The draconian LBT: Local Body Tax explained

LBT is 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, local body tax, draconian Act, common man, transport of goods, goods, dealer, business, Octroi, Cess, LPT, Local Panchayat TaxWith the wedding season round the corner, imagine you are going in your car from Navi Mumbai to Mumbai to attend a marriage with 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.
 
LBT, local body tax, draconian Act, common man, transport of goods, goods, dealer, business, Octroi, Cess, LPT, Local Panchayat TaxAnother 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?
 
LBT, local body tax, draconian Act, common man, transport of goods, goods, dealer, business, Octroi, Cess, LPT, Local Panchayat TaxThe 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)
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COMMENTS

Dekho ji.com

5 years ago

If people of Maharashtra had the Right To Recall their representatives, such laws would not even be tabled in Parliament / Legislative Assemblies, forget about the Govt forcing it onto the people. We need Right to Recall, else people everywhere in India will spend the rest of their lives (as they have done for past 65 yrs) firefighting against such bad laws.

KISHOR

5 years ago

Why didnt goverment recover losses of scam from corrupt politician instead of recovering LBT FROM Mumbai

REPLY

CA PRADEEP AGARWAL

In Reply to KISHOR 5 years ago

Dear Sir,

This is for the public to decide whether they will keep the present Govt. in power and then equate the recovery process.

jaideep shirali

5 years ago

The implementation of LBT should be modified to make it user friendly. If there is no LBT, local bodies would have to beg the State Govt for funds for every road and gutter in our cities, which is ridiculous. Traders oppose LBT because many are not used to declaring their income, leave alone paying taxes on it. Clubbing LBT with another levy makes no sense,for example,many businessmen maintain duplicate accounts for lower tax payments. And let us not blame netas and babus, we have introduced them to the practice of "setting".

CA PRADEEP AGARWAL

5 years ago

Actually the Govt. has taken there election for granted, filing of a caveat in SC is must. But I reside in NCR if at any time any help needed most welcome!

Arun Mehta

5 years ago

Traders are in for long haul with bad timings.'Akhaya Triya' broke the momentum of strike by the reopening of the shops, and now media both at the centre and state too busy with a yet another major 'national crisis','Match Fixing' at IPL6. Meantime,Malls and other big retailers are assured of a jackpot time and praying that the LBT stalemate continues further.

REPLY

CA PRADEEP AGARWAL

In Reply to Arun Mehta 5 years ago

Actually, traders have a problems also, they defer eyesores for future action and not immediate action, whether Akshaya Triti or any other thing the business will down shutters, so it will help everybody and bring administration to where it belongs.

CA PRADEEP AGARWAL

5 years ago

HOW HAS THE PRESIDENT SIGNED THE ACT, INSPITE OF SO MANY INBUILT PROBLEMS. FRANKLY CONGRESS GOVT. IS LIKE THAT WHETHER IN CENTRE OR STATE

CA PRADEEP AGARWAL

5 years ago

Feel Maharashtra has fallen towards Bad Times hence Mechanism is being devised to garner personal and official revenues by hook or crook.

SuchindranathAiyerS

5 years ago

A typical post 1947 Indian Law, LBT is designed to harass, intimidate and extort money from hapless Indians for the ruling scum:

Arun Mehta

5 years ago

The trading community has raised scarecrow courtesy fancy interpretation by some CA's.Whya not they file a PIL in court and get the act struck down.Why the MLA's who voted the bill ever bothered to dissect the Bill word by word.Why the Malls who are doing a Roaring business in Mumbai thanks to the traders strike ever raised this scare as their stakes are much higher than the traders,investment wise.

REPLY

CA PRADEEP AGARWAL

In Reply to Arun Mehta 5 years ago

A joint effort has to be made for getting the law struck off, an application in SUPREME COURT, will bring black and white to the doorsteps.

Shama Zaidi

5 years ago

a neta-babu tax amounting to 25% of their stated annual income should be put in place instead. only if netas and babus can prove to the lokpal that in the previous financial year they have not taken bribes or other material benefits will this amount be returned. otherwise they will have to forgo the 25% plus 80% of their ill-gotten gains.

pankaj parekh

5 years ago

Income Tax & Excise deptt are coming under President, Highest post in India. Even President have no right to seize PPF, but such Power is given to these babus in LBT !
As per C.M. :
Increasing VAT is going to extra burden on small villages/ towns etc. When Congress increased VAT from 4% to 5% then? Have they thought of same at that time ? Now what is harm today? Collection of VAT from said area is hardly 10% to 15%. Not going to make much difference to them.
LBT applicable to Big Cities only. So it is not going to effect Villages/ Towns. All villages / small town, have to depend upon big cities. They have to buy most of the requirements from big cities only. Thus indirectly they are paying LBT.

