By Shweta Sengar
March 27, 2015: In a major move, the Maharashtra government has decided to abolish Local Body Tax (LBT), effective August 1, 2015. In order to compensate the trading community, it has also been decided that Value Added Tax (VAT) rate will be increased. Maharashtra has been voicing its concerns with the LBT and have always batted for a unified tax structure like Goods and Services Tax (GST).
Maharashtra Budget 2015-16 was announced on March 25, 2015 by State Finance Minister Sudhir Mungantiwar. In his maiden budget, the minister announced scrapping of LBT and the government is currently looking for an alternative tax structure. The minister has also promised that once LBT is demolished, there won’t be double taxation in Mumbai. The LBT was introduced by the previous Congress-NCP government with an objective to replace Octroi. However, Octroi was replaced in all municipal corporations in Maharashtra except Mumbai.
Octroi is a local tax collected on goods that are brought into a district for consumption levied by Brihanmumbai Municipal Corporation (BMC). Whereas, LBT is a cess levied by the government of Maharashtra on the entry of goods for use and consumption within the jurisdictions of local municipal corporations. An Octroi of 5.5 per cent is levied on all the goods entering Mumbai. Mumbai has no LBT but Octroi.
In this case, Mumbai will have to pay Octroi as well as enhanced VAT, whose rate will be increased from the date LBT is abolished (if they do not abolish Octroi along with LBT). The proposed date of abolition of LBT is August 1, 2015. Till that time existing tax structure of VAT, LBT and Octroi will prevail in the state.
Speaking about Octroi in Mumbai, Mitesh Mody, action committee member, Federation of Associations of Maharashtra (FAM), says, “Abolishing LBT and Octroi will bring positive effect on trade and industries including electronic components and products. In fact electronic component market in Maharashtra is suffering heavily because of LBT and trade in Mumbai is also suffering heavily because of Octroi.”
Problems with LBT
There are several anomalies in the tax structure due to which LBT never got the support of the trading community, especially the electronics community. Traders opposed it claiming that it will increase tax levels and lead to harassment by municipal inspectors.
According to Mody, “The state is already suffering from long and cumbersome procedure of calculating and paying the taxes. A unified tax structure is the need of the hour and scrapping up LBT is definitely welcomed by taxpayers in general, and electronics community specifically.” Mody is also of the view that a lot of paper work in taxation would decrease and electronics community specifically will make more profit.
Double whammy for Mumbai
It would, however, be a double whammy for traders in Mumbai as the Octroi remains enforced in Mumbai. Therefore, as VAT hike comes, traders in Mumbai will suffer pressure from both the sides. They will have to pay Octroi as well as other taxes that will be levied later. Mody says, “This would be unfair to the people of Mumbai as they will be pressurised from both the ends and they will end up paying more taxes.” He adds that there is no clear picture as of now if Octroi would be abolished in Mumbai and there would be equal tax structure as in other municipalities. “AIREA has written to the government to sort out this issue and hopefully, a solution will be sought soon”, he adds.
Is GST the answer?
The electronics trading community in Maharashtra believes that GST is the answers to their problems as it can set off the losses the government bodies incur by abolishing LBT. The traders, distributors and channel partners have unanimously supported this move by the Central government as they feel it will certainly simplify the tax structure and turn India into one large common market by rationalising the supply chain. A unified tax structure is needed that will be levied across the state. This is not just about low profit margins but the traders want relief from the lengthy and cumbersome process of paying various taxes.
