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Octroi - A Tax in a Time Warp: What Does Its Removal Imply for Greater Mumbai?

Vestigial octroi posts can now be found in the country only in a few cities of Maharashtra. These "legendary customs walls" yielded an easy finance for the city and town development and thus, many local bodies continued with this tax despite its debilities. The fiscal composure of the Municipal Corporation of Greater Mumbai can be singularly attributed to the contribution of octroi, which serves around half of its total revenue income. This paper discusses the fiscal significance of this tax in Greater Mumbai and deliberates on various alternative sources of revenue.


Octroi – A Tax in a Time Warp: What Does Its Removal Imply for Greater Mumbai?

Anita Rath

Vestigial octroi posts can now be found in the country only in a few cities of Maharashtra. These “legendary customs walls” yielded an easy finance for the city and town development and thus, many local bodies continued with this tax despite its debilities. The fiscal composure of the Municipal Corporation of Greater Mumbai can be singularly attributed to the contribution of octroi, which serves around half of its total revenue income. This paper discusses the fiscal significance of this tax in Greater Mumbai and deliberates on various alternative sources of revenue.

I am grateful to Ajit Karnik for his comments and suggestions on an earlier draft. I am also thankful to R R Tondulkar for his help and Gaurang Sahay for his comments on the penultimate draft. However, usual disclaimer applies.

Anita Rath (anita@tiss.edu) is at the Tata Institute of Social Sciences, Mumbai.

ctroi, a metaphor of the customs duty in the local context, has a turbulent history in the arena of public finance. This tax has been withdrawn and reinstated several times in the past in various parts of the world. However, the tax has been removed progressively all over the world. In recent times its existence has, perhaps, been perceived to be paradoxical. On the one hand, it has been a nonpareil source of revenue which ensures fiscal autonomy to the local bodies in the era of decentralised governance.1 On the other, octroi is seen to be a misfit in the globalised world order as it derives its fecundity by erecting customs walls around the cities and towns. Whatever may be the complex set of factors in its removal, such transition has implied fiscal duress for the concerned governments and it is pertinent to decipher what it entails for the largest local body in the country.

Maharashtra is the only state in the country where octroi posts still exist. It is now being abolished in 15 smaller cities in the state.2 Maharashtra initiated the move to abolish octroi by withdrawing it in its municipal councils in the year 1999. However, it continued to be levied by the municipal corporations in the state. The pressure has been mounting from various quarters in recent times for its complete removal. Significant among them have been the increasing pressure from the industry groups, the goods and services tax (GST) regime which is envisaged from 2010, and also as the state has become increasingly isolated in lobbying in favour of octroi when two of its last companions, Punjab and Gujarat abolished it in their jurisdictions.3 The withdrawal of octroi in various local bodies in Maharashtra so far only implies a loss of around 15% of the total accrual from octroi to all urban local bodies (ULBs).4 The remaining municipal corporations, where it still continues, rely heavily on this source of revenue. Octroi constitutes the financial backbone of the Municipal Corporation of Greater Mumbai (MCGM). MCGM raises around 55% of its total income from octroi to all municipal corporations in the state5 and this constitutes around half of its total revenue income (exclusive of the finances of Brihanmumbai Electric Supply and Transport). Proceeds from octroi were around Rs 3,500 crore for MCGM in the year 2006-07. To put this figure in perspective, it is equivalent to the total revenue accruing from the state excise tax and more than one-fifth of the revenue accruing from the state sales tax/ value added tax (VAT). These comparisons make the fiscal significance of this tax quite conspicuous and indicate that the corporation would be at the brink of a fiscal crisis if this tax is removed without locating a viable alternative. It is in this context that an overall comprehension of the system of this tax, a discussion of

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its fiscal significance and a deliberation on various alternative sources of revenue is important. This paper makes an attempt to address some of these issues.

The scheme of presentation of the paper is as follows: The first section highlights the contentious aspects of the tax and its turbulent history. The subsequent section provides an orientation to the system of octroi in Greater Mumbai and underscores the fiscal significance of this tax. A review of various alternatives is presented in Section 3. Concluding observations are made in the last section.

1 Some Contentious Issues

Octroi was originally a duty levied on imports collected at port towns. It was immediately extended to other towns and cities once its productivity as a source of revenue for local governments was recognised (Rao 1986). Octroi, as a source of revenue, has a very long history both in India and other countries. It existed since Roman times in Europe. Octroi was levied in France in the prerevolutionary phase and Paris was surrounded by the “legendary customs walls” which was one of the catalysts for the French revolution (Schama 1989). Octroi was farmed out to private individuals or associations and was highly abused during this time. In case of India, one finds many references to this levy in the Arthasastra.

