Why Has Mumbai Downed Shutters Against LBT?

Aurangabad has implemented it, Kolhapur has implemented it, so have Solapur, Ulhasnagar, Vasai, Virar and a dozen other municipalities in Maharashtra. But when Local Body Tax came to Mumbai – it got a rather rude reception!

Starting October 1, LBT will replace Octroi. The entry point tax legendary for long lines of waiting trucks, high cost of collection, under invoicing, corruption and political intervention. Yet Octroi earns the city approximately 7000 crore rupees and an equally remunerative tax is needed to take its place. Local Body Tax will be levied at 0.1-7% on sales of goods on a monthly basis. So all traders earning 3 lakh rupees and more will need to register with the municipal corporation and file returns. They will also need to keep records for several years. On paper it looks deceivingly simple. But the potential real life complexities have shut Mumbai down for many days. So why is LBT not acceptable to Mumbai’s traders? – To answer that I have with me Arun Doshi of FAM, the federation leading the protests. Also with us tax expert TP Ostwal, Maharashtra Joint Commissioner Sales Tax Mahavir Pendhari, Shiv Sena’s Rahul Narvekar, Harshdeep Kamble, Municipal Commissioner, Aurangabad, Sanjay Sarnaik Chief LBT Officer, Kolhapur Corporation. We also have comments from  Manu Srivastava, the state’s Principal Secretary, Urban Development Department  and Kumar Rajgopalan of the Retailer’s Association. Menaka: Can you list for me your objections to Local Body Tax (LBT) given that nobody wants octroi, everybody wants octroi to go, so we won’t spend time on that. What is wrong with LBT? Arun Doshi: Local body tax is a draconian law. If you go through the details of the Act it will be hell for the traders. Menaka: Give me some instances, why? Arun Doshi: Yes, now in Vasai-Virar, I have been informed that the inspectors from the local body- they visit each and every place and ask for the smallest of invoices for tea, coffee or any entertainment to their guest; then there are petty expenses and everything. Again in the LBT it is not the value of the goods, it is on the tax also and even when they visit, they ask for the bank statement, they ask for the income tax, sales, challan, they ask for the sales tax and these local bodies- they are meant to provide civic amenities to the people and maintenance of the civic amenities; they are not the revenue collecting like sales tax or income tax. (interrupted…). Menaka: You have given me one reason, which is that it includes all petty expenses and is not just imposed on the goods value; what else? Arun Doshi: Otroi is naka-based where only on the invoice they have to calculate the tariff and collect it, whereas in LBT it is account-based, account based is every month we will have to file the challans.. Menaka: You have to pay to file half yearly returns? Arun Doshi: There is a lot of paperwork, I think you should not burden the traders with all kinds of this – because you have to free his energy for trade and development of the trade, instead you are blocking his energy.   Menaka: But Octroi was taking up all your energy in the transfer of goods. If C&F agents, wholesalers and distributors who
are bearing the brunt of Octroi and will now have to bear the expense of LBT or the burden of LBT are not objecting, then why are traders objecting? Arun Doshi: LBT is not restricted to only few categories of people. Menaka: But they are the first category that will have to pay this, right? Arun Doshi: Small vendors will be included, vegetable vendor who's…. (Interrupted) Menaka: There is a return threshold. Arun Doshi: The honorable Chief Minister, initially it was Rs 1 lakh… (Interrupted)  Menaka: Your protest has moved it upto Rs 3 lakh, I understand. Arun Doshi: Rs 3 lakh that is Rs 25,000 per month. So, hardly Rs 800 turnover per day, that invite your registration and you have to pay LBT. Now, vegetables are not grown in Mumbai, it has to be imported. Ostwal: Consider, a small trader, very small trader, now we are talking of mini trader not even small trader. Rs 3 lakh limit means what? Nothing! So how do you expect him to maintain the books of accounts. Income tax law also does not require maintenance of books of accounts up to Rs 1 crore turnover. Presumptive tax is there, 8 percent. Now, if those laws do not require you to maintain the accounts, you expect the small trader to maintain the accounts, an impossible scenario. It means they should hire accountant, incur the cost. They can't earn for themselves then how do you expect them to pay for the accountant’s fees. Menaka: Is it only record keeping that is your problem or it is other things?  Ostwal: Record keeping is a major issue and if it is not maintained properly the inspector raj will harass them.  Menaka: I have got a list of objections from both of you. Let me take it across to Shiv Sena's Rahul Narvekar. Rahul the Shiv Sena and the Bharatiya Janata Party (BJP) which rule the Brihanmumbai Municipal Corporation (BMC), here in Mumbai did propose the LBT as an option and put it in its Budget as well. You were in support of the LBT when the State Government decided to phase out Octroi and phase in LBT in all districts of the State including in Mumbai city. Now, why are you opposed to it because it seems now that the Shiv Sena has extended its support to FAM and other traders who are striking? Narvekar: First and foremost let me put the record straight. Shiv Sena has always been opposed to the local body tax that is being proposed to be applicable in Mumbai city as well from the October 1. We have opposed this tooth and nail and we have got our reasons for that.  Menaka: What are your reasons if I may ask you given that Octroi is a draconian dreaded tax that everybody wants to see go?
