Govt plan to cut VAT hits GST roadblock

Ruchika M Khanna

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 Tribune News Service

Chandigarh, September 28

The proposed cut in the Value Added Tax (VAT) on three of the main industries in Punjab – hosiery, cycle and cycle parts and sports goods — has hit the Goods and Services Tax hurdle. With the state government not clear on what the base year for calculating the state’s own tax revenue will be taken by the Centre for reimbursement of losses suffered by the state with the GST rollout, the government seems to have developed cold feet over any drastic cuts in VAT. 

 Official sources said some ministers had expressed their reservations over cutting down the VAT on these three industries and the edible oil and sewing machine industries. If the proposal moved by the state Excise and Taxation Department were to be implemented, the state would lose an estimated Rs 200 crore annually in its nearly plateaued VAT collection. It was proposed to cut the VAT rate from 6.6 per cent to 3.3 per cent on all other items except edible oils (on edible oil, the government proposed to cut the VAT to 3.5 per cent). 

With the state government not clear if 2015-16 or 2016-17 will be taken as the base year for compensating the states for revenue loss, some state ministers felt that in case 2016-17 was taken as the base year, it would have a lesser VAT collection which would mean that the state gets less compensation from the Centre, once the GST is rolled out next year. Due to this, the Excise Department headed by Deputy Chief Minister Sukhbir Badal has decided to hold another round of talks with all stakeholders. 

Sources say talks had been held between top officers of the Excise and Taxation Department and the industry representatives, with the latter claiming that there would be no loss even after the GST rollout as industry sectors not taking CENVAT credit earlier will be taking CENVAT once GST regime comes into place. Gurmeet Singh Kular, president of Federation of Industrial and Commercial Organisations (FICO), who has been negotiating on behalf of the industry, said though initially the state wanted to make some industrial sectors VAT-free, they had opposed the move as it would have led to a loss of Rs 800 crore annually only from the cycle industry.

“Even with GST rollout, the cycle industry would be getting CENVAT credit, which it was not getting earlier, and thus the loss in VAT collections would be nominal,” he said. 

 Industry sources say over 90 per cent of the bicycles and sports goods manufactured in Punjab are sold outside the state, where these manufacturers pay 2 per cent as Central Sales Tax, and 4 per cent of the tax gets stuck with the state government treasury, which is refunded to them in the form of VAT refunds.