Delhi/Gurgaon: In many ways, the Park Plaza, a 45-room boutique hotel for business travellers, is perfectly located in Gurgaon, one of the premier hubs of business in India. Considered purely from the narrow perspective of the value-added tax (VAT), however, sitting next to a state boundary may not be the most ideal situation.
Ever since its phased introduction, beginning in Haryana in 2003, the rule of VAT has been viewed hopefully as an interregnum between the hugely varying systems of state sales tax and the more uniform, rationalized promised land of the goods and services tax (GST). VAT has removed many inconsistencies but not all, and across the length of supply chains such as the Park Plaza’s, gripes are common about those that remain.
Finance minister Pranab Mukherjee, in his budget speech on 6 July, is expected to make a mission statement on GST, India’s most ambitious indirect tax reform.
The introduction of GST from 1 April is expected to integrate the states into one common market and reduce costs for businesses such as the Park Plaza that are now taxed more than once when they source supplies from outside the state where they are located.
Situated as it is on the edge of Haryana, many of the Park Plaza’s supply chains extend across the state border into Delhi. Tracking one of these supply chains backwards is like encountering the course of a hurdle race—except that the hurdles are irregularly spaced and of uneven heights.
“As a hotel, for us, VAT applies only to our food products and groceries, not even to perishables such as milk or vegetables or fresh meat,” says Sunil Patial, assistant manager, materials, at the Park Plaza. The hotel duly levies that tax—12.5% on food, but 25% for liquor—on the bills of the 200-odd people who eat and drink every day in the bar or in one of the Park Plaza’s two restaurants.
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The Park Plaza’s problem lies in its sourcing of those groceries. If the hotel had been able to find a satisfactory vendor in Gurgaon itself, or even elsewhere in Haryana, it would also have been charged VAT and thus qualified for a VAT credit—the difference between what it levied and what it paid.
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“But there are almost no decent vendors here in Gurgaon,” says Jagdeep Garhwal, the Park Plaza’s finance manager. “Our own vendor keeps promising that he’ll start supplying from within Gurgaon, but that’s probably just to keep us happy.” But even the ability to source groceries from Delhi is an improvement from three years ago, Garhwal adds. “At that time, nobody was willing to deliver anything to Gurgaon at all, even against an advance!”
Now, when the Park Plaza orders its groceries every fortnight from Delhi, it pays the central sales tax of 2% that is levied on inter-state trade, and for which there is no VAT credit to be gained.
This is a disincentive for inter-state trade that Supriya Jain, a senior manager with the indirect tax division of KPMG, admits has plagued VAT.
“It puts the buyer at a disadvantage,” Jain says. “Even for the 2% rate, they need to fill up a form to get that rate. Otherwise, the much higher state-decided rate is levied, and there is no credit for that either.”
The Park Plaza’s vendor in Delhi, Gulati Traders, supplies groceries to “probably 80% of the five-star hotels in Delhi”, its owner Bipin Gulati says.
Gulati has his own crosses to bear. “Till the tax structure is uniform, it is pointless, because it has to impact the supply chain equally at every stage,” he says.
“If I buy a commodity from any part of India, and the tax on it is, say, 4%, I should be able to pass it on through the chain at a constant 4% right until the end product.”
Instead, since states make their own decisions about which commodities they consider essential and in which VAT slab (1%, 4% or 12.5%) they slot the remaining commodities, businesses such as Gulati Traders often encounter varying rates.
For instance, salt is an essential commodity and therefore tax-free in both Delhi and Haryana. In Delhi, pulses are exempt from VAT and cashew nuts are taxed at 4%; downstream from Gulati, in Haryana, pulses are taxed at 4% and cashew nuts at 12.5%. “This is why uniform taxes would be far better,” Gulati says.
One rung above Gulati in the supply chain is Delhi-based Dharamsons Marketing Ltd, which supplies Gulati Traders and at least 40 other companies with Tata Tea and Tata Salt.
Dharamsons is a consignment agent for Tata, so its tea—sourced from Tata in Assam—attracts no central sales tax. “The stock is merely transferred to us for sale, so there can’t be any tax on that,” says Ashok Aggarwal, managing director of Dharamsons.
Though it makes no difference to Aggarwal, Jain points out, tea is another product that can sit on shifting taxation sands. In Assam, unprocessed tea leaves are exempt from VAT; in Delhi and Haryana and some other states, the sale of these leaves is taxed at 4%.
Aggarwal observes that VAT has largely fulfilled one of its primary goals—to make accounting easier and free of the copious documentation and forms that often accompanied the state sales tax systems. “How this new GST will work, if it comes through, I don’t know,” he says. “I haven’t read anything about how it will operate.”
GST is intended, Jain says, to remove the type of taxation wrinkles that permeate the Park Plaza’s supply chain, combine within it excise and service taxes, and create more uniformity of the sort that Gulati craves.
But pessimistic uncertainty exists even about GST. “The government can’t implement excise and service taxes properly even now, can it?” asks Garhwal rhetorically. “So, who expects them to implement GST in all the states?”
This is the first of a five-part series leading up to the budget.
Mint uses the metaphor of the PIN code, as it did in the coverage of the general election, to bring vignettes of the 2009 budget to readers.