Narvekar: Octroi is something which is required. These are the funds which are required to run a city like Mumbai. A city like Mumbai does not run only on the grants which are peanuts given by the State government if at all they give. Menaka: Which is exactly why the state government has replaced a local body tax like Octroi with a local body tax.
Narvekar: Octroi cannot be done away with and it is not draconian the way you are trying to put it. With regards to LBT why we are opposed to LBT is very simple. One, as far as Octroi is concerned, Octroi comes to the BMC corpus, to the treasury everyday. Everyday there is a payment that is received by the Mumbai Municipal Corporation. With LBT in place, the treasury of the corporation is going to run dry for months together till they receive any grant in form of LBT. So, there is going to be a problem of day-to-day wages that is going to be the scenario as far as the corporation is concerned.  Menaka: Are you saying that Octroi must stay and Octroi must not go? Narvekar: What I am trying to tell you is that local taxes of local bodies cannot be done away with. Menaka: But they are not doing away. In fact many traders wanted an enhancement of value added tax (VAT) to make up for the loss of revenue in octroi. Instead, the State government has respected the autonomy of a municipal corporation and said no, we cannot do away with a local body tax (LBT) and hence we are replacing octroi with the tax that is imposed by the municipal corporation and collected by the municipal corporation. I am sure you supported that in the beginning. Why are you against it now? Narvekar: LBT certainly is not an alternate to octroi for the simple reason that it is most impractical. We have seen that in Malegaon also. The courts have given a stay on LBT in Malegaon. After LBT was introduced, there was a loss of Rs 26 crore to a small municipality like Malegaon. So you can imagine what’s going to be the repercussion with a city like Mumbai. In the city like Mumbai, if the revenue module fails, even on a trial basis, the repercussions of that on the entire city are going to be drastic and draconian. Menaka: I am going to bring up the issue of the revenue model in just a bit but before that we have an opinion coming in from Kumar Rajagopalan of the Retailer’s Association of India (RAI). This is a separate association from Federation of Associations, Maharashtra (FAM) and they don’t quite oppose the entry of LBT. I spoke with Kumar and asked him why the RAI is not striking against LBT? Rajagopalan: If you really look at the composition of RAI, we have got people who are definitely large retailers but we have also got quite a few smaller retailers. The only criterion for becoming a member with RAI has been that they should be giving cash receipt to every customer. For every person who is already giving cash receipt, it has never been a problem because they are already recording stuff and it’s a matter of filing a return. So yes, we would like lesser returns to be filed so that life becomes easier for everybody but if the comparison is between paying octroi at the check post on filing a return… (Interrupted) Menaka: Are you not worried about the many concerns raised by other traders in Mumbai city including that of harassment or corruption by municipal corporation officials? Rajagopalan: I think it’s a matter of sitting and sorting things out here. If it has to be done in the spirit that it has been spoken about and I think all the indications we have got is that if and when this Assembly passes this Act which is supposed to get passed in monsoon, if it does pass this then there is going to be a methodology which is similar to the way today sales tax works. So anybody and everybody cannot come into the stores or should not be able to come into the business premises. If a person is filing his return and the assessment is happening in some specific cases and only in special cases if somebody is going to do a raid then I think it is all above board. We are all accustomed to do this. Today, income tax is filed that way, sales tax is filed that way. So I don’t see a big need for a worry if it is passed in the spirit of the way it has to be passed and that’s the indication that we are getting so far. Menaka: If the State government assures you that inspections will be done only with several safeguards in place, then would you be accepting of LBT? If not LBT, then what else? Shiv Sena is now talking about keeping octroi; clearly you cannot be in favour of that? Arun Doshi: I have made it absolutely clear that since last 20 years, we are fighting against the imposition of octroi. Menaka: So do you want octroi to go? Arun Doshi: Octroi and LBT both to go Menaka: So what is the option? Arun Doshi: Retail traders forget one thing. Every invoice above Rs 500, they (retail traders) will have to have the name of the purchaser, style of purchasers business, his address, if he (purchaser) is registered then the registration number. These kinds of details are being prescribed in this LBT Act, every invoice above Rs 500. Menaka: We have with us the Maharashtra Joint Commissioner of Sales Tax, Mahavir Pendhari. He has been interacting with traders from across the State to clarify their concerns. What do you make of the issues that have been raised by Arun Doshi and several traders in this city that there is too much paper work involved, that there will be too many interventions by municipal authorities leading to harassment and maybe even corruption and that octroi rates in some case are lower than the proposed LBT rates and hence the cost of doing business will also go up. Pendhari: If you go through the Act, the registration threshold limit earlier was Rs 1 lakh which was raised to Rs 3 lakh. It is now raised to Rs 3 lakh. That is the basic difference which we are going to make. Secondly, if you are registered in sales tax department as per VAT Act, your threshold limit is Rs 5 lakh. So whenever your turnover process amount is Rs 5 lakh, you are maintaining the books of accounts. If you are maintaining the books of accounts and filing return which is monthly for sales tax, then where is the problem in filing half yearly return with LBT - that is one thing. The another thing is so far as corruption is concerned of municipal officers, then these raids and other things, Maharashtra government is already preparing a manual for how the raids should be conducted like in sales tax. Right now also, in the LBT Act, if you go through LBT Act then for conducting a raid, a Deputy Commissioner Officer is supposed to take the permission of Commissioner level.
