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Bangalore July 15 2013: Karnataka has the highest VAT (value-added tax) rates for industrial inputs among south Indian states. Industry is on tenterhooks about what chief minister Siddaramaiah might do to those rates in his budget on Friday. Some fear he might raise all VAT rates, including on consumer goods, to finance his social welfare schemes. 

"Some politicians have told us that the CM is planning to increase VAT," said R Shivakumar, president of industry association FKCCI. S Venkataramani, head of the indirect taxes and state finances committee of Bangalore Chamber of Industry & Commerce (BCIC), said the chamber hopes Siddaramaiah reduces the rates, "but our apprehension is they will be raised". 

Any increase will raise prices of almost all products - consumer and industrial - and make it less attractive for industry to invest in Karnataka. Industry prefers to manufacture where taxes are lower. 

With effect from August 2012, then chief minister Jagadish Shettar raised VAT rates by 0.5 percentage points to 14.5% (the rate that applies to most consumer products) and 5.5% (the rate that applies to most industrial inputs). This was done to finance drought-relief projects. 

Shettar then had said the rates were being increased for a period of one year. In his budget in February, he had reiterated that the rates would be restored to their original levels with effect from August 2013. 

A VAT hike discourages industry 

In Tamil Nadu, Andhra Pradesh, and Kerala, the upper VAT rate is now at 14.5%, but none of them has a rate as high as Karnataka's at the lower level that applies to industrial inputs. "Karnataka already has a low level of industrialization; it's the services sector that dominates. Any increase in VAT will only discourage industry further. Even a 0.5-percentage-point difference in tax in a large-volume business like automotive can make a lot of difference to the earnings of companies," said Venkataramani. 

Shivakumar said one effect of any increase in tax would be to push people to pay in cash and not take bills, adversely impacting the government's objective of raising taxes. 

BCIC president Harish H V said, "If the CM wants to raise resources, the right way is to improve compliance, the wrong way is to raise taxes, which will only further reduce compliance and hurt people who are compliant. Currently, there's a significant degree of non-compliance." Venkataramani supported the idea of raising property guidance value in areas where they remained below market rates as a way to increase collections.

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