VAT may push prices of drugs, manufacturing goods by 5%

Nisha Das
17 March 2003

Mumbai: The proposed introduction of the value-added tax (VAT) in Budget 2003-04 is likely to push the prices of drugs, commodities and other manufacturing goods by a maximum of 5 per cent.

VAT is proposed as an alternative to central sales tax (CST), which presently is 4 per cent. The finance ministry has agreed to abolish the CST in a phased manner. Till 2003-04, the states that will be implementing VAT will also be subjected to the 4-per cent CST.

But, during the first two years, VAT will be implemented as an additional tax and it may jack up the prices of manufactured goods, say senior officials with the Indian Drug Manufacturers’ Association.

Currently, states like Maharashtra, Rajasthan and Karnataka have decided to introduce VAT from 1 April 2003. Rajasthan will have 10 per cent VAT, Maharashtra 12 per cent and Karnataka 12.5 per cent.

While the government has exempted few items from VAT and has fixed the 4-per cent rate on basic necessities such as agricultural and industrial inputs, medicines and commodities, it will however attract a revenue neutral rate (RNR), a component of VAT. The RNR will be between 10 per cent and 12.5 per cent.

VAT will result in a 3-5 per cent increase in drug formulation prices in these three states to begin with, says an analyst with SBI Caps. Adds a senior ICICI Securities official: “The introduction of VAT will hurt profit margins of ACC, L&T and Grasim, as the fiscal exemption scheme enjoyed by certain cement manufacturers may be converted into sales tax deferral.”