The draconian LBT: Local Body Tax explained

With the wedding season round the corner, imagine you are going in your car from Navi Mumbai to Mumbai to attend a marriagewith your wife who is wearing gold ornaments and a silk saree; please do not be surprised if a government officer stops you and demands LBT on the car, saree and gold ornaments. Your luck may run out further, if he invokes the provision saying that you have failed to take a registration under LBT (Local Body Tax Act). He may demand, in the name of penalty, a compounding fee, that may exceed the cost of the ornaments or the car or the saree itself. You may, along with your wife, be convicted for the offences you may have deemed to have committed under LBT.

Take another situation. Your dabbawala gets your tiffin box daily to your office in Fort area from your house in Thane. As the financial year comes to an end, one fine day, after December, a LBT officer lands in your office instead of the dabbawala with a warrant to arrest you for having brought into the city limits the goods exceeding the prescribed turnover limits.

These may look too fictitious and simplistic or some may call these situations “beyond the wildest stretch of one’s imagination”. Well, going by the experience of dealing with the department, you might have come across officers trying to levy tax on flats situated in Navi Mumbai, purchased from a builder in Mumbai, arguing that the flat was brought into the city limits from Mumbai where the builder’s office was situated. With this kind of background, the LBT looks like a draconian Act, especially with key words like ‘goods’, ‘dealer’, ‘business’ loosely defined in the legislation, giving enough scope for the administrators to stretch their imagination to fanciful limits to the common man’s harassment and dismay.

LBT stands for Local Body Tax, which has been introduced in most of the municipalities and corporations in Maharashtra,  in lieu of Octroi or Cess. It is a levy under entry 52 in the State list of Schedule VII of the Constitution of India, on the entry of goods into a city limits for the purpose of consumption, use or sale therein. Thus, the recent agitations against LBT, a levy, which is constitutionally valid, have given rise to questions as to the root cause of the agitations.

Octroi is a levy which was prevalent in Roman times. It was extensively used as a tax tool in Europe till World War II. Now, it is almost extinct except in Ethiopia and Maharashstra (a true reflection of comparable development of the economy or the situations of drought). Other states in India have done away with this levy and they share a portion of the Value Added Tax (VAT) or Sales Tax (ST) with the local bodies.

Municipalities, with a share from the state government and other tax collection methods like property tax, entertainment tax, etc, can run the administration with a decent budget.  A power to use (more likely abuse), does not necessarily warrant a situation to use. However, the greed to have extravagant budgets, in the name of development (personal development of bureaucrats and ministers as actual development remains a mirage), is the driver that makes the local bodies and the state government stick to their guns in implementing the LBT despite protests.

Being the representatives of the people, our corporators, MPs and MLAs have forgotten that they have a duty to echo public opinion and ensure that government is run as per the wishes of the public. At the time of introduction of VAT in 2005 the Government of Maharashtra had promised that Octroi would be removed and there will not be any additional tax burden on citizens but now they have introduced  the LBT. Thus, LBT is not a good system of tax collection suited for the 21st century, and when there are many other better options available with the government.

Another reason which goes against LBT is the exorbitant compounding fees. The Bombay Provincial Municipal Corporations Act, 1949,  the Act that gives right to levy LBT, as such does not have a penalty-limit prescribed for any violations relating to LBT, though there is an elaborate Annexure prescribing the various penalties. That shows that penalty cannot be levied legally.

However, the Rule 48  framed under this Act, quantifies the penalty that can be levied in different cases. Thus, the said Rule is ultra vires the Act.

Further, the compounding fees, is payable, only if the dealer is convicted. However, the administration is collecting the compounding fee as tax at the time of assessment itself making it a dubious source of revenue for the Government.

Another point against LBT is the cascading effect of teh Tax. Unlike excise or service tax or VAT, there is no concept of set-off or input credit. In other words, every time the goods cross the city limits they will be liable for LBT and levy of LBT may exceed the value of goods itself. A simple reading of the Act would necessarily warrant a LBT when goods are imported from one city to another (as the goods are purchased from another registered dealer under the Act), the corporations interpret that the LBT is leviable in such cases as each city corporation is a different entity despite the fact that the legislation empowering the levy is same. This shows that legislators have not applied their mind while framing the law; else they have done so with full knowledge that it will fill the Governments and their own coffers through corruption.

Another reason that frightens the businessmen is the LPT or Local Panchayat Tax.  Like the areas near Bhiwandi or Khopoli, which adjoin Mumbai, but are outside the city limits and hence octroi-free zones, are now allowed to levy a similar tax on the entry of goods into the village limits. Thus, now this may be looked as a gold mine for extracting LPT by the Panchayats as many businesses have set their shop in view of enjoying the tax-benefits. In absence of such benefit, which may be a reality, if LPT is introduced, these panchayats may not have any attraction to retain the existing business, leave alone attracting the business. Many of the businessmen have started thinking of shifting to neighbouring states, especially Gujarat.

Another reason against LBT is that there is no time-limit that is specified for completing the assessment of the firms. In such situations, the dealers may be kept in suspense as to their liability to maintain books and records. Further, the appeal process is against the principles of natural justice for the simple reason that in case you decide against the order of the LBT officer or commissioner, you are required to deposit the entire tax demanded before filing the appeal. Draconian and unconstitutional, I would think, isn’t it?

The Act is not a comprehensive Act that is well worded or suited for taxation. With lot of alternative avenues open for collecting enough revenues for the corporations, the political class should respect the difficulties of the businessmen and common men, and help them to reach the sane voices (if there are any!) in the government. They should bring in the changes in legislation to repeal LBT and make suitable changes in VAT so that the local bodies do share  revenues the state government derives from VAT. This will ensure that the administration frees itself from the task of collection of addition tax and other related administrative work. This will also help the dealers of additional hassles of payment of tax, filing of return, surveys, raids, check posts, assessments, appeals etc. and also dealing with one more Government body prone to corruption.

(The author is a partner at Borkar & Shenoy, Chartered Accountants)