With the budget session of Tamil Nadu State Legislative Assembly expected to start from July 22, the Tamil Nadu Pharmaceutical Distributors Association (TNPDA) has urged the state government for introduction of Value Added Tax (VAT) regime with multi-point taxation from the budget year 2006.

The TNPDA appealed the government to adopt the VAT system to avoid diversion of trade to the neighbouring states, in view of the higher rate of tax in Tamil Nadu. While states like Kerala and Andhra Pradesh, under VAT regime, concludes the rate of tax for medicines, surgical goods, syringes etc., at 4 per cent along with zero rated or exempted VAT conditions for lifesaving drugs, the sales tax rate for medicines in Tamil Nadu is 10.5 per cent, tempting the traders to divert operations to the neighbouring states.

"The flow of stocks from Tamil Nadu to the VAT implemented neighbouring states has emerged as a major disadvantage marking a substantial loss of 10 to 15 per cent of total annual drug sales, while the total sales of ethical drugs alone will be around Rs 2300 crore per annum in the state. We hope that the government will introduce VAT regime from budget 2006," commented a TNPDA source.

In a pre-budget memorandum to the Chief Minister of Tamil Nadu, the Association pointed out that the available stock of the life saving and essential drugs in the entire distribution chain has come down to the lowest of all times and the aggregate revenue gathered is relatively less, considering full potential of the existing trade in the state, due to non-implementation of VAT.

The taxation at the first point of sales on MRP will increase the carrying cost of the goods while the DPCO regulations curb subsequent cost hike in MRP, which will finally result in deficit to the distributors. In first-point taxation, the price of the goods would be loaded with the full rate of sales tax resulting locking up of huge working capital funds and ultimately, the medium sized distributors will be the sufferers according to the Association.

The memorandum suggested the government to submit draft provisions on VAT for public discussion, to put forward details of transactions for assessment and to clarify the set ups with examples for taking the industry and trade under consideration. The VAT implementation will also help the smooth execution of MRP inclusive all taxes regime in the state.

The Association also requested that the tax involved on the existing stock as on the transition date might be permitted to set off as VAT due within a period not exceeding three months from the date of VAT implementation and any unclaimed sales tax involved in closing stock of goods should be refunded at the end of these three months. The implementation should ensure that the heavy working capital in the form of sales tax on purchases is invested in the goods held by the trading community and by all the distributors and wholesalers of pharmaceutical goods.

It is to be noted that the Tamil Nadu government is ambiguous on introduction of VAT from the year 2006, though the industrial and trade bodies like Confederation of Indian Industry and Federation of Indian Chambers of Commerce and Industry (FICCI) has impressed the government for implementation of the regime. While the Minister for Electricity and Rural Industries, Arcot Veerasamy, commented recently that the implementation of VAT might take some more time, the Commercial Taxes Minister S N M Ubayathullah hinted that the state may soon move to the VAT regime, without revealing any details of the plan.