Thursday, October 30, 2014

Solution to LBT Problem

Now that we are sure with whose government is going to form in Maharashtra, we can expect some solution to LBT (Local Body Tax) Problem. 

Maharashtra designate CM Devendra Fadnavis, at a rally Maharashtra Election rally addressing Traders on LBT

This article is about what could be solution to LBT Problem.

Let's have a brief introduction to LBT Problem.
Industrialist were not happy with Octroi, as whenever the goods used to be imported into the city, it was assessed at the Naka and Octroi was paid. Then there is infamous corruption. Traders were also not happy, but Industrialist were furious. By traders, I mean those who were importing goods once in a month or quarter. Few of the traders were not coming under the Octroi net as they used to carry the goods with them and hence bypassing the Naka. By Industrialist, I mean those who used to import goods on a daily basis and were being harassed by Octroi officers on almost daily basis.

This all lead to voice for a taxation system which removes Naka. Thus the introduction of LBT. Industrialist were happy that this will reduce the harrasment and also the goods movement will be faster. But the traders were irritated as they will have another department to take care and also will need to have a complex and complete accounting of all goods purchased and sold. Talking about the "few traders"

LBT was supposed to be a simple entry based taxation where we would have a single rate of tax (or a 2 rates system max). But this expectation were crushed as soon as the government came out with rate schedule. To further agitate the business community, the rate schedule was different for all corporation. To even further complicate the situation, the LBT rules were not drafted properly. The LBT rules (which effectively is LBT Act) had many interpretation and thus complex to understand. The problem doesn't stopped here. The Octroi department was shifted to manage the LBT department without proper training in many of the corporations which added to the complexities. 
Thus we had a LBT problem. We all needed the LBT to go.

Let's now discuss, the present situation and then the solutions to LBT Problems.
Since BJP has already promised the traders to remove LBT from Maharashtra. Shiv Sena has also made a similar promise. So, on the assumption that these promises shall be kept, the LBT will have to be scrapped. But the solution to the problem is not so simple. The government will have to think as to how will this gap of funds be filled up and by which Tax. 

Municipal corporations have already told state government that, the corporations will need some tax or another in place of LBT. Considering the fact that in most of the corporations the collections from LBT has been less that what was the collection under Octroi. 

Let's now discuss, the solutions to LBT Problem
1st Solution -  Increase VAT (i.e. LBT collected by adding it to VAT)
This is the most discussed solution to LBT Problem. Also this is the favorite of Traders. Here the proposal is to increase VAT rate and the VAT collected on account of this increased rate of VAT shall be distributed to corporations. It has following Positive points
  • Reduces one department for businessmen, thereby reducing compliance  (not to mention corruption)
  • Ease in doing business
  • No fuss of accounting, which is required in LBT
there is very high opposition from Municipal Corporations for this solution. Main reason being, the bifurcation of the VAT collected between corporation. Another reason is that, the municipal corporation will need to depend on the State government for their fund. Also there is a fear that, in case where the Government at the State Level and the Management of the Municipal Corporation is by different there may be delay in releasing the fund.

2nd Solution - Get back to Octroi 
This is not a solution at first glance, but it will calm the nerves of the traders. We can go back to how it was. It will not be an ideal situation, but thinking of the agitation against LBT, it seems to be a practical solution.

3rd Solution - Purchase Tax / Change
This shall be a new tax which replaces the LBT, or in practicality remove the negatives of LBT and simplify the Rates. Politically this new tax will be given new name and in effect will be LBT hopefully minus the negative points of LBT.

4th Solution - Remove this Entry Taxation and introduce GST
Removing entry taxes cannot be a feasible solution in a short term but it can be achieved in medium term. The simple question to be asked here is, why only Maharashtra has LBT and so much agitation against Entry Taxes? How corporations in other State manage their finances?
The State or Central government can finance the expenditure of the Municipal Corporations by increasing the VAT rate temporarily and then as a permanent solution, keep aside funds from GST.

The crux of above discussion is that, it will be difficult for the upcoming government to solve the LBT (Local Body Tax) Problem without introducing GST.

Looking forward to the solution what our hopeful CM comes up with.