Even though Maharashtra will soon abolish local body tax (LBT), the woes for Mumbai’s traders will continue as they will have to pay octroi as well as a higher rate of VAT in the city
By Shweta Sengar
In a significant move, the Maharashtra government has decided to abolish the contentious local body tax, with effect from August 1, 2015. In order to compensate the municipal bodies for lost revenues, it has also been decided that the value added tax (VAT) rate will be increased. Traders in Maharashtra have been voicing their concerns about the LBT, and have always batted for a unified tax structure like the goods and services tax (GST).
The Maharashtra Budget 2015-16 was announced on March 25, 2015, by the finance minister of the state, Sudhir Mungantiwar. In his maiden budget, the minister announced the scrapping of LBT and said that the government is currently looking for an alternative tax structure. The minister has also promised that once LBT is abolished, there won’t be double taxation in Mumbai. The LBT was introduced by the previous government with the objective of replacing octroi. Though octroi was replaced in all municipal corporations in Maharashtra, it wasn’t removed in Mumbai.
Octroi is a local tax collected on goods that are brought into a district for consumption and it is levied by the Brihanmumbai Municipal Corporation (BMC). LBT, on the other hand, 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. Octroi of 5.5 per cent is levied on all the goods entering Mumbai, which has no LBT.
Traders in Mumbai will now have to pay octroi as well as enhanced VAT, the rate of which will be increased from the date LBT is abolished (in case octroi is not abolished along with LBT). As mentioned earlier, the proposed date is August 1, 2015. Till that time, the existing tax structure comprising VAT, LBT and octroi will prevail in the state.
Says Mitesh Mody, action committee member, Federation of Associations of Maharashtra (FAM), “Abolishing LBT and octroi will bring about a positive effect on trade and industries, including electronic components and products. In fact, the electronic components market in Maharashtra is suffering heavily because of LBT and trade within Mumbai is also badly affected 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 traders in the electronics domain. They have always opposed the tax, 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 procedures for calculating and paying the taxes. A unified tax structure is the need of the hour, and scrapping LBT is definitely welcomed by tax payers in general and the electronics community in particular.” Mody is also of the view that a lot of the paper work associated with taxation would decrease and the electronics community, specifically, will make higher profits.
Double whammy for Mumbai
It would, however, be a double whammy for traders in Mumbai if the octroi remains in force in the city. When the VAT hike occurs, traders in Mumbai will be penalised on both fronts – they will have to pay octroi as well as a higher VAT. Mody adds that no clear picture has emerged yet about whether the octroi would be abolished in Mumbai and whether other municipalities will be governed under a similar tax structure. “The All India Radio and Electronics Association (AIREA) has written to the government to sort out this issue and, hopefully, a solution will be found soon,” he says.
Is GST the answer?
The electronics trading community in Maharashtra believes that GST is the answer to its problems as it can offset the losses the government bodies incur when abolishing LBT. The traders, distributors and channel partners have unanimously supported this move by the Central government, as they feel it will simplify the tax structure and turn India into one large common market by rationalising the supply chain. A unified tax structure within the state, too, is urgently required. This is not just about increasing profit margins, but also about relief from the lengthy and cumbersome processes of paying various taxes.
