CA. Maheshwar M. Marathe

CA MAHESHWAR M. MARATHEBACKGROUND:

Around 2300 years ago in India, there lived a king called Dhanananda. He was known as a corrupt king, who used to steal and hide the government funds for his personal profits. He levied heavy taxes on people and even the wood used for cremation of dead bodies was taxed. People were very unhappy, they protested but were suppressed.

To set the things right came Acharya Chanakya, who very systematically dethroned the King and destroyed him from the roots (However there were also other more serious reasons for his destruction). Chanakya was a great Economist a Political Thinker and roaring Nationalist. Chanakya says “the tax collection should be done in the same manner the honey bee collects honey from flowers without hurting them”

Today the situation in Maharashtra is similar to the one created by Dhananand. Maharashtra is the only proud state in the country where we have octroi. The issue of abolishing octroi has been a long pending demand of taxpayers, industries, traders and transporters from every corner of the state. The Kelkar Committee (2002) reiterated that with introduction of VAT there should be unification of indirect taxes into a single tax. The Subodh Kumar Committee (2006) on octroi recommended that the system of octroi should be abolished. In short, what everyone is demanding is very simple, “Merge Octroi with VAT”.

LBT – THE TROUBLE

Despite demand from across the industry and suggestions by various committees to abolish octroi, instead of merging the Octroi with VAT, the state government is making it more rigorous by creating a separate administrative structure and has renamed the Octori as ‘LBT’ (Local Body Tax). And this is despite the fact that many times in the past the VAT rates in the state have been increased on an assurance that the Octroi shall be removed. In the era when whole country is moving towards the GST (Goods and Service Tax) regime which is consolidation of all possible indirect taxes such as excise, service tax, VAT, entry tax, profession tax, aiming at single window compliance, Maharashtra state is imposing a new indirect tax which means, one more compliance, one more set of officials and one more assessment and one more area of harassment of entrepreneur and the Business in the state.

As per the LBT provisions, if the ANNUAL value of purchase/Sale of goods is not less than Rs. 5000 of Schedule A Goods and Turnover of purchase / Sale of Goods is not less than Rs.1,00,000 of all types of goods then such businessmen is liable for registration. Once registered, all compliances are applicable. Some of the other draconian provisions of LTB are as follows

  1. Authority given to Authorized Officers to visit the place of business is very draconian as it will result into undue harassment of businessmen. The situation may be worst where office address is of Residence which is a very common practice for micro and small businesses.
  2. Time allowed for payment of LBT is within 10 days of next month, which is very short as many other compliances such as ESIC, PT, TDS(IT) etc. have to be done around the same time.
  3. Provision of interest @2% per month or part thereof is highest as compared to other Acts.
  4. Provision of Penalty at 10 times is Draconian and may lead to large scale underhand dealings
  5. There is a need to maintain parallel record for the purpose of LBT such as Purchase Register in different format over and above maintained by the dealers for normal business under standard Accounting Practices for all other Acts.
  6. Exercise of monthly Reconciliation is needed.

Going by these provisions following things become very clear.

  1. All the preparations are made to tax even the wood used for cremation of dead bodies
  2. Even a panwala and a street hawker can now be very easily harassed in the name of LBT 3. The businessmen, who strive whole day, pays the multiple taxes, makes all the compliance’s, still stands like a guilty before the tax authorities, would now be involved more in attending to the government offices and officials instead of doing their business.

THE SOLUTION

This scenario is not very healthy for the prosperity of the state. Many states like Gujrat and Karnataka have merged octroi with VAT and are managing it successfully. None of the 125 countries world over where VAT/GST is in place has levied octroi. These examples very clearly state that, keeping a separate tax structure for local body when you have VAT/GST implemented is highly avoidable and keeping a single tax is highly advisable.

It is high time that the government listens to the voice of people and gives a serious though on merging the LBT with VAT. What is required most is the attitude of listening to the demands of the people and displaying a strong will power keeping aside the politics. Going by the non-complied assurances given by the state government the merger should not even result into increase in the rates of VAT but still a call can be taken on the rates based on the overall tax collections statistics and rates prevailing in the other states of the Country. The merger would require the state to plan its cash flow and a sharing mechanism has to be developed so that the requirements of the funds by the municipal corporations can be properly budgeted and the funds are forwarded to them. This is the only acceptable solution to the concerns raised by the industry.

Birth of another Acharya Chanakya is definitely required and has become inevitable in this country, as he has to set many things right which are more serious than LBT. Hence it is better that this small issue of LBT is not kept for his action and allow him to concentrate on the bigger issues.

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0 responses to “LBT – A highly avoidable system of taxation”

  1. milind chakradeo says:

    My client is a retail dealer. He had taken shop act, vat & employee profession tax registration. He has employed 3 employees with a salary of (1) Rs.8000/- (2) Rs.4500/- & (3) Rs.3000/- . On employee No 1 he deducts professional tax of Rs.175/- per month. On employee no 2 and 3, employee profession tax is not applicable.
    But during diwali he pays diwali bouns & Ex gratia of 1 month salary.
    Does he require to deduct employee profession tax during that month ?
    If the diwali bonus amount is debited to a separate Bonus account in that case can he not required to deduct employee profession tax for employee no 2 & 3 ?

