With the announcement of the implementation of Value Added Taxation (VAT) regime from 1st January 2007, the drug traders in Tamil Nadu are relieved from the dubiety over switching to MRP inclusive all taxes regime, though are concerned about the possible confusion during the transition period.

The State government, in its first budget session, had announced to introduce VAT with a threshold limit of Rs.10 lakh for exemption from registration and payment of tax under the State Act. This is expected to benefit around 45,000 small traders. The State would also request that the Centre compensate 100 percent of the revenue loss occurring in the transition period, the Tamil Nadu Finance Minister K Anbazhagan had said in his budget presentation.

Sources said the traders in Tamil Nadu have been considerably affected by the infiltration of stocks from the VAT implemented neighbouring states causing mismatch of prices for the same products in the retail outlets. According to sources with the Tamil Nadu Pharmaceutical Distributors Association (TNPDA),around 10 to 20 percent of the drug sales in the State have been affected by this issue. The state drug market is valued about Rs. 2,500 crore per annum.

Since the sales tax is levied at 10.5 percent in Tamil Nadu, many traders bring the same drug from VAT implemented states like Kerala and Karnataka where 4 percent taxation prevails. This helps the importers to get an extra margin of more than 6 percent through second sales, said sources. The implementation of VAT is expected to curtail such practices.

The Tamil Nadu Chemists and Druggists Association (TNCDA), an affiliate of All India Organisation for Chemists and Druggists (AIOCD), has welcomed the decision. The Association has directed the manufacturers to follow the contract with AIOCD for compensating the trade for the initial losses suffered, as the Association expects taxation at first point of sales as done while VAT was implemented in many other states.

The two major drug trade organizations in the state, TNCDA and TNPDA have taken contradictory stands on the mode of VAT taxation. WhileTNCDA is demanding taxation at the first point, TNPDA demands for multi point taxation system in the state.

TNCDA explains that the first point taxation is easier for the trader, as each point of the distribution chain can avoid keeping separate purchase and sales record for audit. They also say that the system has found to be successful in the neighbouring states.

TNPDA maintains that VAT system should have multipoint taxation, as the working capital will go much higher and the system may lack the characteristics of VAT in single point taxation. They point out that formulations form only 60 percent of the sales of most of stockists. If drugs are offered single point taxation as demanded by TNCDA, the rest of the 40 percent, which includes nutraceuticals, health drinks and similar products, will be under multipoint taxation. They argue that the system of keeping first point taxation for a section of sales and to have multipoint taxation for the rest of the products will cause further confusion.