Local body tax in Maharashtra is a burden, will lead to corruption, say traders

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Thousands of traders in Maharashtra, who are protesting against the local body tax (LBT) and want it to be abolished, say it is not a practical move and an additional burden. While the government claims that the introduction of this tax would bring transparency in tax collection and curb corruption which was rampant during the octroi regime, traders are of the view that LBT will create a new avenue for corruption

By Nitasha Chawla

Clockwise: Traders protesting against LBT at Azad Maidan in Mumbai; a closed shop during indefinite bandh in Mumbai; traders attending a state-level meeting held by Federation of Trade Associationof Pune in Pune, a motorcycle rally taken out by taken out by traders in Mumbai

Friday, 07 June 2013: Maharashtra has been witnessing a slew of protests by traders ever since April 1, 2013, when the state government announced the scrapping of octroi duty and introduced the local body tax (LBT) in Pune. This is a tax applicable only in Maharashtra and in no other state in India. While the LBT has been introduced in the different cities of Maharashtra like Bhayanagar, Vasai, Kolhapaur, Mumbai (in October 2013), etc, in phases since 2009, the agitation against it has become more serious only after it was imposed on Pune in April 2013. The protests spread like wild fire throughout the state, and intensified to such an extent that traders have gone on a fast unto death till the tax is evoked.

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Both the government and the traders have so far refused to relent. Prithviraj Chavan, the Chief Minister of Maharashtra, has made it clear that the LBT will not be rolled back, but a committee would be set up to look into the traders’ grievances. On the other hand, the trader community has conveyed to the government that their protests will continue and be made more intense till LBT is abolished.

Says Mitesh Mody, action committee member, FAM (Federation of Associations of Maharashtra) and committee member, All India Radio and Electronics Association, west zone (AIREA WZ), “Following the meeting with the CM, it has been concluded that a committee of 10-14 people, which will include five to seven representatives from the government and five to seven from traders’ associations, will work together to solve the issue of LBT. However, retailers and traders from Mumbai will continue to be a part of the indefinite bandh until a decision is taken by the government in our favour.”

More than 50,000 members of the 750 associations that make FAM have participated in the protests by closing their businesses and have vouched to continue doing so till their demands are met.

J P Singhania, president, (AIREA WZ)
Mitesh Mody, action committee member, FAM (AIREA WZ)

Even though the Maharashtra government has increased the minimum turnover limit for LBT from Rs 0.1 million to Rs 0.3 million, this has not convinced traders to accept the tax. The CM has also assured the traders that LBT will be phased out once the goods and services tax (GST) comes into effect in India. However, it has been three years since a proposal to implement GST was presented in Parliament and its fate is still not clear.

FAM has told the government that the trading community will not register for LBT and those who have already registered will take back their registrations from the municipal corporation. Shares J P Singhania, president, All India Radio and Electronics Association, west zone (AIREA WZ), “As many as 400 shops in Lamington Road and other electronics markets have kept their shutters down in support of the protest.”

Why traders are agitated

In 2010, when octroi was abolished in Gujarat, the rate of value-added tax (VAT) was increased from 4 per cent to 5 per cent. The additional 1 per cent was meant for the municipal corporations as a replacement for octroi. In Maharashtra, too, the same changes were implemented in VAT, but octroi wasn’t abolished and the 1 per cent increase went to the state. Today, Maharashtra is the only Indian state paying octroi.

Shares Mitesh Mody, “VAT collection in Maharashtra was approximately Rs 585.3 billion in the last fiscal. If we calculate 1 per cent of the total, it comes to Rs 5.8 billion, which should have gone to the municipal corporation had we implemented Gujarat’s model, as promised. However, now the traders are paying extra—both VAT and octroi. The government is making such exceptions only for Maharashtra, which is unfair.”
Maharashtra was heavily dependent on the revenue raised through octroi for its expenditure; therefore it is difficult for it to follow the Gujarat model. Thus, a replacement like LBT was put in place.

