Karnataka sales tax to be revised?

The State IT market is agog with rumors. While some quell the talk of sales
tax revision as just another rumor others are expecting happy times

The local IT market in Bangalore is abuzz with rumors that sales tax will be
brought down shortly. Business has taken a slight hit because of these rumors,
doing rounds since last one week now. In July, this year, the Karnataka
government announced an increase in the sales tax on IT hardware and software
products from 5.75 percent to 13.8 percent, effective from August 1, 2004.
Follow-ing the announcement, the IT fraternity, including its Czar Azim Premji,
talked about the impact of the sales tax hike on IT growth in the State
pro-testing the move. However, even the state-wide bandh and downing of shutters
yielded no result.

The Association for Infor-mation Technology (AIT) also submitted a memorandum
to the government explaining how tax hike will affect the local resellers and
business in the region as products from neighboring states of Tamil Nadu and
Andhra Pradesh (which enjoy low taxation) will have a free-flow into the market.
But this too yielded no result.

According to market sour-ces, the sales tax roll-back rumors started doing
rounds following a news that the revenue department has for-warded a note to the
State government stating: the revenue collection through taxes for the first
half of the year has registered a high. The department also brought to the
notice of the govern-ment that sales tax revenue from IT business fell
drasti-cally during the same period.

It is against this backdrop that the trader community is expecting some
corrective measures from the govern-ment. This led to the rumor that the
government would bring down the taxes shortly to improve the local business and
tax collection.

Meanwhile, the sales tax officials conducted a series of raids in the local
market, in the last couple of days. This led to panicking among tra-ders. While
a section of resellers link these raids to the fall in the sales tax revenue
collection another section attributes this to the intensive campaign by some
resellers. It is said that this section of resellers informed the government
officials that there is a heavy flow-in of inter-state products without paying
necessary duties.

However, the key resellers of the city are unsure about the revision in sales
tax and they put it down as mere rumors.

"Even if a tax revision is good for business, the pre-sent rumor has
delayed the buying decision of many resellers who are waiting for some happy
announcement from the government. Our sales have slowed down in the last
one-week and the market is wary of stocking goods as the drop in sales tax would
hit the margins in business. We have to really wait-and-watch the situation to
imp-rove," said a leading sub-distributor of the city.

Another reseller said, "It is just a ruse being used so as to avoid
taking stocks from the distributors. As it is the quarter-end, distributors
pressurize channel partners to take stocks to meet the numbers. Now, the
resellers are using this rumor as a mechanism to avoid being dumped with stocks.
It is nothing more than a rumor."

"We do not see any strong signs of government revising the sales tax.
However, a section of the resellers here are aggressively lobbying to get it
revised. As it is just three more months to go in the financial year we do not
think that government would bring down the taxes for the benefit of the
resellers," said a leading sub-distributor.

According to a retailer, "With VAT slated to come into effect in another
three months, Dharam Singh gove-rnment may look at revising the sales tax now to
improve its image. Of late, the Chief Minister is talking about bringing back
the IT image glory to the State and we expect him to do it."

Another retailer from the same market, pointed out, "The steep hike in
sales tax only helped unscrupulous players to flourish in the market, who
brought inter-state materials without pay-ing necessary tax and sold it
here." He also added, "We can quell this vendor support."

According to a leading system integrator said, "The present rumors will
die down within a week and we are sure that government is not going to make any
changes in the sales tax. Our Finance Minister is in no mood to do it and
business will be as usual soon."

Meanwhile, another tax issue is also bothering the local IT market. Recently,
the taxmen are investigating the shops to find out whether re-sale tax and
turnover tax had been paid by them. According to the resellers, the govern-ment
has announced some exemptions on certain IT products that were not clea-rly
classified and the sleuths are harassing the traders in the name of raids and
verification.

S Gopikrishna

Chennai