The last week has been hard for Mumbaikars. Never before has there been such a long strike by traders. They are protesting against the levy of Local Body tax (LBT) which is to replace Octroi, the entry tax into municipal limits. I have read viewpoints for and against LBT and here is my take from the limited understanding I have:
1) Why is LBT being levied when it was stated that with VAT being implemented octroi will be phased out in few years – To levy tax is the state’s prerogative. If the state feels there is need for revenue then the buck stops there. If you have a problem with entry tax then why didn’t you protest against octroi which was the same? I agree tax rates in India, and especially in Maharashtra are high. But you cannot wish them away without correcting the fiscal position of the govt. Infact, many people are suggesting that the state simply raise the rate of VAT like some other states have done (this has other issues which I will come to later). They implicitly accept that taxation per se is not the issue. This leaves the other section who will have a problem with all taxes.
2) You will end up raising prices by 7-15% - This is in an SMS doing the rounds. I doubt its veracity. Currently we are paying octroi (supposedly) and now it will be LBT. I think the govt would have worked out some maths such that overall tax remains largely the same.
3) Why not simply raise the VAT rate and pass on the share to the local bodies – This seems logical at first. But the govt has a valid argument against it. VAT is decided at state level but every local body may like to keep entry tax as per their requirements. We would be taking away that autonomy. That is the sole reason I would argue against it. Those in favour of LBT also say that passing on the share of tax to local bodies would be in the hands of the state govt and this would create problems of bias/delay/favouritism. I don’t think this is the issue as mechanisms like escrow can always be worked out such that though tax is collected with VAT it flows to the local body without the state govt being allowed to touch it or interfere with the distribution. But the point about autonomy is important.
4) It will burden small traders – Well, VAT is being paid by those with a turnover of more than Rs 5 lacs. In LBT this has been kept at Rs 3 lacs. I think the govt will anyway raise the limit to Rs 5 lacs. Second part is about getting new registration and keeping records and paying tax and filing returns separately. This is a valid point. The govt should simply share its VAT database with the local bodies so that traders do not have to register. The VAT no can be prefixed or suffixed by a code/alphabets for city, say MUM for Mumbai. The frequency of returns can also be made the same. Even the form can be the same. This would require back-end work from the govt but is needed. Atleast if you protest and say LBT is acceptable if these changes are made then it is palatable and the govt may also see sense in it.
5) It will lead to Inspector Raj and harassment – I think this is the real reason why traders are protesting. The others are just appendages. Over the years traders have come to accept octroi. Whatever they have to pay, whether the actual amount or reduced amount based on fictional bills, they pay at the entry point Absolutely no hassles later. No questions once your goods are within the limits of the city. I surmise a large majority of them cheat by showing false bills and pay lesser tax. The octroi agent s help them in this and take their cut. Infatc, I have even heard that octroi agents cartel actually agrees with the corporation about the quantum of tax their will help the corporation collect. The rest will be evaded and agents will take their commission for facilitating this. It is alleged that this nexus of agents has aligned with a particular political party and this protest is being fuelled by them. I can’t vouch for all this but it is possible. Anyway, what will change? Now you have inspectors who can come and check your records any time. So you have to constantly be alert rather than in octroi where you pay whatever you feel like at the entry limit but no one can question you after the goods are in. This changes the system which has evolved over the years. Now, if you are evading tax then you may have to bribe a different set of officers, but on a continuous basis. The corruption can and I guess will still be there. But the players will change. I think that is the fear.I have spoken to a friend whose relative does business in one of those councils where LBT is already introduced. The feedback was that it took some time to get settled but his reltive says LBT is better than octroi. For the simple reason that he was paying the proper tax earlier too but many of his peers weren’t. Now it has become a bit tougher for the others.
My opinion is that LBT, with the procedural changes I have listed, is better than Octroi. Ofcourse, no tax is still better :)
There may be other pros and cons I have missed out. Feel free to correct me.
