Dealing another blow to citizens already reeling under rising prices, the State government’s decision to increase VAT (Value Added Tax) by 0.5% effective August 1, will further push up cost of household essentials like tea, coffee, confectionaries, toiletries, detergents, automobiles, furniture, cement and spices.

The abrupt decision, and is allegedly brought about by the severe monsoon deficiency, came as a surprise to the manufacturing industry, represented by the BCIC (Bangalore Chambers of Industry and commerce) and the FKCCI (Federation of Karnataka Chambers and Commerce).

There are two slabs currently under the Karnataka Value Added Tax (KVAT) Act, 5per cent — which will now go up to 5.5per cent — comprising IT products, capital goods, industrial inputs and household goods like spices, tea, coffee and matches. The 14 per cent tax slab, henceforth 14.5per cent, comprises MRP products, most of which the average consumer uses on a daily basis.“The manufacturing industry is reeling under terrible recession, bank interest rates have soared from 10 per cent to 14 per cent and the government has reacted by adding an extra burden on the manufacturing sector. It is almost too much to bear,” said Mr Shiva Shanmugam, president, FKCCI.

The government’s revenue projection of Rs 27,000 crore from the manufacturing sector was met with a surplus of Rs 900 crores, which makes this decision even more absurd, feel the various chambers of commerce. “Our economy has already rolled down to 5 per cent growth and it is at this juncture that the government makes a decision like this," added Mr Shanmugam.

This sudden increase, felt Mr B.T. Manohar, chairman, State Taxes Committee, FKCCI, would result in trade diversion. Manufacturers would simply go to neighbouring states like Kerala and Tamil Nadu to buy their capital goods at a rate of about 2 per cent, instead of the 5.5 per cent they have to pay here. They fear this will give unregistered traders and businessmen a new lease on life. “Only businesses which give consumers bills will be affected,” said Mr Manohar.

Meanwhile, the BCCI has also expressed its disappointment over the abrupt change. This will dampen the “already sluggish demand” for consumer goods, including electronic items, at a time when trade is looking for a seasonal pickup. Mr S. Venkatramani, co-chairman of Indirect and State Taxes Expert Committee, BCIC, said, “Ironically, the increase in rates of taxes is certainly good news for trade and industry. There are a number of states where the rates are still pegged at 4 per cent and 12.5 per cent. Therefore, service providers who do not avail input tax set-off may find it cheaper to procure goods from outside the state,” he said, echoing the views of the FKCCI.

The estimated target for the year 2012-13 has been upped by Rs, 2,150 crore to Rs 31,150 crore, with an additional estimate of Rs 1000 crore. “An estimate is one thing, but facts are facts and we feel that this added estimate will not be met,” said Mr Manohar. “The government should have called for a discussion with the FKCCI and the BCIC first. We are always ready to help the poor farmers, but things are tight as it is.”

The technicalities are plenty, but the bottom line is, consumers are likely to find themselves even more strapped for cash in the days to come.