CA PRADEEP AGARWAL

5 years ago

Though this is not the Forum for such things but a request to MLF team regarding an article on-WHISTLE BLOWERS

Desai Bhavesh

5 years ago

At lest somebody took pain to dissect the suspense subject, discussed by everybody!
Keeping pro and cons of LBT aside, basic and fundamental question- Is Municipal Corporation is geared up to implement dynamic nature taxation at such micro level? BMC record is not so good in handling static tax like property tax, water bill and octroi? Law passed without adequate implementation machinery and understanding will be breeding ground for corruption and harassment to traders, whose cost, ultimately will be borne by us.
Sad part about entire episode is poor communication from Government.

REPLY

Poornima mepani

In Reply to Desai Bhavesh 5 years ago

D MCGM is Asia's largest local body, I am told. By personal experience, can vouch for the fact that it is the world's most corrupt one and is a darling of I

Poornima mepani

In Reply to Poornima mepani 5 years ago

sorry, posted an incomplete reply above by mistake.... India's most corrupting industry i.e. telecom. Seen MCGM's new property tax system esp for the calculation of tax on telecom towers.If the revenue issue was truly the reason behind LBT, why didnt it levy a huge tax increase on towers. Aha, the DoT and the GoI love telecom operators, MCGM joined the great Indian telecom party instead of taking them on to make extra hay.

CA PRADEEP AGARWAL

In Reply to Desai Bhavesh 5 years ago

But, what will the citizens do? Traders can't protest, public out of bounds. Govt./Executive Machinery supporting the Govt. of the day, Then what to do? Fail to understand.

jaykayess

5 years ago

I have heard first hand from a known person who was present in multiple meetings with CM Prithviraj Chauhan, that the traders body is not only being aggressively targeted and harassed, but their voice is also being muzzled - all prominent newspapers in Mumbai have been coerced by the govt NOT to print anything from the traders. Newspapers are not even being allowed to accept paid advertisements from trade associations, stating their point of view. Have you seen a single ad from the trade associations? So it is clear that there is tremendous pressure from the govt to ensure that LBT gets implemented, any way or anyhow.

What this article does not highlight sufficiently is that the focus of the traders agitation is NOT against levy of LBT itself - it is purely against the MODE of collection of LBT. All they want is that the additional tax amount should be collected as a surcharge on VAT, without having to file separate returns or be subject to harassment by yet another authority.

The very fact that the govt is not agreeing to such a rational demand proves that the govt has vested interests which are far more and deeper than the mere revenue.

After all, octroi provided so much unauthorized income to the octroi officers, so this is sought to be replaced by this underhanded route.

REPLY

Poornima mepani

In Reply to jaykayess 5 years ago

India's rulers are wolves in sheep clothing and the protesters are sheep in wolves clothing !!!! A muzzled media can do nothing to reveal the true identities.

CA PRADEEP AGARWAL

5 years ago

Actually all the Acts of Centre and States have one thing in common...what is that?

REPLY

Arun Mehta

In Reply to CA PRADEEP AGARWAL 5 years ago

Both the central and state acts provide enough loop hole in the law for interpretation by professional lawyers,CA's to the advantage of their Clients.As long as we have 'incompetent' law makers or Tax lawyers and tax consultants will never starve in this great country of ours.

CA PRADEEP AGARWAL

In Reply to Arun Mehta 5 years ago

These loopholes are kept intentionally for the benefit of ruling elite but when exploited by all then they try to plug those loopholes, in the guise of social reforms and those are highlighted. Why do they have to make stringent LGT, can also issue a heavy penalty challan but they will not do it, because there cannot extricate the amount as demanded. Sorry to say this---but can't help it.

Maharashtra consumer forum orders Vodafone to pay Rs25,000 to doctor

Dr Ashish Gala, a practitioner in suburban Mulund, had registered with Vodafone on the “Do not Call list”. Yet, he got calls from various companies following which he filed a complaint with the service provider on 30 August 2008

 
Holding Vodafone India guilty of deficiency in service, Maharashtra State Consumer Disputes Redressal Forum has upheld a lower court order which asked the private mobile service provider to pay Rs20,000 compensation and Rs5,000 costs to a doctor for failing to stop unsolicited commercial communications. 
 
“Vodafone had failed to discharge its obligation and acted with imperfection, shortcoming or inadequacy in the nature and manner of purpose, which is required to be maintained by it under the regulations,” observed SR Khanzode and Dhanraj Khamatkar in their order yesterday. 
 
“Thus, deficiency in service within the meaning of Section 2(1)(g) of the Act is well established as against Vodafone,” the forum members further said while dismissing an appeal filed by Vodofone against the consumer court judgement. 
 
Dr Ashish Gala, who practices in suburban Mulund, had registered with Vodafone on the “Do not Call list”. Yet, he got calls from various companies following which he filed a complaint with the service provider on 30 August 2008, saying Vodafone should have ensured that he did not get the calls. 
 
Vodafone argued that it was not deficient in service as under Telecom and Solicited Commercial Communications Regulations, 2007, there is no positive obligation on it to stop unsolicited commercial calls. 
 
In fact, Vodafone said, Telephone Regulatory Authority of India did not contemplate and acknowledges the fact that such communication or unsolicited communication calls cannot be stopped entirely. 
 
