Introduction of Local Body Tax in Maharashtra - BMR Advisors

Vol. 8 Issue 5.2 May 08 , 2013
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Introduction of Local Body Tax in Maharashtra
Overview
BMR Analysis- India Budget 2013
In a recent development intended to be a trade facilitation measure, the Maharashtra
Government (‘Government’) has wef April 1, 2013 replaced the existing Octroi regime,
which was applicable in select municipal jurisdictions, with a Local Body Tax (‘LBT’).
In principle, LBT is similar to Octori in that it is a levy on the entry of goods into areas
administered by municipal corporations; however, there are structural differences in
terms of its coverage, manner of levy etc.
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As of date, the LBT regime, governed by the Maharashtra Municipal Corporations Act,
1949 (‘MMC Act’), has been adopted by 19 of 26 municipal corporations in
Maharashtra. For Greater Mumbai, however, the introduction of LBT has been
scheduled for October 1, 2013, until when the extant Octroi regime imposed under the
Mumbai Municipal Corporation Act, 1988 would operate.
Key features
As with Octroi, LBT is imposed on the entry or ‘import’ of goods into municipal areas
for the purpose of consumption, use, or sale; hence, the ‘taxable event’ under the
Octroi and LBT regimes essentially continues to be the same. However, the key
difference is that while Octroi is payable at the time of (physical) entry or import of
goods into the municipality, LBT is payable on a monthly basis depending on the value
of goods imported into the municipality, and is therefore accounting based.
This key difference is indicative of the Government’s intent to liberalise trade, where
the tax collection process has transitioned from a physical control to an accounting
based mechanism. This is also intended to streamline supply chain bottlenecks faced
by the industry at municipal entry points (which had become a common sight) and
reduce tax administration costs in the hands of the municipality.
The other variation is that the LBT regime mandates a higher level of compliances at a
two-tiered level; to illustrate:
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Kaustuv Sen
Nirmal Singh
Dhiraj Agarwal
(A) Importers of goods into a municipal area for any trade, business or profession
(ie the parties who would actually ‘pay’ LBT on a monthly basis) need to obtain
a registration and file returns. Invoices issued for onward sales of such goods
by importers need to contain a specific declaration as well.
(B) Businesses located in municipal areas, who purchase goods from the above
importers for onward sale or use (though not liable to pay LBT as the importer)
also need to obtain registration, file returns and issue invoices containing
specific declarations for onward sales to other businesses; for this category,
the return is mainly a statement of purchases. Inclusion of such parties in the
compliance net is apparently intended as a verification measure.
The rates imposed under LBT range from 0.1% (on precious metals and stones) to 4-
5% (as the residual entry); while 7-8% is imposed to de-merit items like liquor and
tobacco products. These are the standard rates, with some variations between
municipalities.
The threshold norms for the aforesaid compliances are quite low (ie the maximum
being INR 150,000). Thus, the compliance requirements are likely to impact small and
micro businesses in the category (B) above.
Rajeev Dimri, New Delhi
+91 124 339 5050
rajeev.dimri@bmradvisors.com
Sujit Ghosh, New Delhi
+91 124 3395070
sujit.ghosh@bmradvisors.com
Ajay Mehra, Mumbai
+91 22 30217030
ajay.mehra@bmradvisors.com
Himanshu Tewari, Mumbai
+91 22 30217099
himanshu.tewari@bmradvisors.com
Malini Mallikarjun, Mumbai
+91 22 30217025
malini.mallikarjun@bmradvisors.com
Mahesh Jaising, Bangalore
+91 80 40320140
mahesh.jaising@bmradvisors.com
Sivarajan K, Chennai
+91 44 42987004
k.sivarajan@bmradvisors.com
Exemptions from LBT have also been introduced, which depend on the nature of the
transaction. Certain examples are as below:
Import of goods for processing and subsequent re-export from the municipality
Export of goods for processing and brought back within 6 months; LBT would
be levied only to the extent of value addition
Sales returns if goods are brought back within 6 months
Exports outside India
Export of LBT paid goods outside the municipality within 6 months of import
(90% of the LBT paid though a refund process)
Imports by individuals for self-consumption
Other aspects

Certain other aspects of LBT also deserve attention. For example, a process for
determination of disputed question (DDQ) has been introduced for approaching the
authorities for a ruling on taxability or rate related aspects of import. Also, rules for
assessment and re-assessment have been introduced, which inter alia allow the
authorities to value goods for charging LBT on items escaping assessment by
comparison to the fair market value.
Delayed payment of LBT attracts interest at 2% (for the first year) and then 3%
(thereafter).
BMR Comments
While the introduction of LBT should be lauded by the industry at an inprinciple
level, the process of introduction could have been more streamlined
and industry-friendly. For example, clarity on basic elements such as rates of
LBT and compliances were not publicly available till after its introduction; this
impacted the supply chain, especially for goods subject to Maximum Retail
Price (MRP) regime with pre-fixed margins. Given this, the Government could
consider introduction of an amnesty facility for non-compliances during a
transitional period (say for 3 months).
There also appears to be differences in the registration process adopted by
the different municipalities. This should be streamlined through an online
process under a common portal.
The key industry concern appears to be compliances imposed on business
falling under category (B) above, ie businesses which are not liable to pay
LBT, but which buy and/ or onward sell goods purchased from importers or
category (B) businesses (ie 2 nd level businesses located in the municipality).
Given this, small and micro businesses who form such 2 nd level businesses
will have additional compliance obligations due to low threshold norms. Thus,
there is a case for the excluding this 2 nd level from such compliances
altogether; also, compliances by category (B) businesses should be remotely
administered.
The regulations also impose certain responsibilities on such category (B)
businesses in terms of ascertaining whether the goods it deals in are LBT
paid goods. Such statutory responsibilities should be eased, if the purchase
is supported by an appropriate invoice.
The schedules for charging LBT seek to cover intangibles (eg copyrights);
there may be conceptual difficulty in imposing such tax since there is no
[physical] movement of import into municipal areas. Similar concerns may
arise for software delivered online.
There is a lack of clarity on whether transporter and courier companies would
be liable to pay LBT; this question becomes contextual for purchases by
individuals from online portals.
There is no specific exemption for re-imports on account of purchase-returns
There are rate variations (1-2%) between municipalities; ideally, the rate
schedules should be common.
The regulations allow for an assessment to be initiated within 5 years from
the relevant fiscal period (FY); however, there is no clear provision for
completion of such assessments. This provision could be made close-ended.
The regulations allow for obtaining a ruling on disputed (or debatable)
questions relating to certain aspects of the LBT regime; however, there is
doubt on whether such ruling obtained in one municipality will be accepted in
all jurisdictions.
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