The Local Body Tax (LBT) has been proposed as an alternative to octroi. There are serious flaws
in the process of LBT implementation.
1. LBT is levied on each transaction, thus effectively increasing the prices for the end consumer. Thereby the LBT is inflationary in nature.
2. In principle LBT is like another form of VAT. There is no rationale behind why it should not be treated like another form of VAT.
3. The LBT is not based on self assessment. This means it is subject to scrutiny by municipal officers. This will only lead to more corruption as it gives discretionary
powers in the hands of municipal officials.
4. It is bringing several goods and services in its scope which were not previously covered by octroi.
5. It will result in increase in record keeping, thus raising the administrative cost of the traders.
6. It doesn’t address issues such as if a end user comes to a shop and sell his/her old computer (sale of old and second-hand goods). Now, how is one supposed to tax this?
7. There are various trades where the original bills are not available. Hence, one needs to address this scenario first before one can even think of levying such tax. For example wholesale distributors of Kolhapuri chappals procure their footwear from artisans. These artisans do not furnish invoices in most cases.
As per my thought process following is the way in which the LBT should be designed and implemented:-
1. Make it self assessed. Once, assesses have declared the tax, no further question should be asked.
2. Decrease the percentage to say 1% and link it with VAT filing.
3. LBT should be charged only when the goods enter the city limits. It shouldn’t matter how many times goods changes hands when sold within the city limit.
4. In order to make a trader or a shopkeeper comply one can see how much octroi one has paid in previous years.
We cannot have one system replaced with another system that is more inefficient. Finally we all understand the relevance and requirement for having a reasonable resource mobilization system to fund the ever growing
financial needs of the states municipal corporations. However in this
mission LBT instead of being a step forward in the area of urban financial management is proving to be a backward and regressive tax.
The author is a Software Entrepreneur
and Consulting Editor, Intellectual Post