
classifying tea in the RNR category is most likely to put further pressure on
the tea industry, furthering the plight of these plantation workers. The challenges
faced by the tea & coffee industry on VAT are compounded by the fact that
the industries cannot draw any advantage from the input credit system that
forms a critical component for successful implementation of the VAT system.
Credit from input taxes can only be offset in the states where the products
are manufactured. The production of tea and coffee are restricted to very few
Indian states, while the consumption is national. This is bound
to further effect the impact that VAT would have on the prices of tea and
coffee in the country. Several key
legislators and policy makers, including Mr. Ramesh Chandra (Member Secretary
of the Empowered Committee of State Finance Ministers on VAT) and Mr. Kamal
Nath, Union Commerce & Industries Minister, agree that the classification
of tea & coffee in the RNR sector is something that needs to be explored
very carefully and discussed at length. It is a
well-recognized phenomenon that tea in the north and filter coffee in the
south is amongst the sources of sustenance for the lower, lower middle and
middle classes. A recent IRS survey indicates that 45.3% of households with
monthly income under Rs.3000 and 69.4% of households in the monthly income
range Rs.3001-5000 consume packaged tea. So critical is the importance of
these beverages that during the cold waves in north The industry
has also been constantly innovating to help the lower sections of sections of
society enjoy the benefits of packaged goods. For instance, packaged tea is
now available in low unit price packs starting as low as 25p. This is helping
all strata of society, including daily wage earners. Inclusion of
tea and coffee in the 12.5% VAT segment would have a drastic effect on its
affordability amongst these segments of society. It would imply that the man
on the street will now have to shell out a lot more for the essential cup of
daily tea. Many states are worried about loss of revenues by classifying tea
& coffee in a lower VAT slab. However, effective collection processes and
enhanced consumption by placing tea & coffee in a lower VAT slab would
more than make up for any envisaged losses. On the other hand, with the
enhanced taxation effecting prices and, thereby, leading to decrease in
consumption, the backlash is expected to be felt across the industry, from
the planters upwards. So, while the legislators contemplate the
successful implementation of VAT, consumers of tea and coffee anxiously await
to learn of its ramifications on their living standards. |
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