Assessing Octroi

Octroi Phenomenon:Ø Octroi v/s Profession Tax
Octroi taxes enjoy a respectable antiquity. TheConsidering Profession Tax as another alternative to
Romans called them ‘vectigalia’, a tax whichoffset the losses resulting from the abolition of
was levied primarily on wine and certain articles ofOctroi, it is observed that the tax initially fell under
food.the purview of the state governments but now the
About Octroi:same may also fall under the local bodies. In fact
The dictionary definition of Octroi terms it to bemany consider it better, over the state government
“a local tax collected on various articles broughtjurisdiction as the local bodies are better placed in
into a district for consumption.”deriving information from the people.
A sketch:This form of taxation has a lot of scope to grow but
Octroi has been in force in Maharashtra for manyhas fallen short only due to negligence in comparison
years and all municipalities levy it on entry of goods.to the focus attained by other high yielding taxes.
It is a major source of revenue for municipalities. TheAlso those who are not registered for sales tax are
Municipal Corporation of Greater Mumbai (MCGM)not registered for profession tax either. Therefore,
alone collected Rs 2,504 crore as octroi in 2004-05,registration poses a big problem here.
up from Rs 2,240 in 2003- 04.Ø Octroi v/s Property Tax
Octroi has clearly contributed to the tune of 33 perConsidering the Property Tax, octroi and the
cent of MCGM's annual budget and it has beenproperty tax are both collected by the same system
enjoying a 4,500-strong assessment and collectionof machinery. So if one is removed, the other should
department.be made good by the same machinery. Going back
Many Governments had abolished octroi in Municipalto the era of 1960’s, property tax accounted
Councils in the year 1999. The financial implications offor over 70% of the municipal corporations revenue.
abolishing octroi in the Municipal Corporations areSince then there has been an appreciation in the
however, much more substantial since their projectedvalue of land, commonly called capital gain.
net revenue from octroi during 2005-06 was Rs.Hence, there is broader scope for the tax to grow.
4962 crores.However, there are some problems involved in this
Since municipal finances depend heavily on octroiform of taxation. One must keep in mind issues such
income, it will not be possible for them to dischargeas progression rates, poor levels of collection and the
their responsibilities unless they are given an equallyvarious exemptions given to government buildings.
potent alternative revenue source or, areFurther, what one finds in case of Mumbai is the
compensated in perpetuity from the State budget.frozen land rates in the city area where the rent paid
The latter is not possible due to State’s ownis only about 10paise to Rs.1 per sq foot unlike the
developmental commitments and the heavy debtsuburban areas where the rates paid are close to
burden. One merit in octroi tax is that its incidenceRs.3.5 to Rs.4 per sq foot. Infact, if the land rates
falls largely on the residents of the very city. Anyare revised in the city area, much more revenue can
alternative to octroi should, therefore, ideally be suchbe generated.
that its burden falls on the residents of that cityØ Octroi v/s Tax on Vacant Land
alone.Apart from considering all the above mentioned
The details of the present revenue from octroi, thealternative sources, the government of Maharashtra
per capita octroi income of the municipal corporationsmust levy a tax on vacant land. Such a mechanism
and the growth rates of octroi are given in the tablewould not only serve the purpose of revenue
below.generation for the government, but also look into the
In case octroi is to be abolished, or is halved to beginproblem of land scarcity. A similar source of revenue
with, the compensatory resource to the ULB’scould be the Pollution Tax. Again, besides generating
(Urban Local Bodies) should, to the full extent, matchrevenue for the government, it will help to tie over
the octroi revenue lost by each ULB.the pollution problem in the city.
Net Octroi Receipts : CAGR : Per Capita Receipts :Ø Octroi v/s Municipal Development Fund and
Projections (Figures in Rs. Lakh)Municipal Bonds
Almost a decade has passed since the ongoing tussleThe Creation of a Municipal Development Fund and
between the industries and the municipal corporationsissuing of Municipal Bonds could also be considered.
of Maharashtra over the Octroi levy. If we look atThis will not only impart more credibility to the
the India story as a whole, except for Gujarat andcorporation but will also give them liquid cash for a
Maharashtra most other States in India have eitherstart. Also, in the current scenario of rising interest
done away with or are into the stages of phasingrates, it appears to be a good option for the
out Octroi.government.
