VAT to favour FMCG sector

With 21 states having implemented value-added tax and eight states still to adopt it, the impact of the new tax regime is seen largely positive for sectors like FMCG, paper and pharmaceuticals.

According to a study by brokerage firm Sharekhan, for the cement sector, the impact of VAT varies according to the region.

In Rajasthan, which has not implemented VAT, the pre-VAT rate of sales tax was 18.40 per cent. So, with a 12.5 per cent VAT rate, the cement industry in the state would actually gain on implementing it.

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The impact of VAT on the cement sector in other northern states where the rate of sales taxes was 8-12 per cent, is being seen as negative.

In West Bengal, the impact of VAT is positive for the sector since the pre-VAT incidence of tax was 20.70 per cent. In other eastern states where the rate of indirect tax was 12-13 per cent, implementation of VAT is expected to be negative for the cement sector.

In Maharashtra, where cement attracts 15.80 per cent tax, VAT will be positive for the industry, while in other western states where the rate of tax was 8-13 per cent, the new tax regime is seen as largely negative for the cement industry.

In south, where the incidence of tax in the pre-VAT regime was as high as between 16-24 per cent, VAT rate of 12.5 per cent will be largely positive for the cement sector.

The FMCG sector attracted CST in the pre-VAT regime ranging between 4-20 per cent.

Implementation of 12.5 per cent VAT is likely to have a positive impact on prices. FMCG companies also view this tax as a long term positive, since it will help them become more cost-efficient and competitive.

The various duties in the pre-VAT regime for the FMCG sector were as high as 30 per cent excise, 15-18 per cent sales tax and 4-8 per cent octroi, which was limiting product penetration as well as per capita consumption of products.

For the personal computer industry, the implementation of VAT is seen as largely positive since it will reduce cost of manufacture. Also, the price advantage enjoyed by grey market manufacturers over the organised sector will be reduced.

The pharma sector will have a marginally positive impact since it attracted a CST of 8-16 per cent in the pre-VAT regime. The VAT rate of four per cent will be an advantage.

However, lack of uniformity in taxes owing to some states not implementing VAT would cause some problems.

For the paper industry, VAT will have a positive impact in the south where the sales tax in the pre-VAT regime was nine per cent, while VAT rate is four per cent.

In other states where the pre-VAT sales tax rate was between four and five per cent, the impact will be neutral to negative.