Filling octroi vacuum tough

The main aim of the 74th Constitutional amendment, effective since 1993, has been to devolve more powers to the urban local bodies (ULBs), allowing them to function in a decentralised framework.

It insists, the state governments allow ULBs to “levy more taxes and duties”, with the principle of ‘sharing taxes’ between the state and the ULBs effectively observed. And if the state considers providing any funds, these should be given ‘from the consolidated fund’, backed with effective legislation.

With octroi abolished, albeit from November 15, the seven municipal corporations’ main source of income will be gone. From all likelihood, the municipal corporations, whose financial strength depends on octroi, will have to depend heavily on the state’s grant-in-aid funds.

Currently, octroi account for between 70 and 75 per cent of their incomes. Rest of the amount comes mainly from the property tax.

The imposition of cess on value added tax (VAT) or on power consumption, the two alternatives the government is considering to adopt to compensate the seven corporations from the loss due to octroi abolition, has a severe drawback.

The cess will be imposed across the state – not just on those who live in the seven corporations but also on villages. “Cess can not be imposed in a city,” said a senior bureaucrat.

The official added, “Abolition of octroi in most parts of India has put extra burden on the state coffers. The same will happen in Gujarat.” In fact, what has happened after the abolition of octroi from the state’s smaller towns will be repeated in the seven corporations. “The government pays municipalities Rs 800 crore annually, collected mainly from cess on petrol and diesel across the state. As against this, in 2006-07, they collected Rs 131 crore from their own sources.”

An official document says, if one leaves aside octroi, “greater devolution of responsibilities to ULBs, has not been matched with a corresponding increase in their financial capabilities and powers.”

It further says, “It is important to redress this imbalance by enhancing their revenue base,” recommending monthly user charges for handling solid waste, providing underground drainage services, drinking water and other services. Enhancing property tax, too, is considered a major option.

A senior bureaucrat said, “While finding out alternatives, one should remember what the economists have taught us: that direct taxes – such as those levied by the ULBs – are more effective than indirect taxes, like cess or setting aside entertainment tax and stamp duty.

These taxes alone would make ULBs to work more effectively, making them administratively independent, without depending on state coffers.”