It is essential to note that octroi as a tax in the BMCLearning Lessons (Inter State Comparison) :
was introduced in 1965. Prior to that only 'town duty'Of the 28 states and 7 Union Territories in India,
was being levied on a very few items. At that timeMaharashtra and Gujarat are the only two states
yield from property tax was the mainstay ofthat are still continuing with the obsolete tax-Octroi.
municipal tax revenue for Mumbai. For example, inIt’s time the two states take some learning
1964, total revenue of BMC was Rs.23.64 Crore, outlessons from those who have done away with this
of which Rs. 18.59 Crore were from property taxform of taxation.
while Rs. 1.54 Crore only were from 'town duty'.Although in the case of Maharashtra, parameters like
Property taxes accounted for 78.61% of totalthe size of the state, the size of the industry and
municipal revenue while town duty accounted forthe number of people getting affected by the
onlyremoval of octroi (including the municipalities and the
6.53%.industry) play a decisive role in the issue, it should
Nevertheless, in Maharashtra, despite the continualstall the consideration of alternative and desirable
assurances and diverse committees created by thesources of taxation.
Government of Maharashtra in the same direction,Ways and Means adopted by the states of Tamil
things seem to be moving at a sluggish rate todayNadu, Kerala, Rajasthan, Punjab:
with respect to abolition of Octroi. This brings us toDifferent states have adopted different
the vital question of ‘What is it that is holdingmethodologies to find alternative solutions to the
the government back, to reduce this ‘inter stateproblem at hand. States like Tamil Nadu and
tariff’, if one may call it so in the era ofRajasthan have introduced a flat entry tax of 2
plummeting global tariffs’?percent and an additional Land and Building Tax, while
On the one hand, the municipalities seem to beKerala had levied only Land and Building Tax. Punjab
opposing the abolition of their main source ofhas done away with Octroi completely without
income-Octroi, given that it contributes nearly 60%imposing any additional levy.
to their revenue. On the other hand is the industry.The municipal corporations of Chennai and Trivandrum
The Industry seems to echo the idea that Octroihad relied only on two forms of taxes- Entertainment
must be abolished due to its various ill effectsand Property for the bulk of their revenue and Octroi
including the final distribution price.was far from sight.
Given the milieu that even an agriculturally rich stateMethodology adopted by Calcutta:
like Punjab, is in the process of gradually abolishingIn case of Calcutta, the loss from abolition of Octroi
the levy, the answer to “Why then iswas compensated by transferring the entire state
Maharashtra not doing as ‘Romans do’Entertainment Tax to the local bodies apart from
“? seems to be the crying need of the hour.16% of Sales Tax and the Development Grant. Also,
This paper attempts to analyse the role of Octroi inthe municipal corporations were empowered to issue
the state of Maharashtra. Alternatively, the papertrade licenses and levy higher tolls on heavy vehicles.
attempts to provide diverse sources of revenueFurther, the cost of living allowance was to cover
which Maharahstra could tap instead of harping on100% of Calcutta Municipal Corporation’s liability
Octroi.and the grant was expected to rise by 3.35% every
Octroi in Maharasthra – An Overview:yr accounting for the inflation.
Maharashtra has 21 municipal corporations spreadSteps undertaken by the Government of Rajasthan:
across the State. Going by the statistics provided byTaking the example of the Government of
the Municipal Corporation of Greater Mumbai, theRajasthan, the Octroi leviable under section 65(b)
development plan for the city of Mumbai for theofthe Rajasthan Panchayati Raj Act, 1994, was
period 2005-2025, is to be financed in the followingabolished in August 1998. The government in order to
manner:compensate the local bodies had levied surcharge on
The position and weightage of Octroi can be judgedthe sales tax. (source- 1999). The compensation
by the figures given above. It is thus imperative togiven was on the basis of 1997-1998 prices.
find alternative sources for funding the municipalities.Broadly, compensation was to be of the value,
Current scenario:equivalent to Octroi plus 10% increase per annum.
The Economic Survey of India 2006-2007 states thatHowever, for the year 1998-1999, the compensation
the net state domestic product at current prices forwas to be 2/3rd more than the Octroi received
2005-06 stands at Rs.3, 86,241cr up 14.2% moreduring 1997-1998.
than the previous yr. The State’s own taxIn line with the Rajasthan Government Industrial
revenue is estimated at Rs.40,323cr for 2006-07Policy 1998, the process was gradually adopted
ie.20.23 % up than the previous year and states ownbeginning with exemption of Octroi in scientific
tax revenue receipts as percentage of gross stateinstruments and those equipments required by
domestic product is up from 7.76% in 2005-06 totechnical institutions.
8.11% for 2006-07.Another industry to get exemption from Octroi was
The average growth rate of VAT has beenthe Automobile Industry, although the exemption limit
estimated at 13% for the state. In order to source inspecified in the policy has a short span of ten years.
more revenue from the Profession Tax, the stateFor industries making use of fly ash and stone slurry,
government introduced an amnesty scheme wherein100% exemption would be given and finally in case
an individual paying tax after April 1, 2002 would beof small scale industries under the rehabilitation plan,
exempted from any prior tax dues. The state’sexemption from octroi would be given to boost the
Stamp Duty cashed in an amount equivalent to Rsmajor employers in the industry. Further, to boost
5000cr in the year 2005- 2006, marking an increasethe agricultural sector, the Purchase Tax and the
of 23% over the previous year.Octroi Tax was rationed for specific commodities.
