Published Editorial

Goodbye to octroi, but no welcome for LBT

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The Hindu Business Line

by

Heetesh Veera
Tax Partner
EY

Contributed by:

Abhishek Shah
Associate Director – Tax & Regulatory services
EY

Octroi has been levied on the entry of goods into municipal limits of Maharashtra by the municipal corporations of the state since 1965. It has been a cash cow since — the total collection of octroi last year for the Mumbai Municipal Corporation alone was Rs 6,770 crore, contributing to about 45 per cent of total receipts.

Maharashtra has decided to implement a Local Body Tax (LBT) in lieu of octroi from this fiscal — and with this, India will become an octroi-free country. While LBT has been implemented in most municipal corporations since April 1, 2013, it will be made applicable in Mumbai from October 1, 2013. Under octroi laws, duty had to be paid at the time of importation of goods into the local area, and the checkpost authorities were empowered to assess and collect the octroi. The authorities’ powers included detention of the vehicles, determination of fair value of goods imported and so on. The idea behind introduction of LBT is to remove the bottlenecks associated with collection of octroi and smoothen the movement of goods.

Levy, Rates and Exemptions

Local Body Tax is applicable on the entry of the goods that is imported for the purpose of consumption, use or sale, into the limits of a municipal corporation.

The rate of LBT ranges from 0.1 per cent to 7 per cent. Goods not specifically covered (in the Taxable Schedule) or are not exempted (in the Exempted Schedule) attract a flat rate of 4 per cent. Dealers whose turnover is less than 5 lakh and builders/ contractors have an option to pay LBT at compounded rates. When any LBT-paid goods that are imported into the city are exported outside the city, 90 per cent of the LBT paid is refunded, subject to certain conditions. Certain other exemptions/ concessions includes re-import of goods by dealers when goods are sent for specified processes, import of goods specified job work/ export outside India, and so on.

Compliances

Dealers are liable to get registered if their turnover exceeds the prescribed threshold — such as when sales/ purchase turnover of goods covered by taxable schedule exceeds Rs 5,000 and the total sales/ purchase turnover of all the goods exceeds Rs 1 lakh. Dealers have to pay LBT within 10 days from the end of each month, and are also required to file half-yearly and annual returns.

Other compliances for the dealers include quoting LBT registration number on the bill/ invoice and maintenance of details of imports in the prescribed format.

Penal Provisions

For delayed/ non-payment of LBT, an interest has to be paid at 2 per cent per month (3 per cent from the 13th month onwards). A set of penalties are provided under LBT for various defaults — failure to apply for registration can attract penalty up to ten times of LBT payable; failure to issue bill, invoice or cash memo can attract penalty up to two times of LBT payable.

Other lapses, such as failure to disclose entry of goods, or failure to disclose correct liability in the return, inaccurate claims/ deduction can attract penalty up to five times the LBT payable.

Conclusion

Although touted as a dealer-friendly levy, the introduction of LBT has already run into trouble with trade bodies — firstly, due to the delay in abolition of octroi, which was promised at the time of implementation of VAT. Moreover, other States that used to levy octroi, such as Gujarat and Rajasthan, have gradually phased it out, either by introducing entry tax or by enhancing the VAT rates.

The dealers are also upset that provisions such as filing returns, and maintenance of LBT-specific records for a period of up to 10 years, are onerous and would add burden to the existing set of compliances that the trade fraternity is subject to. To add to this, the widespread powers given to the officers, such as compulsory assessments of dealers, levy of penalty and so on, may collectively lead to a license raj regime.

With ease of payment and hassle-free movement of goods sans the checkposts, LBT appears to be a welcome step. However, some of the harsh provisions of LBT have to be watered down. Else, the levy, collection and assessment of LBT could be realigned with VAT Authorities (probably on the lines of profession tax) for successful implementation.