Although octroi is the most productive source of revenue for local bodies it is also the most discredited one. Some of the charges often labelled against this tax are articulated here. First, octroi is considered to have a distortionary impact on the economy. A major part of octroi falls on inputs and capital goods, and probably generates a chain of cascading effects (Shyam Nath and Sen 1989). Second, some studies indicate the tax to be highly regressive. The final incidence of the tax can be traced in the high prices of essential items consumed by the low-income groups. In this context, an early study by Bahl (1975) observes that in Ahmedabad and Bombay the system of octroi was regressive and probably more so in comparison to state sales tax. Again, the octroi system affects rural and marginal producers adversely. In a very highly competitive market, where forward shifting is not feasible traders tend to shift it backwards to labour and capital. Thus, it has implications for exploitation of rural producers. As Shyam Nath and Sen observe,

…the local bodies which collect a lot of revenue through octroi are

typically ones which function as local markets for the small urban pro

ducers within the municipal bounds as well as rural producers from

the contiguous areas. While the former are not liable to octroi, the

latter are generally unable to shift the tax due to weak bargaining

power. This results in supply of public goods in the urban local area at

the cost of the rural populace (1989: 473).

Thus, octroi directly promotes concentration of trade and industry in large urban centres. It provides a disincentive for sound policy of industrial location beyond municipal limits. Interestingly, if a metropolitan area extends beyond the taxing jurisdiction it dissuades even intra-metropolitan trade. As Bahl and Linn (1992) mention,

…the tax (octroi) can provide a cogent disincentive for metropolitan integration under an areawide authority, because consolidation of fragmented local authorities would automatically reduce the octroi

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tax base by detaxing intrametropolitan commodity flows. From the standpoint of efficiency, the octroi is therefore an unmitigated disaster (p 227).

Another important loophole in the system often highlighted by the trading community is related to its administration. Octroi being a check post levy has wasteful effects and thus is beset with huge deadweight loss as it imposes a barrier on the free flow of goods. The detection of vehicles and their physical verification costs the system in terms of fuel and time loss. Some estimates suggest such costs to be of a very high order (NCAER 1979). Apart from these losses the system is a breeding ground for all kinds of malpractices. The collusion between the tax payers and collection officials leads to huge losses in revenue. Due to all these problems it has been labelled as an “obnoxious, vexatious and wasteful” tax.

The contentious nature of this source of revenue is reflected in the fact that it has been discontinued and revived several times historically. It was abolished in France during the French revolution but was reintroduced in Paris in 1798 to meet the financial needs of the municipalities. Other cities in France followed suit and octroi was reinstated. A similar trend is visible in other places across the world. In India, the levy introduced in the Mughal era was abolished at the end of the 18th century, but was reintroduced again. It had a very irregular course throughout the 19th century. The East India Company introduced this tax in 1805. As it became a fertile ground for corruption and other malpractices, it was severely condemned and withdrawn from the presidencies of Bombay, Bengal and other places. However, most of the provinces reverted to the levy of this tax since 1860 under the pretext of resource crunch. The local and central government negotiations continued incessantly for the discontinuation and reintroduction of this levy. Hugh Tinker’s comment, cited in Rao, on this aspect captures the prevailing situation:

The history of octroi in the 19th century is of a recurring contest between the Government of India and the provincial governments, the former constantly pressing for its abolition, and the latter steadily extending its operations. If a student were to calculate the extent of the correspondence covering the subject in the thick leather volumes of the old India office records, devoted to the proceedings of the Government of India, Home Department (Municipalities) he would probably find that at least half of the volumes of letters, orders, resolutions and despatches are taken by this one subject-Octroi (Rao 1986: 160).

The abolition of octroi gathered momentum in the 20th century. Such moves are visible across the world during this period. In Europe it existed in the post-second world war era only in France, Italy, Spain, Portugal and Austria with a radical reduction in the total area of its operation. In France, it was suppressed from January 1949 (GoM 1987). In other European countries it persisted in a limited manner and the last octroi outpost in Belgium was removed in 1970 (Rao 1986). In Iran a local tax similar to octroi, “gate tax”, was abolished in 1962 (Marshall 1969). In case of Bangladesh, it existed till 1981 (Bahl and Linn 1992).

The levy of octroi does not find mention in the central list of the Constitution of India. It comes under the state list. Entry 52 provides for taxes on entry of goods into a local area for consumption, use or sale therein (List II and Schedule VII). Octroi


was levied in almost all states in the 1950s in India. Different states have discontinued this levy at different periods of time. Kerala and Tamil Nadu are the first states to abolish this levy in their jurisdiction prior to the reorganisation of states in 1956. In 1965, it was removed in Andhra Pradesh. The subsequent period witnessed withdrawal of this levy in other Indian states.