However, this year the state government seems toOctroi versus Non- Octroi States:
be going slow on this tax. The entertainment Tax onThe above table clearly indicates that in case of non
Cable TV has been increased by 50%. The MotorOctroi states West Bengal is the only statethat gets
Vehicle Tax has been increased from 4 to 7% onstate financing to the tune of 70% despite being a
four wheeler vehicles and the tax on goods vehiclesbetter industrial state than Assamthat gets funds
is already at the maximum level. Further, there hasworth only 20% from the state government.
been a reduction in the CST from 4 to 3% that willBoth the states show contradictory findings. On the
result in an estimated loss of Rs1000cr for the yearother hand, all Octroi levying states show higher
2007.percentage of the expenditure being self financed.
Two contradictory findings emerge from the above.The question that arises is not of obtaining larger
On one hand, the government has earned moregrants from the state governments but also of self
revenue that can be utilized to a certain extent todependence without the Octroi Levy in the high per
compensate the municipal corporations. On the other,capita income states than Assam.
one would find that the government has alreadySecondly, when it comes to levying taxes,
exhausted some alternative sources of revenue inMaharashtra levies the maximum percentage of
the form of Entertainment and Motor Vehicles Tax.taxes in India. In this milieu, the pendulum certainly
In addition to this the government also has todangles towards the abolition of Octroi. This can be
consider the development of the state. Nevertheless,quantified by taking an example of the local taxes on
these findings in no way imply that the governmentthe Road transport industry levied by a few states.
should not abolish Octroi.Major States and Local Taxes on Road Transport
Although computerization of the entire process hasIndustry (%) 2001-02 :
been considered to help in resolving the problemsThe table also brings to the fore the double edged
with Octroi such as theft and mishandling to anknife of taxation for Maharashtra, the otherend
extent by some experts the fact that malpracticesspelling burden on the consumers.
exist even in computerized systems.Consequences of Octroi Abolition
Because of the above shortcomings of the octroiThere are no two opinions on the fact that Octroi
system, it is often termed to be ‘obnoxious’abolition implies huge losses for the municipalities. So,
‘vexatious’ ‘wasteful’ anddevising alternative sources of revenue becomes
‘distorting’. The abolition of Octroi will notimperative.
only help to attain economies on logistics andAnother problem faced in case of Octroi levying
warehousing but will also make India one unifiedstate would be hindrance in implementation of
market.development plans. A similar situation was seen in
Some alternative sources of Octroi:Haryana where road construction was stopped
Some of the alternative sources which can be lookedfearing the inability of the municipalities in making
at in order to raise revenues for the municipalitiestimely payments.
include:Octroi abolition would also pose a problem for the
Ø Increased Property Taxemployees involved in the task, since they will have
Ø Increased Value Added Tax (VAT)to be put in alternative divisions for work.
Ø Increased Profession TaxBesides, the problem of this direct employment,
Ø Imposition of Entry Taxthere are many others who earn a living because of
Ø Levy of Cessthe Octroi Nakas as, tea stalls, dhabas, motor
Ø Revision in User Chargesworkshops etc
Ø Issuance of Municipal BondsAnother very important point to be kept in mind is
Ø Creation of a Municipal Development Fundthat the municipal bodies should not go bankrupt to
Ø Tax on Vacant Landthe extent that they do not have sufficient funds to
Ø Imposition of Pollution Taxpay their employees. Such a situation was found in
Ø Roof top tax as in NepalPunjab where the state high court had questioned
In the past, there has been a huge debate overthe abolition of octroi.
finding alternate revenue sources for Octroi.Also, there is no guarantee that after octroi abolition,
One school of thought emphasized that replacementthe prices of various commodities will come down. A
of Octroi by any other form of levy amounts to thesimilar situation was found in Punjab, where the
same thing and that it was in no way a step towardsmunicipal corporations of Ludhiana, Jalandhar, Patiala
reformation of the tax structure in India.and Amritsar had not seen much reduction in
The other school of thought advocated the demandcommodity prices.
for greater grants by the central government in theWord of caution
form of large state funds. Further, some othersAs mentioned above, one of the inhibiting factors for
advocated the need for fiscal reforms and budgetthe abolition of Octroi is the largesse earned by the
management by the local bodies. Some experts haveMunicipal Corporations of Maharashtra and Gujarat.
also believed that the introduction of Goods andAlthough both the governments have listed a few
Services Tax (GST) by 2010 will itself result inalternatives for the same, yet the phasing out will
abolition of Octroi.take time as such a move involves amendment of
Another proposal was to ear mark certain proportionthe Municipal Act and the related laws.
