Octroi taxes have a respectable antiquity, being known in Roman times as vectigalia. It is in essence a tax levied on bringing commodities into a local area/ district. As of 2013, octroi is levied possibly only in Ethiopia and in Maharashtra.
In order to abolish this cadaverous practice, the Government of Maharashtra (GoM) decided to replace it with a tax supposed to be more robust and tax payer friendly. As most of us are aware, the GoM finally acted upon its long standing promise of doing away with Octroi and introduce an account based system of tax ‘The Local Body Tax (LBT)’. The tax being based on the philosophy of selfassessment, shall definitely reduce the hassles and inefficiencies caused due to stoppage of vehicles at Octroi check posts.
While most of us are must have become aware of the broad scheme of the Act by way of newspaper and media reports, we need to familiarise ourselves with the legal framework.
The basis of the levy is the Maharashtra Municipal Corporation Act, 1949 (‘Act’). Section 152P of the Act empowers the Municipalities to levy LBT on items imported into their territory. However, while there is no separate Act, there are a whole new set of rules which essentially govern the levy. All the important provisions are contained in the rules thereby making them more relevant than the Act.
However, the new tax has been welcomed with one of the largest mass movements by the business community in recent times, and the government has been forced to postpone the levy. The reason for the stiff opposition seems to be certain draconian provisions. However, before welcoming or opposing this Act, we need to objectively analyse the provisions of LBT.
Levy: The levy is on import of goods for the purpose of consumption, use or sale. Thus liability to pay LBT generally rests on the person who brings goods within the limits of a municipal corporation. However, when goods are purchased from within the city, it shall be the duty of the purchasing dealer to ensure that the goods are not imported goods. If the goods purchased are imported goods, he shall ensure by way of a declaration in the purchase invoice, that LBT on the same has been paid. In case of lapse of due diligence by the purchasing dealer, he shall become liable to LBT.
It is pertinent to note that, Rule 22 empowers the Commissioner to enquire and satisfy himself that the declaration furnished is true and correct. Thus having regard to this provision, it will not be wrong to extrapolate the verdict of Bombay High Court in the case of Mahalaxmi Cotton Ginning Pressing and Oil Industries ([2012] 051 VST 0001) wherein the Hon’ble High Court has upheld the constitutional validity of Section 48(5) of the MVAT Act, which provides that set-off of Input Tax credit (ITC) shall only be available if tax is actually paid by the supplier into the government treasury. Thus if during the course of assessment proceedings, the officer observes that the selling dealer has not “actually paid” the VAT in full or part, he shall be entitled to deny the claim of ITC made by the purchasing dealer. This is already causing undue hardship to the assessee under VAT.
Lacuna in the definition of LBT: LBT has been defined to mean a tax on the entry of goods into the limits of the city. However, it does not include octroi. This exclusion of octroi from the definition might result in double taxation. As mentioned above, LBT will have to be paid on any goods imported within the city. However, since LBT does not include octroi, those dealers who have imported goods within the city after paying octroi might be asked to pay LBT as well, as payment of octroi shall not tantamount to payment of LBT.
Coverage of one and all: Virtually anyone bringing in goods to the city is proposed to be brought under the ambit of LBT. The definitions of ‘business’ and ‘dealer’ have been kept wide enough to override any decision of the courts granting exclusion to people from VAT. This is because, ‘Business’ has been defined to also include profession and any kind of occasional transaction without regard to its frequency, volume or regularity. The definition of ‘dealer’ includes all kinds of persons including various agents handling goods/documents of title and auctioneers who receive the price for auctioned goods.
Be it small or big traders, professionals, brokers, factors, agents, societies, clubs, etc. or people carrying on temporary business; almost everyone will be covered if he makes purchases of a meagre Rs. 1,00,000/- in a year and brings into the city goods worth Rs. 5,000/-. Even one-time transactions like purchase of car by an individual to render professional services shall be liable to tax.
Registration, returns & maintenance of records: While dealers carrying on regular business within the city are required to obtain make an application for registration within 30 days, dealers carrying on temporary business are required to make an application 15 days prior to commencing a business.
Returns are to be filed at half yearly intervals within 15 days from the end of the period. The first return shall be in Form E1 and shall be for the period of 6 months – April to September. The second return (in form EII) is an annual return i.e. for the full financial year. Thus there is an overlapping of return period. Further, there is also a provision for revision of returns; however the time limit is very short i.e. within a month from due date of filing of the original return.