2 Fiscal Significance of Octroi

Prior to an understanding of the relative significance of octroi in Greater Mumbai, an interstate analysis of its importance in the general fiscal scenario of the ULBs is attempted. This analysis clearly reveals the differential fiscal standing of the octroi levying and non-levying states.

Information on the per capita own tax revenue for 15 major Indian states along with their ranks for 1998-99 and 2002-03 is provided in Table 1. Octroi was being levied in three states in 2002-03, viz, Punjab and only in municipal corporations of Maharashtra and Gujarat. It reveals that Punjab enjoys a very special position with the highest per capita own source of revenue and own tax revenue, which is around three times that of national average. It is worthwhile to notice here that in 1998-99, Gujarat was the topmost state as per these parameters and Maharashtra was in third position subsequent to Gujarat and Punjab. Octroi was abolished in Haryana, Orissa, and in the municipal councils of Maharashtra and Gujarat between these two-time points and the fiscal positions of these states have been adversely affected after the abolition of octroi.

MCGM offers a special case for the study of octroi. It garners the maximum revenue from this commodity tax being the commercial capital of the country. In Greater Mumbai “town duty” was levied from 1911 till 1965 which imposed duties on articles brought into the precincts of the city irrespective of the fact whether they are to be used, consumed or sold within the city limits. In 1964, with the amendment to the Mumbai Municipal Corporation Act, 1888, octroi was introduced and became effective from 1 April 1965. The system of assessment was “specific”, that is as per unit of computerisation of operations at all work centres by the installation of Brihanmumbai Octroi Software System (BOSS) at the check posts; and simplification of the procedures of payment of octroi, exemptions and refunds. The octroi rates in Mumbai vary from 0.1% to 7%. The highest tax rate (7%) is applicable to commodities which include food items, beverages, liquor, cigarettes, wood, marble, granite, etc. The lowest rate (0.1%) is imposed on bullion, gold and articles thereof.

The octroi barriers in

Figure 1: Barrier-wise Accrual of Octroi Revenue Mumbai are situated at -MCGM (Average for the period 2002-03 to 2006-07) Sea 4% Air 7%

road, sea, air and rail-

3%Head office 1%Road 60%
Railwayway entry points. It is also levied on mineral

Oil pipeline 25%

oils imported through pipe lines. There are in total 62 collection points, at present, which include five road barriers,6 seven sea docks and two railway collection points. Approximately, 6,000 vehicles carrying consignments liable for octroi enter the city every day (MCGM 2007). The average share of these barrier-wise proceeds for the five-year period (2002-03 to 2006-07) is presented in Figure 1. It can be deciphered that the maximum collection (around 60%) accrues from the road barriers. The second important contribution comes from the levies on crude oil. Its share in total octroi revenue is around 25%. Around 5% to 7% each is collected from goods imported via sea and air. Only 3% is collected from railway barriers. There has been a steady increase in revenue collections from mineral oil imports. This could partially be due to the increase in prices of the petroleum products.

An analysis of the top 10 commodities which yield the major contribution to octroi can be useful (Table 2, p 89). The relevant data is for two different time periods – 1986-87 and 2006-07. The

measurement number or volume of goods, commodity classification in the two reference

Table 1: Per Capita Own Tax Revenue of ULBs in Major for almost all commodities prior to 1982. An Indian States periods may not be the same, and hence,

States 1998-99 2002-03

ad valorem system of taxation has been in-may not enable direct comparison. How-

Amount Rank Amount Rank

troduced as per the directives of the depart- (Rs) (Rs) ever, a few observations can be made with

ment of urban development and public health in 1982. And, all the commodities are being assessed on ad valorem basis since the year 1989 (MCGM 2003). A major change in the commodity classification system was brought about in May 2007 to get rid of the ambiguity in the classification, especially, those with multiple uses, by way of adopting the Harmonised Commodity Descrip-