say 10% of the existing state levies like VAT, StampGujarat is already in the process of phasing out
Duty, Motor Vehicle Tax, Entertainment Tax etc. forOctroi by November 2007 and as per the
the Panchayati Raj Institutions, Urban Local Bodiessuggestions given by the state finance commission,
and Local Bodies. Some experts opined have opinedvillage panchayats would be given a grant equivalent
that VAT revenues have grown all over India byto the average of the past three years octroi
more than 26%. So estimating the growth figures ofrevenue apart from an annual increase of 7%. This
all these taxes and their contribution to local bodieshas resulted in additional loss for state governments
will without doubt compensate the current Octroiworth Rs.47.39cr for rural bodies and Rs.168cr for the
revenue.urban bodies for the year 2002-2003. Therefore, the
We shall now try to benchmark Octroi against somegovernment is being cautious taking into account full
of the alternative sources of taxation:weight of its actions.
Ø Octroi v/s Levy of CessRecommendations:
Levy of Cess will not only reduce the paper workThe present system of levy and collection of octroi
but also remove all the octroi check postswhich willneeds to be abolished. The loss due to full abolition of
result in reduced transit time leading to savings inoctroi in the year 2006-07 is of Rs. 5572 crore. It is
freight cost for the companies. Ithas been successfulpossible to compensate the ULBs fully for loss due to
in Navi Mumbai, an area that has a large industrial belt.abolition of octroi.
There are no check posts in the area and hence noAbolition of octroi will require imposition of Municipal
stoppage of vehicles.Profession Tax by ULB’s; imposition of Additional
Also, it saves manpower and administration expenses.VAT; reform of property taxes, coupled with
Further, only the registered dealers arerequired torevision in user charges. Imposition of a general entry
pay the cess on the entry of goods under thetax can be considered at a later date.
Bombay Provincial Municipal Corporation Rules 1996The municipal bodies can be permitted to impose and
and no unregistered dealer is required to pay it. Also,collect their own independent professional tax.
cess reduces the costs of importers who areThe job of registration under the Shop and
required to unload and reload goods under octroi forEstablishments Act should also be given back to the
evaluation of weight and sealing. However, no suchULB’sto facilitate imposition of professional tax
complications are involved in case of cess.by municipal corporations / councils.
Replacement of Octroi with Cess could be a possibleOctroi should be eliminated in two phases. After all
solution as cess would contribute to the tune of 80%legislative changes are in place, a date should be
of the Octroi revenue. This implementation could benotified to bring into effect the profession tax and
carried out in two phases, starting with the metrosAdditional VAT levies. Octroi rates should be halved
and class one cities in the first phase and slowlyfrom a date 3 months hence. The Government
spanning across the remaining cities in the secondshould simultaneously notify a date for the full and
phase.final abolition of Octroi which should be a date 12 to
Ø Octroi v/s Entry Tax18 months away from the date of octroi reductionto
In case of an Entry Tax, states such as Karnatakahalf.
and Madhya Pradesh have replaced Octroi with anThe State Government should give guarantee on a
Entry Tax in the past. Some of the merits of the taxtapering basis for three years starting from the
over Octroi include its account based system infirstreduction in octroi rates, for the loss, if any,
contrast to the checking system under Octroi thatincurred by the ULB’s in case the additional VAT
reduces the hindrances, delays and harassment arisingdoes not yield the anticipated revenue.
from the checkpoints and physical verification can beWithin these twelve to eighteen months municipal
avoided, if the administration is backed by ancorporations should complete restructuring of the
adequate information system.property tax according to a capital value/area based
However, the tax is not adequate enough to offsetsystem. Simultaneously, they could revise the user
the octroi tax. Many times it has shifted thecharges for water and sanitation services to ensure
production and distribution centres outside municipalfull cost recovery.
limits resulting in unnecessary movement ofConclusion:
consumers to these centres. However looking at theThe state of Maharashtra with Mumbai as the
view point that both entry and Octroi are entryfinancial capital is one of the wealthiest States in
taxes, the difference should not be much.India housing some of the most important industries
Ø Octroi v/s VATincluding Textiles, Electronics, Petrochemicals etc. It is
Another suggestion has been the increased VAT orevident that the contribution of Maharashtra’s
surcharge on VAT. This alternative has beenIndustrial sector can grow further, especially when all
recommended by the majority as it overcomes thehindrances to trade get abolished, including Octroi.
problems of earlier taxes of double counting and theThe government must act before it’s too late.
cascading effects. Infact, it is considered as aAlthough abolition of Octroi might result in some initial
transparent system of levying taxes. Since VAT andlosses, it will be beneficial in the long run. This will not
Octroi, are both different forms of sales tax, it isonly ease inter state trade and generate more
considered judicious to levy the reformed tax-VAT,revenue but also impart some degree of uniformity
instead of the age old Octroi.to the tax system.