Wednesday, May 15, 2013

Why not LBT in VAT?

There may be some doubts as to why LBT is levied or as to why there is a need to levy LBT separately, can’t we add the levy directly to VAT and save the burden of additional taxes on the businessmen who is already burdened with tons of Taxes and compliance.

To answer the above question lets first understand as to logic behind levy of Octroi or Cess or LBT.

The idea is to tax those businessmen for enjoyment of facilities and infrastructure of a City as these Entry taxes are levied by Municipal Corporations only. Here the logic is since a businessman is enjoying the infrastructure of a City he will be in a better position to those businessmen who operate from rural areas.

Hence we cannot have a tax structure where LBT rates on goods are directly added to VAT, as it will amount  to unjust with those who operate business from rural areas. In simple words it will amount to asking businessmen to pay tax on the facilities (Infrastructure) which he is not enjoying at all if LBT is added to VAT.

But this is not the end to the discussion, government has to make a trade-off between additional burdens (New Complexities) on urban business or to do a little unjust treatment and add LBT to VAT thus saving the dealer from new taxes.

Moreover, there has been a debate from Municipal corporations as to they will be then forced to act according to wimps and fancies of State Government if LBT is added to VAT because VAT shall be collected by state govt, and then LBT portion shall be distributed amongst the various Municipal Corporations.

This call is completely depends upon the government Policies. The State of Gujarat has adopted second approach and has added the Entry taxes into VAT while Maharashtra has taken stand as to keep Entry taxes separate from VAT.