Madhya Pradesh


Tamil Nadu



Andhra Pradesh 552.34 1 390.85 2

435.54 2 540.27 1
359.65 3 209.14 5
231.29 4 182.57 8
220.66 5 270.38 3
151.92 6 50.37 12
122.13 7 207.5 6
121.31 8 213.04 4
101.45 9 27.69 14
92.32 10 203.78 7

some clarity. First, crude oil continues to be the top-most contributor of octroi revenue in both the years. Its relative share, in fact, has increased over time. Second, many raw materials figured as the major contributors earlier, viz, machinery and spare parts, iron and steel, instruments, non-ferrous metals and cotton, etc. In contrast, final goods constitute the major contributors of the

tion and Coding System, which is a world-Rajasthan 85.29 11 18.17 15 octroi currently. It is worthwhile to men

wide accepted classification system. MCGM West Bengal 72.25 12 149.28 9 tion here that there was an industry

has also initiated other important steps to Bihar 50.51 13 73.84 10 friendly tax structure prior to 1990-91. The improve the system of octroi in the last few rates of the octroi on capital goods and

Assam 42.18 14 59.49 11 Uttar Pradesh 28.18 15 45.4 13

years. These include inter alia improve-finished goods were high. The levies on raw

All states 182.59 – 174.59 –

ments, both short term and long term, in materials were comparatively lower. In the

Source: Estimations based on the data provided in GoI (2004) as the facilities at the check posts; complete cited in Oommen (2006). post-1990 phase the raw materials as well

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as finished products are subject to the same octroi rate. Third, computers and peripherals, motor vehicles, plastic items and items involving hazardous waste are now the major imported items in terms of their octroi value. Items like paper and cotton no more figure in the top 10 imported commodities now.

Table 2: Octroi Revenue from Top 10 Commodities: MCGM (1986-87 and December 2007)

Commodities 1986-87 Commodities December 2007*
Amount Amount
(Rs in Lakh) % (Rs in Lakh) %
Crude oil 2,706.92 15.73 Crude oil 14,567.00 78.96
Machinery and Electrical
spare parts 2,692.73 15.64 equipment 1,175.18 6.37
Iron and steel 2,293.1 13.32 Liquor 502.98 2.73
Electronic instruments 1,948.35 11.32 Motorcars 478.71 2.59
Hair oil, lace 1,857.69 10.79 Plastic commodities 351.71 1.91
Piece goods 1,767.31 10.27 Goods involving
hazardous waste 295.70 1.60
Non-ferrous metals 1,579.4 9.18 Computer and peripherals 284.92 1.54
Liquor 857.79 4.98 Metal items (bars and rods) 275.42 1.49
Cotton 756.9 4.4 Toys and models 259.03 1.40
Paper 751.99 4.37 Machinery and parts 258.95 1.40
Total 17,212.18 100 Total 18,449.59 100.00

*Such information could be availed only for December 2007 and is not available for a financial year. However, this pattern is similar to the whole financial year and thus, is comparable with the 1986-87 data. Source: Information for the year 1986-87 and December 2007 is availed from GoM (1987) and the Department of Assessment and Collection, MCGM, respectively.

To comprehend the fiscal significance of the tax in Greater Mumbai it would be useful to see its contribution in absolute terms (revenue generated by octroi and its growth rate over the years), its relative significance (trend of its share in the total revenue of the corporation and its performance vis-à-vis other taxes), and its buoyancy. Table 3 presents the gross octroi receipts of 22 municipal corporations in the state for 2004-05. It reveals the highly disparate position of these corporations in terms of the revenue that they get

Table 3: Gross Octroi Receipts (2004-05)

from this source. Octroi

Municipal Corporations of Maharashtra

revenue was less than No of Municipal Corporations Octroi Receipts (Rs in Crore)

10 Up to 50

Rs 100 crore for 16 muni

6 50 to 100

cipal corporations in that

5 100 to 350

year and MCGM received

1 (MCGM) Above 350

around Rs 2,450 crore.

All 4,395

The contribution of

Source: GoM (2006).

octroi is the highest in case of Greater Mumbai

Table 4: Octroi of MCGM: Net Proceeds and Growth Rate

among all local bodies.

Year Revenue* Period Growth The growth of revenue (Rs in Crore) Rate**

from octroi has also been 1965-66 7.4 1971-72 to 1980-81 7.7

phenomenal in case of 1971-72 20.9 1981-82 to 1990-91 8.8 Greater Mumbai. From

1981-82 85.7 1991-92 to 2000-01 4.8

1991-92 470.4 2001-02 to 2007-08 11.4

Rs 7 crore in 1965-66 it

1995-96 880.2 1971-72 to 2007-08 6.8

has gone up to around

2001-02 1561.1

Rs 4,200 crore in

2002-03 2003.8

2007-08 (Table 4).

2003-04 2170.9

The annual (trend)

2004-05 2450.1

growth rate during this

2005-06 2803.2 period is around 15%. 2006-07 3485.2

The growth rate of octroi 2007-08 4184.3

in constant prices for the *Net of refunds; **Annual trend growth rate of octroi in constant prices.

period 1971-72 to 2007-08 Source: Department of Assessment and Collection, MCGM.