While the government claims that the introduction of LBT would bring about transparency in tax collection and curb corruption, which was rampant during the octroi regime, the traders are of the view that the LBT will create a new avenue for corruption. Explains JP Singhania, “Now, every trader would have to maintain accounts, give assessments, and file returns with the municipal corporation and subject themselves to its inspectors. It will not only give birth to an Inspector Raj in Maharashtra but also pave the way for more corruption since the LBT requires a lot of paper work and dealing with the inspectors. Moreover, we are already accountable to different tax windows; adding the municipal corporation to it, which will assess us every month, is not a practical move.”

Besides, traders would have to pay LBT as a lump sum within a specified period of 40 days. This, in addition to other taxes paid by them, is going to further add to their tax burden. Shares JP Singhania, “The LBT needs to be filed once in 40 days, for which it is not easy to keep a record of all the goods a trader has; neither is there so much time or resources available to a trader. Also, apart from filing excise tax, VAT, sales tax and IT returns, this is just an additional burden.”

Moreover, the traders are feeling cheated by the government since they were promised in 2009 that the state would levy only one single tax called GST and do away with all other taxes like luxury tax, entry tax, etc, to create a single window tax system. However, octroi was supposed to be outside the purview of GST but went to the state government itself. Now, with the introduction of the LBT as a replacement for octroi, the purpose of creating a single tax window will be defeated and traders will have to continue being accountable to various tax bodies.

Demands of the traders

Maharashtra is the only state in India that has this additional tax, the LBT, as a replacement for octroi. All other states in India have adjusted for octroi charges by increasing the existing taxes like VAT. Therefore, the traders are now demanding the linking of LBT with VAT. Shares Mitesh Mody, “The government should compensate for its loss of octroi by increasing VAT charges. This will avoid the hassle of filing taxes every 40 days for the traders and our accountability will also not shift to another body, as it would in the case of LBT. The traders are ready to pay more tax but within the existing structure and not to a new body.”

Another issue with the traders is that the LBT rates are different for every city in Maharashtra, which makes it an unfair system. For instance, in Nashik, the LBT rate is 2.5 per cent on industrial equipment, in Aurangabad the rate is 2 per cent, and for Navi Mumbai it is 3.5 per cent. Says JP Singhania, “The LBT structure is unfair for traders who are paying more in some cities. Therefore, we want all the cities to have similar tax rates and there should be the same rules for municipal corporations of every city of Maharashtra to maintain equality in the system.”

Traders in other states gearing up to cash in on LBT
Pawan Rastogi, finance controller, RS Components and Controls India Ltd

While LBT is a tax imposed on the purchase of goods, octroi was levied on its sale. This means that the burden to pay the LBT will fall on the end-users, that is, the consumer, whereas in case of octroi, the burden to pay the tax was on the traders. Therefore, under the LBT regime, goods are going to become costlier in Maharashtra because the traders will include the amount of LBT in the cost of the goods they sell. As a result, the traders in Maharashtra may lose their business to traders located in other states, who would be preferred by the consumers. Traders in other states are, therefore, trying to cash in on LBT in Maharashtra.

Manish Kwatra, managing director, Metro Electronic Products

While LBT is a tax imposed on the purchase of goods, octroi was levied on its sale. This means that the burden to pay the LBT will fall on the end-users, that is, the consumer, whereas in case of octroi, the burden to pay the tax was on the traders. Therefore, under the LBT regime, goods are going to become costlier in Maharashtra because the traders will include the amount of LBT in the cost of the goods they sell. As a result, the traders in Maharashtra may lose their business to traders located in other states, who would be preferred by the consumers. Traders in other states are, therefore, trying to cash in on LBT in Maharashtra.

Vikas Minocha, proprietor, Cosmic Devices

Vikas Minocha, proprietor, Cosmic Devices, a Delhi-based trader of electronics components, also shares the same view, “The rate of LBT varies from city to city within Maharashtra, which is unfair for traders located in a city where the rate is high. Eventually, Maharashtra traders will suffer and lose out to the traders of other states.”
It is interesting to note that those who sell goods in Maharashtra from other states like Delhi or Bengaluru can now offer a cost advantage to the consumers, as octroi has been lifted so they do not have to pay for their goods to enter Maharashtra. And since LBT is a state subject, those selling goods from outside Maharashtra don’t fall under the purview of LBT. Hence, they can sell goods at a lower price to the consumers in Maharashtra.
Explains Pawan Rastogi, finance controller, RS Components and Controls India Ltd, a global distributor of electronic components, based in Delhi, “If LBT isn’t rolled back, we will have an edge over the traders in Maharashtra since we neither have to pay octroi nor LBT. Therefore, we will be able to offer a cost benefit to our customers.”