  2. prashant says:

    Again we required one Chanakya in India.

  3. MVV Nathan says:

    A FEW YEARS BACK, ADDITIONAL FIVE PAISE POSTAL STAMPS WERE INTRODUCED TOWARDS BANGLADESH REFUGEE REHABILITATION WITH A PROMISE THAT IT WILL BE WITHDRAWN ONCE THE REFUGEES ARE REHABILITATED. IT WAS NEVER WITHDRAWN. SIMILARLY, OCTROI HAS ALSO LIVED ITS LIFE AND SHOULD BE ABOLISHED NATIONWIDE. LBT, IN THE SAME WAY, ONCE ALLOWED, THOUGH TEMPORARILY, WILL ONLY RESULT IN ADDITIONAL BURDEN TO THE END USER OF GOODS AND SERVICES. INDIANS, BEING THE MOST PATIENT AND TOLERENT PEOPLE IN THE WORLD, WILL GET USED TO IT. THE GOVERNMENT CAN THEN THINK OF IMPOSING FURTHER TAXES LIKE LOCAL AIR TAX, LOCAL WATER TAX, LOCAL SOIL TAX, ETC.

  4. GURUSWAMY K says:

    The tax payer is helpless when they are burdened with more and more levies with complex isscues and provisions enacted with an intention to create more avenues for lack of clarity both to the tax payer and the tax administrator It is done for obvious reasons and things are becomming bad to worse with such bad legislations

  5. Dharmendra Kapure says:

    Again we required one Chanakya

  6. Dharmendra Kapure says:

    Now again we required one Chanakya for such revolution

  7. Nishu Patel says:

    Its very bad for the small medium enterpriser to comply with rigid LBT with the compliance of other law

  8. A. S. Bhat says:

    I remember Octroi was abolished by some corporations in Maharashtra and Entry Tax was introduced at that time. (Navi Mumbai was a case in point) Why is that not workable in other cities? Apparantly it was working smoothly until now!

  9. Hitesh Sanghvi says:

    Mr Sandesh

    Sales LBT is Charged without any setoff of the Purchase LBT

    the cost will definitely increase

    this is clear case of increasing corruption,

  10. James says:

    I completely agree with your view that LBT is a completely avoidable system, but in the long run and not all of a sudden.
    Reason: The Local bodies in Maharashtra particularly have borrowed magnificent sums to fund various infrasrtuctural projects in their limits hoping that the State Government would give sufficent grants regularly as promised and desired, when the Octroi on the whole would be abolished or merged with VAT towards which the state goverment has given a blind eye. Now in such a situation the Local Bodies are trying to play safe by ensuring that their revenue remains constant or now with the introduction of LBT even an increement in the revenue. So the best solution for long run as you suggested: Rational sharing of State Revenue with the Local Bodies. But in the near future the abolition of LBT cannot be expected or to some extent can be justified.

  11. ANIL KUMAR SINGH says:

    Yes, the condition of general public is miserable as the local govt.has also levied tax on wood used for cremation of dead bodies.The way in which tax is being imposed is unsocial.It shows that local Govt.is not assuming the social responsibilities.Levy of Indirect tax as single levy is strongly advisable.Tax structure should be made simple for compliance.

  12. hari babu says:

    The article correctly expressed pit falls in LBT.

    Already, there is lot of corruption and harassment in case where the LBT or Cess is in operation.

    Departmental officers call for unnecessary details, data and documents, only to extract money from the dealers in the end. Otherewise, they resort to raising best judgement assessments with astronomical demands, without any relevance to the data submitted by the dealers. They call for cash book, bank books, sales register, purchase register and all other books. What is the need for sales register, while purchase register is the basis for payment of tax. Further, is it practically possible to link all the entries in cash/bank book with purchase and sales book, particular in case of big dealers? Of course, the officers can ask for entry by entry reconciliation and resort to best judgement if reconcilation could not be done within the time given by them.

    Nobody to the rescue of dealer, except huge money to be paid as bribe to come out of huge illegal demands.

    Hope the Government withdraw this local body tax and increase the VAT to cover their revenue loss.

    (K. V. Hari Babu)
    09322904665
    022-39221006

  13. SANDESH says:

    Dear Maheshwar,
    I’m fully agree with above discussion. But % calculation is not fixed in my mind. Please suggest,
    Tax rate of Octroi @ 5.5% on commodity entered in city. approximate ratio of Material inflow is 60 to 70%. flat 5.5% is applicable on all goods inward in city.
    now as per current tax rates in LBT schedule wise i.e. from 2% to 5%, highest one is lesser by 0.5% than octroi.

    Can you please explain how it will affect to consumers & purchasers in city if tax rates are going to be reduced?

    Thanking you.

    Sandesh P.

  14. ASHWIN GALA says:

    A GOOD ARTICLE. THIS AWARENESS & UNDERSTANDING IS VERY MUCH REQUIRED.

  15. Mustafa says:

    It will benefits only FDI & its a government policy to support foreign investor & to finish small traders

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