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is around 7% per annum.7 The non-local taxes, especially, the supplements to sales tax, are considered to be problematic as overlapping taxes levied by various levels of governments lead to tax competition and thus such taxes would impinge on the already narrow base of tax available for higher levels of governments. The pace of growth has been slower during 1991-92 to 2000-01. It has been the maximum in the post-2000 phase. This could be attributed to high increases in octroi rates and largescale revamping of the octroi system.

Several factors contribute to the growth of octroi revenue. These could be an increase in the volume of imports coming to the city, increase in prices of commodities, increase in other commodity taxes like customs duty,8 and/or increase in the octroi rates. It is difficult to decipher the specific influence of these independent factors. Figure 2 presents the annual growth rate of octroi in constant prices for the period 1972-73 to 2007-08.

Figure 2: Growth Rate of Octroi (Real) of MCGM (1972-73 to 2007-08)








-10 1972-73 1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08

A visual investigation of Figure 2 suggests that huge annual jumps in the octroi revenue generally correspond to the years (1976, 1982, 1983, 1989, 1993, 1998, 2000 and 2002) in which revisions in the octroi rates have been effected.9

The relative contribution of octroi in the overall fiscal framework of MCGM is appreciable. As stated earlier, octroi serves around 50% of the total revenue requirement of MCGM (Table 5, p 90). Figure 3 (p 90) presents a comparative picture of the revenue income of the corporation and the proceeds from octroi for the period 1993-94 to 2006-07.10 The growth rate of the revenue income of the corporation is equivalent to the growth rate of octroi. The annual trend growth rate of the revenue income and the revenue from octroi in constant prices has been 6.5% and 6.3%, respectively during the period 1991-92 to 2006-07.

Table 5 makes it explicit that the contribution of octroi is far ahead of the contribution of property tax, the other important source of revenue for the MCGM. The property tax mentioned here includes, apart from general tax, a host of other taxes which are levied on the rental value base of the properties in the jurisdiction excluding only the government taxes. It is worthwhile to mention here that as per the latest figure, which is for the year 2005-06, the revenue of octroi is almost twice that of property tax. However, it is worth noticing that the gap between the revenue of these two taxes has gone down over the years. In 1991-92, contribution of octroi was three times that of property tax. The rate of growth of property tax has been higher than the octroi during the reference period. However, the growth rate of property tax needs further investigation to find if there is an inherent buoyancy of the system. Piggybacking of a number of taxes, hike



Figure 3: Revenue Income and Proceeds from the Octroi, MCGM

(1993-94 to 2006-07, Rs in crore)








0 1993-94 1995-96 1997-98 1999-2000 2001-02 2003-04 2005-06

in tax rates, and to some extent, new constructions contribute to this increase in revenue. The revenue significance of the octroi of MCGM vis-a-vis some state-level taxes can be deciphered from the Figure 4. The revenue from the octroi accruing to only MCGM is equivalent to the state excise revenue and exceeds the central sales tax accruing to the state. It is almost around one-fifth of the state sales tax.

Octroi has also been an elastic source of revenue. The buoyancy of the revenue accruing from octroi for the period 1993-94 to 2005-06, estimated as the responsiveness of the revenue from octroi to changes in net district domestic product11 (NDDP) of Greater Mumbai, has been 1.34 (estimated for the series in constant prices). Figure 5 (p 91) shows that the octroi revenue as a percentage of NDDP has gone up from 2.6 in 1993-94 to 3.7 percentage in 2005-06. It fell during the 1990s and has shown an increasing trend in post-1997-98 phase. This coincides with

Table 5: Revenue Income, Property Tax and Octroi of MCGM: Growth Rate and Relative Share (1991-92 to 2006-07)

Revenue income Octroi
Year Revenue Incomea Property Taxb Octroic Property Tax Octroi’s
(Rs in Crore) (Rs in Crore) (Rs in Crore) Share in Share in
Revenue Revenue
(%) Income (%)
1991-92 990.38 156.16 470.35 15.77 47.49
1992-93 1,066.09 175.33 516.73 16.45 48.47
1993-94 1,416.34 274.97 660.33 19.41 46.62
1994-95 1,621.45 327.73 779.05 20.21 48.05
1995-96 1,820.38 374.61 880.15 20.58 48.35
1996-97 2,217.88 459.24 941.34 20.71 42.44
1997-98 2,420.16 537.94 980.32 22.23 40.51
1998-99 2,770.97 642.61 1,163.58 23.19 41.99
1999-2000 3,034.25 698.03 1,336.93 23.01 44.06
2000-01 3,837.45 852.89 1,619.36 22.23 42.20
2001-02 4,033.15 947.58 1,561.08 23.49 38.71
2002-03 4,600.22 1,127.30 2,003.76 24.51 43.56
2003-04 4,898.85 1,169.24 2,170.85 23.87 44.31
2004-05 5,520.01 1,282.98 2,450.09 23.28 44.45
2005-06 5,947.37e 1,399.07 2,803.22 23.52 47.13
2006-07 6,831.75e 3,485.15 51.01

