Mumbai: Scrapping of local body tax may increase VAT by 1.5%

  • Surendra P Gangan, Hindustan Times, Mumbai
  • Updated: Jun 03, 2015 18:44 IST

The abolition of the local body tax (LBT) is likely to hike value-added tax (VAT) by 1.5%.

The only hurdle with the VAT surcharge is that Mumbaiites will be burdened with double tax – VAT as well as octroi. But the state government is trying to come up with a solution for this.

The state government is all set to abolish local body tax (LBT) from August 1 in all civic bodies, except Mumbai.

The state government has assured the state’s 26 civic corporations of protecting their earnings and also their autonomy.

On Tuesday, finance minister Sudhir Mungantiwar said that though they have come across various alternatives, hiking the VAT was the most feasible option.

“The other alternatives, which are under consideration, are turnover tax and local tax at the corporation level. The turnover tax is likely to hit the industry badly and hence unlikely to be accepted,” Mungantiwar said.

If VAT is hiked, it would be collected through sales tax by the state government and subsequently passed on to municipal corporations.

Quelling fear of losing revenue after the LBT abolition, the state government has said that it has finalised the formula for the devolution of the tax amount to match the loss. The municipal corporations will get the devolution of the tax equal to the highest income earned in whichever financial year in the past five years.

The year-on-year hike in the devolution would be equal to the growth rate of the annual revenue of the government. “The devolution would be done on monthly basis and there would be no need of a nod from the legislature. This means there would be no delay in crediting the amount,” he said.

The annual octroi collection in 25 municipal corporations is Rs 1,400 crore – the largest chunk of Rs800 crore comes from Mumbai. The state government has been finding it difficult to find an alternative to the octroi collected by the Brihanmumbai Municipal Corporation (BMC).

According to sources, the state is likely to allow the BMC to continue with octroi. Mungantiwar said the tax replacing the LBT will be implemented only for eight months as the introduction of the goods and services tax by the Centre will come into effect after April 1, 2016.

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