Vodafone further contended that as per explanatory memorandum issued to clause 16 of the Regulations, 15 days time is provided for a subscriber for making the complaint to his service provider in respect of unsolicited commercial communications. However, the complainant had failed to make any such complaint within a fortnight.
 

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COMMENTS

mnatives

5 years ago

nice

Traders' body calls for an open debate on LBT in Maharashtra

According to CAIT, traders have lost business of over Rs75,000 crore during the past two weeks of their strike. The government should come forward for an open debate on imposition of the LBT, the traders' body has demanded

 
Traders' body Confederation of All India Traders (CAIT) has called for an open debate on the merits and demerits of local body tax (LBT) that is being implemented in Maharashtra even as most shops across the state have remained closed today as well.
 
CAIT claimed that loss of business during the two-week long protest from traders and shopkeepers is estimated to be over Rs75,000 crore. To avoid more losses, the traders' body has called for an open debate on the merits and demerits of imposition of such a tax.
 
“The estimated business loss was over Rs75,000 crore causing a revenue loss of about Rs9,000 crore to the state government due to the strike,” the confederation said.
 
Wholesale and retail traders from Mumbai, Thane and Nagpur have been on an indefinite strike against LBT, stating the move will hurt their businesses badly.
 
Maharashtra is trying to replace the traditional octroi system with the new LBT. LBT is an account-based cess collection for every raw material used or imported into the city’s limits by all businesses, traders and manufacturers. In the newly introduced local body tax, a lump sum amount has to be paid by traders or manufacturers or owner of goods within the specified period.
 
CAIT said LBT suffers with various legal infirmities, ambiguities, confusions, disparities and anomalies. It will lead to double taxation on the same product, which is against the settled law of any taxation system.
 
“The basic principles of proposed Goods & Services Tax (GST) for which the Maharashtra government has already agreed, have been flouted even when the GST is not yet implemented. This amply shows that state government is inclined to play with the taxation system,” said BC Bhartia, national president of CAIT.
 
CAIT national secretary general Praveen Khandelwal questioned the jurisdiction of local bodies to enforce, collect and govern any accounting based tax, which has interpretation of law at each step. The municipal corporations and other civic bodies are not mandated to act as tax authorities. “Accounting based taxation system and interpretation of the taxation law, not being the core competence of municipal authorities, will result into greater harassment and victimization of traders,” he said.
 
According to Khandelwal under the proposed system, traders will have to keep record of all such entries and will have to file a return with the local self-government of the concerned city. This will lead to extra paper work whereas the traders are already subject to comply with large number of paper formalities under different acts, laws, rules and regulations, he claimed.
 
In Mumbai, which is the only city that charges octroi at 4%, LBT will come into effect from October, while other cities in the state have already gone the LBT way. 
 
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COMMENTS

Srinivas

5 years ago

Dear Mr Jaideep, the issue is not one of hiding income - as rightly stated, there is double taxation involved, no set-offs, and most importantly, we all know that once law is brought into force, it is never repealed - hence the association is right to be on strike. Why only Maharashtra politicians have the brains to bring in LBT and not anyone else - because for so many years, we have accepted the wrong practice of ZAKAT ( the Urdu word for OCTROI )! This is filling coffers of all parties and they have been enjoying and now they know that under GST they will not be able to get any more revenues.

KISHOR

5 years ago

Why didnt goverment recover losses of scam from corrupt politician instead of recovering LBT FROM Mumbai

hasmukh

5 years ago

LBT is a new tax and will involve huge expenditure to be incurred to administer it. New Dept. to be set up, whole army of staff to be appointed and all procedures to be undertaken :registrations, correspondence, returns, challans, notices,hearings, assessments, appeals etc. Thus, major part of revenue will be eaten away by exp. for administering it. It will only benefit the bureaucrats and increase corruption.
As an alternative, the Govt. can vary the rates of taxes, which are already in existence e.g. VAT to take care of revenue requirements.

Suiketu Shah

5 years ago

Big question is why is octroi and LPT only in Maharashtra(not in any other state in India).This itself proves the intention of the government and why the association is dead right in insisting it be abolished.

jaideep shirali

5 years ago

The excuses given by traders do not hide one attitude, which is that they make money but not want to pay tax on their actual income. The LBT move comes after reports for last 15 yrs have preferred an alternative to octroi. As for jurisdiction of local bodies to collect tax, is Mr Khandelwal ready to donate, along with his fellow traders, for each road/ gutter in this city ? Anyway, the traders have been misleading even their own on where LBT applies and where it does not. Let LBT come, the procedures can be modified once GST comes as well.

Srinivas

5 years ago

LBT is the last nail in the coffin of the businessman in Maharashtra - ask all the guys who are still trying to get the VAT audit completed for 2005-2006 which is already time barred ! The entire Maharashtra government machinery is following the footsteps of their political leaders - looto, looto, jitna ho sakta hai looto.

I know personally of 2 people who have wound up and relocated to Gujarat - and I wish I had joined them too !

The Maharashtra government seems to be thinking that real estate will be enough to keep its people fed ! When will they be proved wrong ? God only knows !

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