Finance commission says no to abolition of octroi

According to the commission, 16 states and three Union Territories had abolished octroi, but it still existed in nine states and three Union Territories. However, in all the states which had abolished octroi, the deficit of municipal bodies had sharply increased, affecting their activity.

The Gujarat Chamber of Commerce and Industry, Confederation of Indian Industry and other trade and business organisations have been pressing the government to honour its commitment to abolish octroi. The government had appointed a committee, headed by Finance Minister Vajubhai Vala, to examine the question. Last month, Vala indicated that abolition of octroi may not be possible.

However, the matter is not yet closed. GCCI president Utkarsh Shah said Chief Minister Keshubhai Patel had assured them that a decision would be taken by month-end. “The Chief Minister is keen; he only wants that there should be an alternative source of revenue,” Shah said. CII Regional Director Sunil Parikh said they were trying to work out an alternative, which will be based on “principles of VAT”, for presenting to the government.

The case against octroi is based on familiar arguments: it breeds corruption, the cost of collection is very high, assessment is done by junior functionaries, it affects trade by creating obstacles in free movement of goods, and leads to waste of fuel and manpower when goods carriers are held up at check-posts.

However, the commission has said that octroi is the main source of income of municipal bodies. The fact that octroi is collected on the spot, unlike other taxes, avoids problems of collection of arrears and also ensures liquidity for municipal bodies. Besides, it does not impose much burden on the people, as the rates of octroi are small.

The commission has found “impracticable” the suggestion made by GCCI for replacing octroi with a surcharge on sales tax. Not only will it give rise to problems of sharing income from a common pool, but the rate of surcharge will have to be very high in order to fully make up the loss of revenue, the commission says.

For instance, the sales tax on spices was 4 per cent and the octroi in Ahmedabad 2 per cent. In order to abolish octroi, a surcharge of 50 per cent would be necessary. On certain items like hosiery goods, the surcharge would have to be more than 50 per cent.

A senior government officer said this would not only be unpopular, but also prove counter-productive. As tax rates were close to “saturation point”, a high rate of surcharge will damage trade and industry, and strengthen the incentive for evasion, affecting government revenue, he said.

Another alternative often talked about is entry tax, which exists in Madhya Pradesh and Karnataka. The commission has pointed out that a proposal to impose entry tax in Gujarat was withdrawn in 1988 following objections from trade and industry.

The CII regional director said entry tax would also be a barrier to free trade, like octroi. Another common objection to entry tax is that it would give municipal bodies the right to examine books. For, unlike octroi, which is charged after physical verification of goods, entry tax is charged on the basis of entries made in books.

How the government would honour its electoral commitment remains to be seen. But abolition of octroi is not going to be easy after the commission’s recommendation, which is a statutory body, appointed under provisions of the Constitution, to make recommendations regarding sources of revenue which could be assigned to local bodies.