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Octroi: To Be or Not to Be!

Published on Mon, Feb 18,2013 | 14:10, Updated at Mon, Feb 18 at 14:10Source : 

By: Sachin Menon, Partner, KPMG

Octroi is a levy on entry of goods into the municipal territory for use, consumption or sale. Levy of Octroi on goods entering Mumbai has been estimated to earn revenue of Rs. 7,200 crore to the Brihanmumbai Municipal Corporation (BMC) in the financial year 2012 – 13.

The current Octroi system is plagued with various anomalies and is proving to be counterproductive. Octroi is collected at the time of entry of goods within the municipal areas of Mumbai itself which requires verification, assessment and collection of tax; this proves to be tedious and results into transit delays causing economic loss to the industry. Owing to the inefficiency and rampant corruption in the system, Octroi levy is turning out to be an agent of political parties and bureaucrats. In addition, the human resource administration cost incurred to keep the Octroi system up and running is acting as a further deterrent.

In view of this, BMC has now proposed to introduce local body tax (LBT) with effect from 1 October 2013. LBT is an account based system, wherein tax will be charged on a lump sum basis on the value of goods. BMC will be required to take due care that LBT does not effectively prove to be just another name for the existing system. It is imperative that LBT is a progressive system based on monthly accounting, self declaration and e – filing.

In order to bring the LBT model to light, BMC will be faced with fresh challenges and issues. Companies and business enterprises prepare their accounts on a pan India basis and the bifurcation of accounting is at best available state – wise due to VAT compliances. Under the LBT scenario, city / territory – wise accounting will be cumbersome and more so, it seems to be a distant reality keeping in mind that city – wise accounting will be required for entry of goods for sales, stock transfers and personal use alike.

Octroi is levied on entry of goods, for sale, use or consumption, into the municipal territory. In contrast, LBT is proposed to be charged only on sales. This may backfire, especially when BMC is inclined to keep the revenue earnings from Octroi constant even after transition to the LBT scheme.

As a result, BMC will have to make sure that LBT evolves into a full proof taxing provision; free from any loop holes. Currently, Octroi is collected in cash on a daily basis. Under the LBT regime, the authorities must evaluate the option of issuing online entry permits for goods entering Mumbai and make online payments for LBT liability compulsory. More importantly, online LBT registration for assessees should also be made mandatory for convenience of both, the authorities and the taxpayer.

The entry permits must be serially numbered alongwith details of description of goods, quantity, value, etc. The system of accounting for entry permits and their value must be similar to that of purchase registers (for e.g. goods entry register). Based on such permits the taxpayer may file the returns and discharge its LBT liability directly to the BMC on a monthly basis.

In nutshell, BMC must show intent to design a tax law which is reformative and progressive; otherwise LBT may turn out to be another old wine in a new bottle.


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