 
Ostwal: The point which Mr Doshi was making is that an invoice Rs 500, you go to a Dadar shop, the bhajiwala (vegetable) shop in the morning. Their turnover is more than Rs 1 lakh, every small shop has. Do they give receipts? Every person who buys… (Interrupted) Menaka: Isn’t that something which is supposed to change? Ostwal: It is impossible. Menaka: But isn’t that something that needs to change? Ostwal: No, is impossible. Is he going to keep an accountant? Menaka: We want to bring more and more people into the tax net. Ostwal: There is no space for somebody to sit there and make an invoice, accounts and receipts etc. he just collects the cash and puts it in his retail box. Menaka: As a citizen who pays tax, would you not believe that all such systems must become methodical eventually electronic and that everybody must be within the tax net? Ostwal: I do agree. So, therefore let the records filed with the sales tax department be accepted. Pendhari: One thing I must make clear, see bhajiwalas and these small people, these are all exempted goods. Bhajiwala issues a bill or doesn’t issue, it hardly matters. The other small traders -if they issues the bill, which is less than Rs 5 lakh, if suppose one doesn’t issue the bill even he sells on and above Rs 500 then still whatever is his declaration under Rule 28 his declaration is accepted and the scheme of the Rule 28 is upto the amount of Rs 13 lakhs, whatever turnover is shown by the dealer that has been accepted. Moreover what we can do is, we can ask the government to give a summary assessment sort of thing. If suppose whatever return has been filed by the dealer that is required to be accepted summarily.  Arun Doshi: In Vasai and Virar there are instances where the inspector use 10-15 bouncers, they have visited small shopkeepers.  Menaka: If not LBT, what is the solution? Arun Doshi: Yes, we want only single window under the VAT we are ready to consider additional whatever percentage that has been mutually decided; we are ready to give. Menaka: I put this issue to Manu Srivastava, the State’s Principal Secretary of the Urban Development. I began by asking him why the State had preferred to impose a levy like LBT in the place of octroi and not go the Gujarat route, which is to enhance the VAT rate by one percent as Gujarat did?
 
Srivastava: This option of putting a surcharge on VAT was also examined by the government and we realised that it actually suffers from these two major drawbacks. Number one, it will actually go beyond the city limits and it will actually impact a much larger section of population and clearly that was not acceptable and the second thing is in fact whatever collections actually accrue to the State following the surcharge on the VAT, they will be first actually getting deposited in the consolidated funds of the State and then through a budgetary process they will be given by way of grants to these urban bodies. So, this will actually make these bodies financially dependent on government grant, which is not a desirable phenomenon and therefore consciously a view was taken that we must actually replace octroi by a system that protects the financial autonomy of these urban local bodies and at the same time keeps the incidence of tax on the same set of person.  Menaka: I get your rationale for why you have picked LBT versus an enhanced rate of VAT. You have heard all the concerns that traders have raised in Mumbai city over the last several weeks. We have seen shops shut for many days now. What is your response to those concerns which range from additional paperwork, additional registration over and above the many registrations that they have to do, the threat of harassment by municipal corporation officials, the fact that business may become unviable thinks to some of the higher rates of LBT versus octroi. How do you respond to these myriad concerns that traders have raised? Srivastava: As far as the government is concerned, we are absolutely open for discussion on all these issues. I would like to very quickly share some of the amendments that have recently been made in the law so as to actually simplify the levy of this tax. First of all, we have increased the limit for registration from Rs 1 lakh to Rs 3 lakh. In fact, small traders need not register themselves under LBT. Secondly, we are also in fact saying that any search or seizure should not be done without the expressed permission of the State government. So this, we feel, will actually eliminate any possibility of harassment at the lower level. In fact, the rates under this new system are proposed by the Municipal Commissioner and approved by the government. So our effort has been to actually try and ensure uniformity of rates for various commodities across States, which is again not possible in other system. We have actually so far brought in certain category of goods under exempted category right now. In fact, 59 essential commodities are under exempted category and they are exempt from the levy of LBT. So this will in fact reduce the prices of these commodities and that will be benefiting