 

What is the Local body tax

LBT is the tax that has been imposed by the civic body of Pune on the entry of goods into the local municipality for consumption, use or sale from April 1, 2013. However, in Mumbai, LBT will be applicable from October 1, 2013. But unlike in the octroi regime, trucks carrying goods will not be subjected to physical checking at check posts. Traders would now require to pay the tax once every 40 days using online portals, cheques, demand drafts or cash through a designated bank or at designated counters of the civic bodies.

LBT replaces the octroi, which was introduced in Maharashtra in 1965, with 21 municipal corporations levying the tax on the entry of goods in their respective municipal areas. Under octroi, goods were subjected to physical verification, making for a cumbersome, time consuming and inefficient process. Moreover, with the levy being paid in cash, the system was prone to leakages, corruption and political intervention.

While octroi is a one-time tax imposed on the entry of all goods, with the LBT, traders and manufacturers will be required to pay 0.5 to 7 per cent tax only on goods sold, based on self-assessment on a monthly basis. Significantly, traders will be required to keep thorough records of the sale and purchase of goods for 10 years.

In case of LBT, each transaction can be traced to the last level, as businessmen down the line will have to get registered. The LBT being an account-based tax, all deals are expected to be recorded. Moreover, LBT has to be paid directly by the importer unlike octroi, which could be paid by the consigner.

However, with no octroi posts, there are chances that traders would bring in goods and not report them. In this way, LBT could be dodged. Therefore, a strong system of physical inspection of business premises has been put in place by the civic bodies of Maharashtra. This is what traders are opposed to, saying it would lead to high-handedness.

 

“LBT is an Unnecessary Tax”

We believe that the taxation system should be simple and less complicated, whereas the introduction of the LBT will add to its unnecessary complexity. On the other hand, the GST will make life easy for businesses as all the taxes like LBT and VAT will be replaced by one GST tax. Therefore, GST should be implemented at the earliest.

Pawan Rastogi, finance controller, RS Components and Controls India Ltd

The LBT is an unnecessary tax imposed on traders. An ideal replacement of octroi would have been increasing the rate of VAT by 1 per cent rather than making the traders accountable to the civic bodies.

Hiren Ajmera, director, Brilliant Electro-Systems Pvt Ltd

We don’t welcome this new LBT tax system since it encourages disparity in the state. The LBT rates are different in every city of Maharashtra. For instance, in Navi Mumbai, the rate is lower than in Thane. This means one can buy goods from a city which has a lower tax rate if it is located in close proximity like Navi Mumbai and Thane.

Sujata Soparkar, vice president, Thane Small Scale Industries Association

I don’t think that the government is justified in imposing LBT on traders in Maharashtra. It will not only make the cost of goods go up in Maharashtra but also put a burden on the traders to file returns for yet another tax with a separate government body. There is also a huge penalty for those who fail to file their LBT returns on time and the prosecution laws are also very strict. For traders doing small scale business, the entire process of LBT is very cumbersome.

Haresh Abhichandani, MD, Millennium Semiconductors

 

States that replaced octroi with other taxes

In most of the states, octroi was abolished following the introduction of value added tax (VAT) in 2005, without the levy of any alternate tax. The introduction of VAT led to an increase in the revenues of the states which helped them compensate the loss suffered by municipal corporations following the withdrawal of octroi. For instance, Tamil Nadu and Kerala impose a flat rate of 2 per cent as the entry tax. They have also resorted to an additional tax on land and building.

Punjab, on the other hand, didn’t impose any new tax as a replacement for octroi. In West Bengal, Kolkata has adopted multiple initiatives to offset the loss in revenue from the abolishment of octroi, which includes taxes like entertainment tax, sales tax and the development grants, with some part of these taxes going 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 per cent.

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