Wednesday, March 25, 2015

LBT going from 1st August 2015, really?

Local body tax no more from August 2015
TV screen on the day of Maharashtra State Budget announcement
Story about, will the LBT go so easily.

Update (04/08/2015) : LBT exempted for dealers how's turnover is less than 50 CR

We saw the above screen flashing every 5 minutes in almost all all news channel on the day Maharashtra State budget was read by State Finance minister. We all were happy. Specially the trader community had more reasons to celebrate than others. The post here today is about will LBT go away so easily? Will NO LBT from 1st August 2015 be a reality? If it becomes reality what will be the consequence?

Why this time the promise of abolishing LBT seems more promising than other past so many promises?

The answer lies in the place where the promise was made. The main reason behind government not being able to keep it's words for abolishing LBT was for lack of funds to substitute revenue which will be forgone by removing LBT. But, when the government sat  down for making budget, they made through calculation of from where and how the forgone revenue will come from (which we will discuss in next para in this post). Thus when the promise of "No LBT" made in budget announcement, it seemed more promising.

Effects of Abolishing LBT

The revenue loss by removing LBT will be compensated by adding a surcharge (in line with Gujrat) on VAT. In addition to increase in VAT, Property taxes, Water Tax may also be increased. The state government's move to bow down to the demands of traders and scrap the local body tax (LBT) may eventually burden people with hikes in municipal taxes such as property tax and water charges, in its bid to make up for the shortfall in revenue. The government is considering allowing municipal corporations to increase the taxes on civic services, such as water supply and sewerage system.

In his budget speech, finance minister Sudhir Mungantiwar announced that the faith-based LBT, which replaced octroi in all of the state's municipal corporations except Mumbai, would be scrapped from August 1. He added that extensive deliberations were required before enhancing the value added tax (VAT) rates, indicating that the task is yet unfinished.

The political side of LBT abolition.

When Cong-NCP alliance ruled Maharashtra, they argued that LBT cannot be abolished and included in VAT because surcharge on VAT will also be borne by villagers and people not in Municipal corporations. Logically speaking, LBT is an extra tax for enjoying facilities of living in Municipal Corporation. Hence, the logic given by then ruling party seemed logical. The same argument is gaining momentum with Chavan questioning sanctity of decision to abolish LBT. The BJP led government will also have to convince it's ally Shiv Sena, specially after their comment "Shiv Sena wants clarity on LBT abolition, more funds for Mumbai"

The Oppostion led by the Congress and Nationalist Congress Party on Monday warned the government of serious repercussions if they replace the Local Body Tax (LBT) with a surcharge on Value Added Tax (VAT) applicable across Maharashtra.

Speaking on the budget in the legislative assembly, former chief minister Prithviraj Chavan said not only would civic bodies lose financial autonomy, rural areas would have to bear an additional tax burden. ''All industries in municipal corporation areas today pay LBT. If there is a surcharge on VAT this will have to be reimbursed to them. Has the government any answer to this issue and has it taken the mayors and municipal commissioners of the 26 corporations into confidence? We did and there was a strong No to the abolishing of LBT,'' he said.

NCP leader Jayant Patil said there are reports that the government plans to increase the VAT from 12.5% to 15.5%. "Increasing VAT in the municipal corporations where LBT is being abolished is alright but the government cannot increase it in rural areas. We shall strongly oppose any such move,'' he warned.

Patil criticised finance minister Sudhir Mungantiwar for not elaborating on the tax components in Part II of his speech. He pointed out that while the government made a mention of BMC's revenue from crude oil stating that the octroi was actually a duty collected from the entire state and paid to the civic body. Patil asked if Mungantiwar planned to take this money from BMC since LBT is being abolished.

A day after the BJP-led government in Maharashtra presented its maiden budget, its ally Shiv Sena has sought clarity on certain aspects of abolition of Local Body Tax (LBT) and said more funds should have been allocated for Mumbai. “When the LBT is abolished, except Mumbai, 26 other municipal corporations will suffer losses to the tune of Rs 6,195 crore. The Finance Minister said that these losses will be compensated by levying a surcharge on VAT. Yet, the government needs to clarify on how will these municipal corporations lose money and how will they be compensated for it,” an editorial in Sena mouthpiece ‘Saamana’ said.

Story so far

Before octroi was scrapped, the 26 municipal corporations in Maharashtra collected around Rs 14,000 crore under that head, with Mumbai accounting for the largest chunk. Traders had earlier sought that the much-reviled octroi be abolished and replaced with LBT and the erstwhile Congress-NCP-led state government brought in the LBT in a phased manner from 2010 onward to replace octroi in all municipal bodies except BMC. However, the traders later charged that LBT had led to "inspector raj" and corruption, though officials said the levy would have also curbed income tax evasion. 

Sources: Times of India, The free press Journal, DNA, Hindustan Times, The Free Press Journal