Growth Rated 12.8 15.6 12.6 – –

(6.5) (9.1) (6.3) – –

a: Revenue income is exclusive of budget of BEST and less of inter-budget contributions.

b: property tax refers to property tax exclusive of government taxes. c: Net collection exclusive of refund. d: Annual trend growth rate for the period 1991-92 to 2006-07 (for property tax the period is up to 2005-06). e: Revenue income for 2005-06 is revised estimates and that for 2006-07 is budget estimates; Figures in parentheses represent growth rate for the series in constant prices. Sources: (1) MCGM (relevant years), Outline of Civic Finance, for revenue income.

(2) Records of Department of Assessment and Collection, MCGM for Property Tax and Octroi.

increases in the rates of the Figure 4: Octroi of MCGM as a Percentage of Some State-Level Taxes

octroi for almost all com

(Average for 2002-03 to 2006-07, in %) modities at that time. 0 50 100 150 200 250 Thus, the fiscal signifi-

Taxes on profession tradings,

5421 116 101 200

cance of octroi is quite ap-callings and employment parent in Greater Mumbai. Not only is the fiscal mag-Taxes on property and

capital transactions

nitude of octroi very high, but it also provides liquid

State Sales Tax/VAT

cash for day to day management of the affairs of the city. More importantly,

Central Sales Tax

the cost of collection of this tax is comparatively low. In

State Excise

2004-05, the cost of collection of octroi in case of Greater Mumbai was only Taxes on vehicles 1.45% of the gross octroi receipts. The cost of collection of property tax has been much higher (8.46%). This is also true for other municipal corporations in the state (GoM 2006).

3 A Review of Alternatives

Several committees constituted to review various aspects of this source of revenue have unanimously accepted its deficiencies, however, their views regarding the future course of this tax and its viable alternatives do not converge (GoM 1987). Some of the early committees like the Taxation Enquiry Committee, 1925 and the Local Self-Government Committee, 1939, recognised the problems with this tax. However, given its revenue potential, these committees did not suggest an outright removal of the tax. These committees reluctantly recommended that octroi should, however, be judiciously levied, carefully imposed and properly collected. The more recent committees like the Jyoti Basu Committee (JBC 1994) which was constituted in response to the countrywide strike of the All India Motors Transport Congress (AIMTC) demanding the withdrawal of octroi, made it categorical that octroi should not be abolished without an alternative comparable source of revenue being identified. It suggested that the states may streamline the system of octroi which would reduce the unnecessary delays, tax evasion and other loopholes. Demand for the abolition of octroi, however, continued unabated from various quarters and culminated in its discontinuation in many parts since late 1990s.

A committee was recently constituted by the government of Maharashtra for devising an alternative to Octroi and it submitted its report in 2006 (GoM 2006). The committee recommends the abolition of octroi and sees the possibility of raising equivalent revenue from various sources. It suggests the abolition of octroi in two phases and the initial move suggested would be to reduce the octroi rates to half the existing rate. It recommends an additional state VAT on motor spirit and other commodities and also an imposition of profession tax by local bodies to recoup the losses thereof. The complete abolition of octroi in the second phase can commence once the property tax system

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Figure 5: Octroi Revenue as a Percentage of NDDP (in %)






1993-94 1995-96 1997-98 1999-2000 2001-02 2003-04 2005-06

is rationalised and ensures higher yield to overcome the losses due to the discontinuation of octroi.

