First let me pen down the impact and then the reasons as it will make the reader to think as to what the shortcomings are and for the reader to get an insight into how these policies affect the common man.
It is upon the Government to ensure that the benefits of all policies should accrue to everyone without any inequality. The major problem with VAT is traders and customers are uneducated on its computation. Or a VAT department ought to be set up which takes care of imparting knowledge on VAT to all and in its subsequent computation and also to study the impact it has on the lives of the people especially those BPL (below poverty line). It should conduct surveys and make the information public and freely accessible by all.
Impact on Kerala Economy
Hike in prices of snacks like chips and other fried items-which are felt among ordinary people.
Hike in prices of writing materials (4% tax levied) like ink, eraser, paper, etc which are very commonly used goods by the students.
Hike in prices of medicines, especially life saving drugs (supposed to be exempted).
Hike in prices of medical equipment, (costs more when compared to electronic goods) as a 12.5% tax is levied so poor patients will find it difficult to pay the bills. [Recently Delhi & Karnataka Governments cut down the tax to 4%]
Processed goods: Retailers charge more than before.
Branded goods: They are under priced as traders resort to unethical business practices.
Spurious goods: They will tend to flood the market.
The traders from states where VAT is not introduced take advantage of the price differential, thereby flooding the Local Kerala markets with their goods. Moreover these products are of questionable quality.
Till date the shop owners were collecting additional tax from the customers without paying the Government.
The commodities which enter from other states are procured without bills which in turn are sold without bills to the consumers. This results in a heavy loss to the exchequer.
Quality of products manufactured in Kerala is affected as they abstain purchasing from states where VAT is introduced, and they suffice by procuring from very near areas, so as to reduce cost, but it happens with the subsequent reduction in quality too.
Food products entering from other states are relatively cheaper as they are transported into Kerala using clandestine methods which reduce their transportation costs.
An overall rise in prices in the state, mainly felt among the ordinary people. It was introduced in April 2005.
Reasons for implementation
VAT is scientific in developed nations like Europe not in developing nations like India which is characterized with a lot of Cottage industries, because it becomes unscientific.
VAT proposed lower prices, wide spread tax compliance and equitable tax collection.
VAT or value added system is a multi-stage consumption/production tax computed on the value of purchase/sales made at various stages of its business activity.
It proposed to bring maximum benefits to traders, businessmen and customers.
Impact on neighboring states
In Lakshwadeep, almost all articles are imported from Kerala (VAT state) and Karnataka (VAT state) which is going to bring about an increase in the cost of living without a consequent/subsequent increase in the standard of living.
Issue of bills should be made mandatory.
ISI should standardize the quality of consumables.
The prices prevailing on that day should be displayed in shops like groceries. (As in jewellery shops)
The Food & Civil supplies department should make a regular inspection of quality.
It is feasible to set up an institute for Food technology as in Mysore which examines different food samples so as to ensure quality standardization.
The Hindu, Saturday, June 4, 2005-Peoplespeak.kochi edition.Pg 2.