The introduction of value-added tax last month has not resulted in the expected decline in commodity prices, according to National Council for Economic Research. In fact, the high cost of production manufacturers now face because of the VAT may make prices surge.
"There is still confusion in the market regarding the VAT. In fact, the prices of some commodities like pulses that are outside the VAT list have increased. On the other hand, the expected price decrease is yet to be seen," Ncaer said in its quarterly report.
In its region-wise analysis, the report said prices in southern India were expected to fall as opposed to those in northern India.
The Crisis Over VAT: Complete Coverage
This is because sales tax for most consumer items was higher than the tax rate applicable post-VAT, the report said.
Ncaer said a manufacturer selling goods in several states would have to go through both VAT and sales tax documentation of respective states, which could prove to be cumbersome.
"Manufacturers would also be required to invest in maintaining record books as per the requirement of respective states and would have to fix different prices for different states considering their tax rates," the report said.
The report said the price disadvantage faced by northern India was less serious than the cost pressures arising out of the implementation of the VAT, including issues related to supply chain management.
The cost impact would depend on how and from where the company was procuring materials, it said.
A company whose suppliers were based in the state where its manufacturing facility was located would benefit more under the VAT, NCAER said. It warned that if producers passed a part of this cost of restructuring on to the consumer, prices might rise.
