All you need to know about LBT

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 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. 

Local body tax is a levy that traders will have to pay the local municipal corporation for importing goods into the state.

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. Once implemented, LBT will replace traditional octroi collections.

At present, octroi is paid by traders every time goods enter the city. This charge is applicable in certain states and varies from state to state.

All shopkeepers, who sell goods over a certain amount, will have to pay LBT. It will range from 0% to 7% and will be computed based on a trader’s turnover

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.

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 variouspenalties. That shows that penaltycannot 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 registereddealer 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 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. 

Stringent book-keeping: A bane to traders
As per LBT rules, it will be the responsibility of traders to maintain records and pay tax.
The rule book empowers municipal officials to check any trader’s books of accounts and impose a fine up to five times the disputed amount.