The Hindu : Tamil Nadu / Chennai News : VAT affects growth rate of revenue collection in Tamil Nadu

Online edition of India's National Newspaper
Monday, Aug 27, 2007
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Tamil Nadu

Tamil Nadu - Chennai

VAT affects growth rate of revenue collection in Tamil Nadu

T. Ramakrishnan

CHENNAI: The introduction of VAT (Value-Added Tax) has not affected revenue flow to the State Government in absolute terms, but it has hit the growth rate of revenue collection.

VAT was introduced in the State on January 1, replacing the Tamil Nadu General Sales Tax (TNGST) Act. Till the end of July 31, the revenue collected by the Commercial Taxes department was Rs. 9,460 crore. For the corresponding period in 2006, the department netted Rs. 9,359 crore. The growth rate was just about 1 per cent.

This was a steep fall compared to the growth rate of 15 to 20 per cent recorded in the previous years when there was no VAT. For instance, in the financial year of 2005-2006, the growth rate in collection was nearly 20 per cent. The revenue collections are critically important to the State as they constitute nearly 70 per cent of the overall revenue collections and support several welfare schemes and infrastructure projects.

Senior department officials say that the current boom in economy is primarily responsible for the department being able to achieve the collection for the first half of 2007. However, it is expected that there will be a revenue loss on account of the introduction of VAT. Apart from the general sales tax, additional sales tax, resale tax and surcharge stand abolished under VAT. So, the loss will be much more for a major manufacturing State with high rates of taxation. To offset the compensation, the Union Government has been implementing a scheme since 2005-2006. According to the scheme, the compensation was 100 per cent in the first year (2005-2006); 75 per cent in the second year (2006-2007) and 50 per cent in the third and final year (2007-2008).

Since the State began to implement the scheme in January (which happened to be part of the second year), it was eligible for 75 per cent compensation for three months of the financial year 2006-2007. Chief Minister M. Karunanidhi has written to Prime Minister Manmohan Singh and Union Finance Minister P. Chidambaram to provide compensation at the rates of 100 per cent, 75 per cent and 50 per cent for the calendar years of 2007, 2008 and 2009 respectively. The officials are hopeful of a positive response from the Centre.

Contrary to apprehensions expressed by the trading community prior to introduction of VAT, the transition from the TNGST Act to VAT has been smooth, because of the thoughtful measures taken by the department such as dealer-friendly registration method, provision for self-assessment by dealers, abolition of renewal of registration as dealer under the new system and continuance of all tax exemptions granted under the old law, say the officials.

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