Bye Bye Octroi, Hello LBT?

Thousands of Traders, Wholesalers & Retailers in Mumbai have taken to the streets this week to protest the Local Body Tax or LBT. LBT was introduced to replace the corruption ridden and very tedious Octroi Tax – a Tax levied on the entry of goods into a municipal area. Instead, now LBT will be imposed on the sale of goods. But traders are vehemently opposed to it. Ashmit Kumar finds out why?

Mohan Gurnani, President, FAM
“Now every trader is supposed to maintain accounts, give assessment, give returns to Municipal Corporation, subject themselves to the inspectors of the municipal corporation and therefore when you subject somebody to an inspector, you create an Inspector Raj” Protests against the proposed Local Body Tax or LBT are growing louder in Maharashtra. In Mumbai, thousands of traders have taken to the streets saying LBT will increase costs, cause harassment and stifle growth. Maharashtra is the only state in India that still levies Octroi – a tax that dates back to the Roman Empire. Last year the state decided to phase out Octroi and phase in LBT. But this is no happy bye bye… The levy of Octroi was introduced In Maharashtra in1965, with 21 Municipal Corporations levying the tax on the entry of goods in their respective municipal areas. Octroi entails physical verification of goods making for a cumbersome, time consuming and inefficient process. Moreover, with the levy being paid in cash, the system has been prone to leakages, corruption and political intervention. In 1987, a committee under Maharashtra’s former Chief Secretary P D Kasbekar recommended a local body tax in the place of Octroi.  After 17 committees and about 25 years of deliberation, Maharashtra has finally decided to implement LBT from 1st October this year. Yash Arya, Partner-Indirect Tax, Haribhakti & Co
 “I feel that LBT is a step in the right direction because Octroi is very old system and Octroi is levied only in Maharashtra. Earlier Gujarat was also used to levy Octroi but they also switched over from Octroi system by adding a percentage to their value added tax (VAT) rate” LBT places a levy similar to Octroi on the movement of goods and is also collected by the municipal body. However, the administration process is vastly different. Octroi is a one time tax imposed on the entry of all goods. Under LBT - traders and manufacturers will be required to pay 0.5- 7% tax only on goods sold, based on self-assessment on a monthly basis. Importantly, traders will be required to keep thorough records of the sale and purchase of goods for 10 years. Adding to that compliance burden is the need to maintain city-wise records. Uday Pimprikar, Partner-Tax and Regulatory, EY
“The ability for administration of this tax at the local areas is still suspect. The quality of administration for collecting these kind of taxes is not entirely upto the mark because of historical issues” Yash Arya, Partner-Indirect Tax, Haribhakti & Co
“The challenge is that currently also there are many number of indirect taxes for example, service taxes applicable on services, VAT is applicable in respect of sale of goods, excise is applicable in respect of manufacture of goods, custom is applicable in respect of import of goods, LBT will also add up compliance requirements significantly for the people, for the trade, which are importing goods into city limits of Maharashtra” Many states have over the last decade replaced Octroi with other taxes. For instance, Tamil Nadu imposes a flat rate of 2% as entry Tax. It has also resorted to an additional tax on Land and Building. Kerala has done the same. In Punjab Octroi gave away to no new tax. In West Bengal - Kolkata has adopted a hybrid of various initiatives to offset the loss in revenue from abolishment of Octroi. Revenue from entertainment tax and 16% of Sales Tax and the Development Grants are advanced to the local municipal corporation. Rajasthan has imposed a surcharge on sales tax while most recently, Gujarat abolished Octroi and instead hiked VAT rates by 1%. Uday Pimprikar, Partner – Tax and Regulatory, Ernst and Young
“Possibly Maharashtra at least for the first stage could impose or replace Octroi for most products apart from some amount of smaller category of products where they are concerned about that revenue & then possibly at a second stage, move on to VAT entirely when they get that comfort” Maharatshra presents a unique challenge to the administration – it is heavily dependent on revenue raised through Octroi. For instance, For FY12-13, the total Octroi Collections estimated were 6900 crores, which was over 45% of the total targeted revenue receipts of 15200 crores. Though there have been calls to ape the Gujarat model, BMC officials claim Gujarat is facing very low buoyancy in terms of revenue generation and that higher expenditure was beginning to hurt. Maharasthra is one of only two places to levy Octroi. The other place is Ethiopia. These words by the Maharasthra CM, Prithvi Raj Chavan add context to the heated debate on the introduction of Local Body Tax or LBT as an alternative to Octroi. While there is near consensus on the complete abolition of Octroi, given the administrative concerns, logistical issues and the heavy compliance burden, the jury, it appears, is still out on LBT being the best alternative. In Mumbai, Ashmit Kumar.