Identifier
Created
Classification
Origin
06CHENNAI1660
2006-07-27 08:01:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Chennai
Cable title:  

TAMIL NADU TO ADOPT VAT FROM JANUARY 2007

Tags:  ECON EFIN PGOV IN 
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VZCZCXRO2528
RR RUEHBI RUEHCI
DE RUEHCG #1660 2080801
ZNR UUUUU ZZH
R 270801Z JUL 06
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 9218
INFO RUEHNE/AMEMBASSY NEW DELHI 1842
RUEHBI/AMCONSUL MUMBAI 4817
RUEHCI/AMCONSUL CALCUTTA 0560
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

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

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Tamil Nadu announces a switch to VAT
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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)

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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.

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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

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