There are several alternatives to octroi, which are either being used in practice or is projected as viable alternatives. A review of these possible substitutes is in order. They can be broadly categorised under two broad heads: local and non-local taxes or levies (Shyam Nath and Sen 1989). Important substitutes under the first category are: local sales tax, local business tax and business property tax (BPT). The local sales tax is a local counterpart of the federal sales tax. It is levied by many local bodies in the US. It contributed to 6% of local revenue in the US in 1998-99 (Ulbrich 2003). The local sales tax is considered to be problematic as overlapping taxes levied by various levels of governments lead to tax competition, and thus, such taxes would impinge on the already narrow base of tax available for higher levels of governments. A local business tax is levied on the business turnover in the local jurisdictions. There are many variants of this levy in vogue in different parts of the world. The prominent ones include a local counterpart of the profit tax or capital tax levied by the higher levels of governments. Some other types of taxes in this category include gross receipts tax imposed on the local business receipts, annual fixed levies on the business houses, which is similar to a licence fee, and an amusement tax, which is a percentage levy imposed as an entry fee at the places of entertainment. The third important category of local tax is the BPT, which is of the British type, and it entails a special levy on the business properties. It is a supplement to the local property tax and involves separate and higher taxation of business properties. Among all local taxes, BPT has drawn much attention.

The major non-local alternatives include supplements to sales tax like additional sales tax, a surcharge on sales tax or an entry tax. A problem associated with the surcharge additional sales tax is that it would have a smaller base and thus the required tax rate would be much higher to recoup the losses from the abolition of octroi. An estimate for the year 1986-87 demonstrated that on an average an additional levy of 3.67% would give the required loss of revenue, and if levied as a surcharge, the rate of surcharge would be about 45%. This is certainly a very high rate of taxation (GoM 1987). At present, given the magnitude of revenue accruing from octroi, a surcharge of 20% on the existing state-level sales tax rate would be necessary just to compensate MCGM for its revenue loss in the absence of octroi. The surcharge is going to be of a higher order, if the compensation is to be made to all local bodies in the state. Secondly, the tendency of such tax is that it sticks to its collection level and smooth passing over of the required share to local

Economic & Political Weekly

june 20, 2009 vol xliv no 25

governments seems unlikely given the fact that the amicable settlements of shared taxes between the central and state governments are also not the rule in Indian federalism. The state and local governments’ exchanges in this regard have also not been satisfactory. This is, perhaps, the reason why in Uttar Pradesh, where it was employed as a substitute for octroi, has been replaced by a trade tax (NIUA 1998). In this context, it is worth mentioning that the total arrears of grant-in-aid, taxes, and charges due from the state government to MCGM was to the tune of around Rs 600 crore by the end of 2004.12

Two important alternatives, entry tax and BPT, have captured the attention of the various committees and individual researchers working on the subject. Both entry tax and the octroi target the commodities imported from outside the local jurisdiction. However, these two levies are different in a number of ways. First, unlike octroi, the entry tax is not a checkpost-based levy, rather it is an account-based levy. From the accounts of the dealers the information on the fraction of the purchases made from outside the local area is ascertained and the value of these goods becomes the tax base for the levy of the entry tax. Second, it is an ad valorem levy, whereas octroi is a combination of both specific and ad valorem levies in some cases. Third, entry tax is a state-level levy and thus, the local bodies access it as a compensatory grant. Finally, entry tax is levied mainly on intermediate products, thus its coverage is much smaller in comparison to octroi. It is almost like an appendix to sales tax specifically levied on the imported items.

Entry tax has been suggested as an alternative to octroi by GoI (1983) and GoM (1987). Entry tax is in vogue in some Indian states and in case of Maharashtra, in Navi Mumbai Municipal Corporation. The experience of some states like Madhya Pradesh and Karnataka,13 where it has been in vogue, suggests that it is not a very productive source of revenue. A shortfall in revenue with the introduction of entry tax is expected as first, some of the imports by individuals and small dealers are not liable to entry tax; second, changing over from a checkpost-based system to an account-based system would in the short run affect tax compliance adversely; and third, there may have to be made provisions for set off and refunds (GoM 1987: 17). The administrative ease is the basic advantage of this tax. However, the fundamental problem of an indirect tax as inherent in octroi also

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afflicts entry tax and it is regressive in nature. As observed by Shyam Nath and Sen,

…entry tax not only discriminates between the local and non-local goods, but also within the non-local goods between the goods of mass consumption and intermediate products on the one hand, and all other goods, on the other. This renders entry tax more discriminatory than octroi, as the discrimination in octroi is limited. This discriminatory treatment may thwart accomplishment of the objectives of uniformity in taxation of mass consumption goods and proper treatment of intermediate products. Further, it may adversely affect the interjurisdictional trade and commerce (1989: 474).