Payment of tax is to be made on a monthly basis. The Rules also provide for a composition scheme for small dealers having turnover upto Rs. 5 lakh , builders and contractors. The composition scheme provides for a simple way of calculation of taxes irrespective of items imported, which is quite encouraging.
LBT requires issuance of bills in case of any sales amounting to a meagre Rs. 10/- or more and more so preservation of the same for a period of 5 years. Failing to issue an invoice might lead to penalty. However there is a duplicacy in the penalty provisions – Rule 48(1) provides a penalty upto double the tax amount, while Rule 48(7) provides for a penalty of double the invoice amount. Both the provisions provide penalty for not issuing invoice.
Further, the taxability of an item is determined in accordance with rates mentioned in the Schedules. Schedule-A lists the items and rates at which the same shall be taxed. The dealer will need to work out the liability to LBT based on different rates prescribed (ranging from 0% to 7%) and this may become an exercise in itself. Schedule-B lists out the items exempt from tax.
There are very few items which have made it to the coveted Schedule-B and even fruits, vegetables, etc are not covered in the exemption list. Persons dealing in these will have to register as well.
Sweeping powers: Wide powers have been given to the Municipal officers to seize goods, attach any property (and not just bank and debtors as is the case in VAT), stop any vehicle in transit etc. The business community is afraid that these powers will become a cause of harassment. However, it may be mentioned that some of the powers can be exercised only by an officer of the rank of DMC and above.
Further, penalties for most offences are steep and discretionary which might also give an impetus to unsavoury favours sought by officers. For example, (i) Penalty for non-registration may extend upto 10 times of the amount of LBT payable during the period during which the dealer did not have registration; and (ii) Penalty for failing to disclose fully and truly all material facts, claiming an inaccurate deduction or failing to show appropriate liability of LBT in the return may go upto 5 times the amount of LBT payable.
Exemptions & Refunds: Goods sent for job work/ processing outside the city should be received without any change in appearance or condition; failing which LBT will have to be paid afresh on the entire value of goods and not just the value addition on account of processing. What fails to appeal to a rational mind is how processed goods will appear the same as original! The other condition which needs to be complied with is that the goods sent out should be brought back within 6 months.
In case of goods imported into the city for job work, the condition appears a little rational as the words used in the Act are the goods should not change ‘form’, which in my opinion is a little broader than the word ‘appearance’.
Further, LBT shall not be levied on goods exported outside the territory of India.
It is also relevant to note that, in case of goods imported but re-exported to another city, by way of sale or otherwise (i.e. branch transfer), 90% of the LBT paid on import shall be refunded.
Payment of disputed appeal before appeal: The law mandates assessee to deposit the entire amount of the disputed tax before filing an appeal. Considering that the appellate authority is a municipal officer and the despicable disposal rate that Indian judicial system has, in my humble opinion, stay should be granted atleast upto the stage of first appeal.
Appeal against an order passed by an officer below the rank of a Deputy Municipal Commissioner (DMC) shall lie with the DMC while that passed by an officer of the rank of DMC and above shall lie with the Municipal Commissioner. Further, there is no provision for second appeal and hence the only remedy will be approaching the High court.
Interest on delayed payments: The interest rates prescribed for delayed payment of LBT are phenomenally high. Interest rate ranges from 2% p.m. for delay upto 1 year to 3% p.m. (36% p.a.) for delay of more than a year. Interest rates need to be re-visited as no other law requires payment of such high interest rates.
No credit mechanism: No mechanism for input credit of LBT paid has been prescribed in the Rules/ Act, which will lead to a cascading effect on LBT paid. This shall especially affect those dealers who do not directly procure from the manufacturer as more the number of intermediaries, lesser the chances to fix a competitive selling price.
While the law relating to LBT is indeed welcome being more sound in terms of ideology as compared to octroi, it is only apropos that some of the provisions be revisited and watered down so as to inspire confidence within the business community. While all and sundry were under the ambit of octori; the same cannot be the case in LBT in view of administrative difficulties of registration, returns, assessment, etc.
Taking a cue from the above, LBT can be perceived to be akin to VAT. Thus the simpler way for the State could be to collect it alongwith VAT under a separate challan/accounting code.
With the traders demanding abolition of the law, the government has responded by promising to revisit the Act. In principle, the levy is better than octroi – it is accounts based, will avoid delays when goods are in transit. However, the way the Rules have been drafted, it appears to put excessive compliance burden on the trading community. Having to deal with one more authority with potential harassment has made the businesses nervous. It shall not out of context here to remember Benjamin Franklin’s saying “The only things certain in life are death and taxes.” All that one can hope for is, that the law be made simple so that it can be widely and easily adopted!
