Sticking to its pre-poll promise, the Devendra Fadnavis government in its maiden budget on Wednesday decided to scrap the contentious Local Body Tax or (LBT) from August 1 and compensate municipal bodies for lost revenue by increasing the Value Added Tax (VAT), but stopped short of defining the extent of such an increase.
Finance Minister Sudhir Mungantiwar, said the state government will have to compensate municipal corporations in the state, excluding Mumbai, Rs 6,875 crore for abolishing the local body tax, one of their largest revenue sources.
“The revenue received on account of increase in tax rates under the modified VAT Act will be assigned to municipal corporations and demand will be tabled on account of grants to be given to other areas, as per requirement,” Mungantiwar said in the legislative assembly. Extensive deliberations are required on the enhancement in tax rates under VAT, he added.
LBT is a tax which traders pay civic bodies for importing goods into the city. Unlike octroi, which is paid every time a consignment enters the city, LBT aims to speed up goods’ movement, with a stress on self-declaration by traders who maintain LBT accounts.
Traders’ organisations have been insisting on doing away with LBT and bringing a single-point taxation system instead with a VAT surcharge of 1 per cent.
However, government officials have said 1 per cent will not be adequate to cover the revenue gap, suggesting an additional tax of at least 2.5-3 per cent.
“The government wanted to end LBT from April 1 itself, but deferred it to August because we are still discussing a way out of this logjam,” said a government official on condition of anonymity.
Municipal corporations, however, have been reluctant to let go of LBT. A former municipal commissioner who did not wish to be named said, “We set targets to improve LBT collection every year. My municipal corporation would increase its revenue from LBT by about 20-25 per cent a year. It is unclear how the state government’s grant to bridge the losses from discarding LBT is going to increase every year.” He added that LBT is being abandoned too soon without giving it time to mature.
While discarding octroi charged in the limits of the Brihanmumbai Municipal Corporation has also been on the cards, the BJP-Shiv Sena government’s budget for 2015-16 remained silent on this. LBT was to replace octroi even in Mumbai, which earns about Rs 7,800 crore from octroi, but was put off after intense protests by traders.
In a move that will bring additional revenue to municipal corporations, Mungantiwar has also proposed to increase the rate of the premium Floor Space Index (FSI) given to developers.