the citizens. So if there are any issues regarding the rate of tax, government is open. We can definitely discuss this thing and consider the feasibility of reducing those rates. Menaka: In the earlier part of the conversation, Rahul Narvekar of Shiv Sena brought up the issue of revenue model. We do have LBT success stories in this State – that’s if municipal commissioners are to be believed. I have with me the Aurangabad Municipal Commissioner Harshdeep Kamble. Aurangabad levied LBT starting 2011. Mr. Kamble would you say that the transition from octroi to LBT in Aurangabad has been a success? Kamble: I would say that LBT has been a good success in Aurangabad because if we go by the financial figures- earlier in 2010-2011, the octroi collection in Aurangabad Corporation was Rs 138 crore, but now 2012-2013, after the LBT, the collection of LBT is Rs 179.7 crore. So, we see that there has been a considerable rise in collection through LBT. Menaka: You told me earlier that more than 20,000 traders have not registered under LBT in Aurangabad. I understand that the earlier system of privatised octroi was horrible, traders were very opposed to it, which is why they were a little more accepting of LBT, but I am sure traders in Aurangabad had the same concerns as traders in Mumbai did- how did you deal with them? Kamble: First thing which I told you was - telling about LBT in detail to the trader organisations and requesting them to tell to other traders, that is one. Second, our intervention was at later stage when all the traders had some idea about LBT. Third, we told them that this is a better system than octroi because this is good for their business also and it is a sort of a voluntary type first assessment, so it will definitely help them and they can start their trading immediately after receiving the goods. So in octroi they had to wait for two-three days sometimes. So, it used to affect their business also. Fourth thing which I would say is we went to them with the forms and then we requested them to register- therefore our number is higher, which I said is 20,350. Then of course we had redressal committee which meets very often and I would like to add one more thing that it was because of the general body counsellors of the corporation- they also took interest into this and I would rather say that role of media had been very positive in Aurangabad for this LBT propagation as well. Menaka: We have another example in Kolhapur. Joining me now is Sanjay Sarnaik, Chief LBT Officer, Kolhapur Corporation. Can you tell us if you think LBT has been a success in Kolhapur or not and how traders have reacted to it?
(Byte translated from Hindi) Sarnaik: LBT has been applicable from April 1, 2011 in Kolhapur Corporation. In the first year, here too, there was much opposition from traders. So, in the first year, we reached to Rs 58 crore from traders and one percent stamp duty including, like this we reached Rs 68 crore in the first year and whatever was the revenue loss incurred that was compensated by the government up to Rs 20 crore; in this manner we have reached upto Rs 98 crore.  Ostwal: This is only one side you have not heard the other retailers or the merchants from those cities- you have only heard the revenue side, commissioners. You must hear the other side as well like what we are hearing Mr. Doshi. What is the experience of the traders in the other cities must be seen. Honestly speaking, any compliance burden introduced on the tax payer is harassment. What is the need of having a scrutiny if the sales tax returns are shown to them and therefore you accept the sales tax as the threshold. Pendhari: If the dealer is registered in Sales Tax, then automatically as per the LBT rules he is automatically registered, he is a deemed registered dealer under VAT. So, dealer is not supposed at all to apply for registration. Ostwal: What now Mr. Pendhari says is a deemed registration though the limit is Rs 5 lakh, why don’t you accept the Rs 5 lakh as a limit. Pendhari: First of all, department wanted its autonomy to be retained, if suppose the amount is collected by the state government, and then there maybe certain problems in distribution that is one thing. Menaka: The honest truth is will you to be able to convince the BJP, Shiv Sena led BMC to give up their right to collect tax? Arun Doshi: Definitely. (interrupted…). Menaka: Rahul Narvekar in the first part of this show says we don’t even want to give up octroi. Ostwal: This is between the two governments and the bodies. Why do you want to harass all the millions of people? Arun Doshi: When Goods and Services Tax (GST) is coming, then where is the need for creating all this thing, complexities?  Menaka: It seems to me that there is no solution to this impasse? Arun Doshi: The traders will not relent and our indefinite strikes will go on till government relents and listens to our logic. Menaka: I would let that be the last word on this show, to all my guests’ thank you very much for joining us. It seems this issue of LBT will continue to haunt Mumbai city and keep shutters down.