Local Body Tax – Why Brickbats Instead Of Bouquets?

 Adv. Neerav Mainkar

After years of dragging its feet on the abolition of Octroi at its Check Nakas in several cities, the State Government has finally abolished Octroi in the cities of Nagpur, Pune and Pimpri-Chinchwad, Thane & Navi Mumbai Municipal Corporations, replacing it with Local Body Tax (LBT).

The State Government is also all set to launch LBT Regime in Mumbai w.e.f. from 1^st October 2013, which is ‘in lieu of Octroi’. Basically, this is a tax on purchase and not on sale. All commodities imported into the city of Mumbai shall be subject to levy of LBT, unless otherwise exempted.

Now, the moot question is that if Octroi was considered the very epicenter of corruption, red-tape and the most poorly managed tax body, why is there a state-wide protest against a more transparent and better coded tax regime, which is the Local Body Tax or L.B.T., the way it is now infamously known.

The Federation of Maharashtra (FAM), an Association of Traders has launched stiff protest against the introduction of LBT, which has spilled on to the streets and has paralysed the State’s economy and created a fear psychosis in the mind of the common man. Many industries are joining the bandh, which is likely to be indefinite. Transporters, too, have joined the Bandh and have extended their support to the cause of the Traders.

In this backdrop, an attempt is being made to de-mystify the LBT and look into the reasons why it has evoked brickbats instead of bouquets, when it seeks to replace the draconian Octroi Regime with more transparent tax administration.

The reason is not far to seek. If one were to go through the text of the Bombay Provincial Municipal Corporations (local body tax) Rules, 2010, it can be seen that the said Rules virtually bring the check naka to your door step. It is a case of falling from the frying pan into the fire. The Rules are elaborately drafted and apparently try to achieve transparency. However, the basic difference between the Octroi and LBT is that Octroi was like the Customs, where the goods, once cleared, moved freely without any further check by Customs (although VAT, etc. were checkpoints for further transactions), whereas LBT is like Central Excise which is a total record based tax and indirectly covers all transactions in its ambit.

The LBT Rules provide for meticulous procedure like obtaining registration, even if temporarily doing business in a city, filing of returns every six months, accountal of the goods even after they have been subjected to LBT, provisions for collecting data from the trade in a mandatory manner in the name of statistical information, severe penalties including recovery of amounts due from a person liable to pay LBT from any other person who is holding any amount on behalf of such person, provisional attachment of property, which can extend up to 2 years, suspension/ stoppage of refunds if found to be against the interests of the Revenue, cumbersome procedure for claiming exemptions and mandatory audits.

While the tax rates are not really a subject of dispute as most of the items are likely to be covered under the 2 to 4 % bracket, this is an added cost to the end consumer as the LBT is not likely to be subsumed in the GST, either. Thus, the existing multiple taxation system gets an impetus with this lacuna and is likely to hamper the smooth transition to the GST.

Some of the arbitrary Rules, which are the root of the protest, are discussed below:

Rule 20: Presumption and Burden of Proof:

This Rule stipulates that if a registered dealer has purchased goods under Schedule A (Taxable goods) from another registered dealer within the city area, in order to prove that he is not liable to pay the LBT on his purchase, if called upon by the Commissioner, he would be required to produce a certificate from the selling dealer that the said transaction is in the regular course of his business as provided in Rule 21 and if the Commissioner is satisfied, then he may pass an order that the first registered dealer is not liable to pay the LBT.

Sub-rue (2) further provides that unless the contrary is proved, it shall be presumed that the said goods have been imported into the city and shall be liable to tax.

Rule 21 & 22: Certificate to be issued by the selling dealer and particulars to be furnished in the bill, invoice of cash memorandum:

Rule 21 stipulates that when a dealer holds goods within the area of a city and sells such goods to another dealer within the area of the city, the selling dealer has to issue a certificate with particulars as per Rule 22.

Rule 22 stipulates that the bill, invoice or cash memo should contain the particulars of the full name and style of his business, the address of his place of business and number of his certificate of registration and the particulars of the goods sold and the sale price thereof. and‑

It is further provided that where the sale price is not less than Rs. 500, the dealer shall also enter in the bill, invoice or cash memorandum the full name and style of business of the buyer(if any), and his address and the number of any certificate of registration held by him under these rules.

