TAMIL NADU TO ADOPT VAT FROM JANUARY 2007

UNCLAS CHENNAI 001660 SIPDIS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EFIN PGOV IN SUBJECT: TAMIL NADU TO ADOPT VAT FROM JANUARY 2007 REF: A)05 CHENNAI 00694 B)05 CHENNAI 01777 ¶1. (U) Summary: U.S. companies have welcomed the Tamil Nadu government's announcement that it will adopt Value Added Tax (VAT) from January 2007. The companies remain apprehensive of the rules that will govern implementation, however. State officials assert that rule formulation will be consultative. Tamil Nadu expects to sustain a revenue loss of $51.6 million in the first year of the VAT regime. State finance officials remain optimistic that the central government will fully compensate any loss. Financial dependence on the center will increase the stake that Tamil Nadu's ruling Dravida Munnetra Kazhagam (DMK) party has in the survival of the central government, led by its coalition partner the Congress Party. End Summary -------------- Tamil Nadu announces a switch to VAT -------------- ¶2. (U) In its maiden budget presented on July 22, Tamil Nadu's DMK-led government announced its decision to adopt VAT beginning in January 2007, thereby reversing the anti- VAT stand it took during the May 2006 election campaign. U.S. companies have welcomed the announcement. The Chief Financial Officer of automotive component manufacturer Visteon told us the move to VAT is long over due and will ease some of the competitive pressures that manufacturers faced in the state. Tamil Nadu did not join neighboring southern states when they adopted VAT in April 2005. (Ref A) -------------- U.S. Companies apprehensive of VAT rules -------------- ¶3. (SBU) U.S. companies, however, remain apprehensive of the rules that will govern implementation. Ford India's General Manager for Government Relations told us that the rules will determine the "tax slab" into which various inputs will fall. The Deputy Secretary (Budget) for the Government of Tamil Nadu tried to assuage these concerns, saying that draft rules would be put on the web for stakeholders to study, and that the final version, which requires state legislature approval, will incorporate their suggestions. However, U.S. company representatives remain skeptical of the state government's assurances. -------------- --- Tamil Nadu expects center to offset revenue loss -------------- --- ¶4. (U) The Tamil Nadu government estimates it will sustain a revenue loss of $51.6 million ($1=Rs.46.55) in the first year of VAT operation. With the ruling DMK party in Tamil Nadu forming part of the Congress-led coalition at the center, Tamil Nadu bureaucrats expect their demand for full compensation will be met. They also point out that the experience of neighboring states where actual revenue loss was lower than estimated (Ref B). However, Prof. Paul Appasamy at the Madras School of Economics told us that because Tamil Nadu has a large manufacturing base the differential between estimated and actual revenue loss could be much lower than elsewhere. -------------- Switch will bolster Congress position -------------- ¶5. (U) Comment: The adoption of VAT will increase the dependence of Tamil Nadu on revenue transfers from the Congress-led central government to balance its books. This dependence will act as a further incentive for the DMK to ensure the continued survival of the Congress at the center. End comment HOPPER