VAT Happenings

The long delayed Value Added Tax (VAT) regime that has been implemented in India from April 1 this year has got off to a start in most states except some. Even as some fine tuning will have to be done as the regime progresses, and as the CST gets withdrawn in phases next three years, confusions, fears and resistance have taken their toll and the trade has reluctantly settled down to normal business. Resistance to change in any new tax system is natural and the trade was worried on account of increased paper work and accounting systems to be maintained necessitating increased expenses, which the smaller businesses were averse to. Offtake of goods was therefore low and the pharmaceutical industry too has seen very low sales figures in the past two months as the retailers were reluctant to stock up due to uncertainties surrounding VAT then. As a result, growth rates for February, March and possibly April are quite low and major companies have been seeing dips in value and volume terms in their domestic retail sales. The larger companies with better export sales could balance their overall top and bottom lines, but the same cannot be said for many other pharma companies. However, as far as implementation and payment of the VAT in the pharma sector goes, the pharma trade’s suggestion has prevailed with their demand for VAT on MRP at first point being accepted.

There is no denying the fact that the pharma trade lobby in India is a strong one, and in the case of VAT, have managed to pass on the headaches to the manufacturer. Their argument that the government gets its tax as a single point levy must have made sense to the state governments as collection at different stages in the distribution chain is equally complex with a large number of products. This is notwithstanding the fact that only seven or eight states agreed in principle to VAT on MRP at first point of sale and the trade body exerting pressure on other states to follow suit. Andhra Pradesh traders went into a strike for this demand and the state High Court warning retailers to open shop. The MRP issue has come to the rescue of the pharma traders as VAT is now payable at four per cent on MRP by the manufacturer, all other trade margins being calculated backwards in this industry. There is no cascading effect coming into play and the manufacturer recovers this amount from stockists who, in turn, claims it from the retailers who ultimately will pass on the VAT levy to the consumer. As long as there is uniform pricing of products throughout the country, this becomes feasible. This could again be a good model for other goods that have uniform pricing. Drug retailers are not willing to pay CST and asking manufacturers to absorb it. Manufacturers will have no option but to open C&F agencies or depots in each state and fill Form F to avoid CST and the trend of C&F agencies which was on the wane will again flourish. The next two or three months will reveal the VAT story of everything going smooth, and if there could be a marginal fall in drug prices too, which is most unlikely to happen.

—nvramamurthy@expressindia.com