An analysis of these rules suggests that unlike Octroi, there is envisaged a check on the intra-city transactions as well, although the same do not attract LBT, not being imports into the city. Thus, each and every transaction above Rs. 500/- shall bear the details of the purchaser, as well. Now, when the dealers issue VAT invoice, the above particulars as per LBT requirements would also have to be incorporated in the invoice. Further, on a practical note, cash memos do not contain the full details of the buyer in most cases, which will now become mandatory. Also, if the buyer gives false particulars, the seller will be taken to task. On the other hand, if the seller asks too many details, the buyers will be unwilling to share the details. This would lead to a chaotic situation. The transition from Sales Tax era to VAT era has been relatively smooth as such minute intervention has not been the focus of the tax administrators. The presumption, in above rules, is to hold the dealer as guilty until proved innocent. Even in criminal jurisprudence, strict proof is required to convict a person and the burden of proof is always on the prosecution. However, in the LBT Rules, the tax payer would be made to run from pillar to post to prove his bonafide and until such time, he would be considered a tax evader.

Rule 25: Determination of Fair Market Price:

This is another arbitrary provision, which empowers the Commissioner to himself determine fair market price of any commodity imported into the city by a related person or not against consideration, if he feels that the declared value does not reflect the fair market price.

However, no mechanism to determine the fair market price in such cases has been provided, which means that any arbitrary value that is fixed would be final in the absence of any sound parameters to arrive at the same such as value of comparable or identical goods imported during same period, market survey, coast analysis method, etc. This lacuna needs to be addressed quickly failing which there would be lot of litigation.

Rule 26: Inspection of goods in transit:

Sub-rule (1) provides that any vehicle in the area of the City, when so ordered by the Commissioner with a view to preventing evasion of local body tax, shall be stopped and kept stationary so long as it may be necessary, by the driver or any other person in charge of any vehicle (including transport vehicle) and such person shall allow the Commissioner to examine the contents in such vehicle and inspect all records relating to the goods carried in such vehicle which are in possession of such driver or other person in charge, who shall, if so required, give his name and address and the names and addresses of the owner of such vehicle, as well as of the consignor and consignee of such goods.

Sub-rule (2) provides that if the transporter of any goods, in the City fails to furnish documents relating to the title of such goods, he is so transporting then, unless proved to the contrary, he shall be deemed to be the owner of such goods and shall, notwithstanding, other provisions of the Act or these rules but subject to the provisions of this rule, be liable to pay local body tax, interest, or as the case maybe, penalty payable in respect of such goods, under the provisions of these rules.

This is the provision which is most susceptible to abuse. Under the Octroi regime, a long queue at check nakas was a common sight for travelers, which impeded inward movement of passengers in the city. However, since the LBT Rules also provide for checking of transport or other vehicles within the city, there would now be naka-bandis within the city limits, where even private vehicles could be stopped and checked. This situation is even more fearsome. The citizens would have to learn to live with various naka-bandis i.e local police station naka-bandi, drink-and-drive naka bandi and now LBT naka-bandi. The Transporters have been cast with a very heavy burden of disclosing the details of consignor & consignee and if found wrong, the transporter himself would be considered the owner of the goods and penalized. A poor truck driver is mostly illiterate or semi-literate. How can he be expected to bear such an onus as he too may be given wrong information by the consignor about the nature of goods, details of consignee, etc., which he has no reason to verify in the course of his duty, which is to transport the goods to their destination.

While there are several other provisions, which are arbitrary or ambiguously drafted, the protests are not against the tax being imposed but the manner in which it is being imposed. The common dealer fears cumbersome compliance procedures more than the tax itself. The elaborate procedures prescribed would mandate that every dealer, however small, would need the services of a consultant to comply with the provisions of LBT adding to his cost.

The most important reason for the protests is that the Government has done precious little to educate the masses about the main features of LBT and this has led to grapevine spreading several false notions about LBT, which need to be clarified by the Government, which is a duty it owes to the tax payers of this city, which contributes a lion’s share in all forms of revenue to the nation.

Lastly, the State Government needs to be sensitized to the fact that Taxmen are not policemen and taxpayers are not criminals. So let us brace ourselves to welcome the change and hope that the change, in its final form, is for the better!

About the author:

Adv. Neerav Mainkar is a Law Graduate and Founder of law & consultancy firm – M. Neerav & Associates.

He has spent over 16 years in the Customs & Central Excise Department in the Executive Cadre and is visiting Faculty to train Audit Officers of the CERA.

He specializes in handling Customs Litigations, right up to Appellate Tribunal/High Court/Supreme Court, Settlement Commission and effectively defending cases on behalf of clients.

His firm provides one stop assistance in Service Tax / Central Excise and Customs to clients and also advises entities for Tax Planning, setting up of industries in Tax holiday zones like Himachal Pradesh (Baddi) and setting up, De-bonding of 100% EOU’s, SEZ and EPCG schemes and other DGFT matters.