A business property tax has been suggested by some committees and individual researchers. BPT is suggested as an appendix to the general property tax. Shyam Nath and Sen (1989) endorsed the BPT as a viable alternative to octroi in Indian situation. Through a general equilibrium analysis of the incidence of indirect tax, a la Harberger, Shyam Nath and Sen (1989) established that,

while octroi is a tax on the product (equivalent to a tax on capital and labour both), business property tax is a tax on only one factor-capitalin one sector. The incidence of business property tax will be exactly similar in pattern to the corporate income tax; the case that Harberger himself analysed. If we assume that the impact of business property tax is on that sector of business which is relatively more capital-intensive (which is quite reasonable), then the tax burden will rest mostly on capital itself … whereas that of octroi/entry tax is, in all probability, more spread out (p 477).

BPT as an alternative would, perhaps, impose a huge burden on business properties. The property tax system in Greater Mumbai is beset with serious problems at present and the property tax rates are exorbitantly high. The compensation from octroi by business property tax would imply 350% additional property tax rate on non-residential properties as the non-residential rateable value in 2005-06 was Rs 811 crore and the revenue from octroi for that year has been Rs 2,803 crore. It means that a total tax rate of more than 460% and around 670% for properties with and without water meter, respectively, has to be imposed which is exorbitantly high.14 Thus, pending the rationalisation of property tax system, getting more revenue through BPT seems a difficult option.

It would be worthwhile to find how other non-octroi cities of similar magnitude are managing their finances. Such analysis, nonetheless, is circumscribed by the availability of data. The analysis here is confined to the revenue receipts of Delhi, Hyderabad, Chennai and Bangalore. The data is for different time periods for different cities.15 Hence, it is only indicative of a pattern. The extent of external funding (inclusive of grants and assigned revenue) is high in all these cities and varies from 25% in case of Delhi and Bangalore to almost 40% in case of Chennai. Property tax remains the single most important source of revenue. It serves more than 50% of the total revenue receipts in Delhi and its share is more than 40% in Hyderabad and Chennai, and is around 35% in Bangalore. Non-tax revenue serves one-fifth of the total revenue receipts in Hyderabad and Bangalore. Besides, cess (education, health, etc) serves around 10% of the total in Bangalore. Two other sources of revenue,

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june 20, 2009 vol xliv no 25

which are either within the purview of the local body or are bodies suffer from non-buoyancy and are highly contentious assigned by the state government, are important contributors in nature. The abolition of octroi poses a special challenge in for local government revenue. These are duty on transfer this context and more so for Greater Mumbai, where octroi of property and profession tax. Duty on transfer of property is the most lucrative source of revenue. An analysis of possible contributes about 10% of the revenue income in case of Delhi alternatives has not been very encouraging. Among the sugand is an important component in the assigned revenue gested alternatives, BPT and entry tax have drawn much attenobtained by Hyderabad and Chennai municipal corporations. tion. BPT is not a viable alternative for MCGM at present, as the Profession tax serves around 10% of the total revenue income property tax system itself is beset with serious problems and in case of Chennai and is a component in the assigned revenue there is already a high tax burden on non-residential properin Hyderabad. ties. Piggybacking of several other taxes on the general prop-

The discussion in this section highlights the problem in erty tax has already exhausted its potential. Given the frozen finding a suitable alternative to the most fecund source of reve-tax base, an inordinate increase in property tax rate would nue, the octroi. The problem is striking in the case of Greater be essential to recoup the necessary revenue. The entry tax is Mumbai, where this tax yields the highest revenue in absolute similar to octroi without a physical barrier to commerce. Howterms. The analysis suggests that no single option can ensure a ever, entry tax is not as productive as octroi but shares many of comparable return without a conspicuous increase in its tax its loopholes. burden. Rationalisation and mobilisation of revenue from exist-To ensure fiscal autonomy, it would be essential for MCGM to ing sources as well as locating other possible revenue options locate sustainable own sources of revenue in place of octroi. become imperative. Property tax is the principal source of revenue in all non-octroi

cities. The rationalisation of the property tax system and tapping

4 Summing Up

further revenue from this source becomes necessary in the As Indian cities grapple with the growing demand for infra-absence of octroi. Simultaneously, augmenting resources from structure and decent living conditions, the shrinking of financial non-tax options like user fees and exploring other options like resources available at the disposal of city governments is infrastructure cess and profession tax would be important in certainly a matter of concern. The tax instruments of the local ensuring fiscal solvency of the corporation.

Notes 10 Revenue incomes for 2005-06 and 2006-07 are (New Delhi: Planning Commission, Government revised and budget estimates, respectively. of India).

1 There is a sharp divide in the fiscal position of the local bodies in the octroi-levying and non-levying 11 NDDP figures since 1999-2000 are provisional; – (2004): Report of the Twelfth Finance Commission states. A study of select municipal corporations of Source: Government of Maharashtra: District (2005-2010) (New Delhi: Ministry of Finance, the octrio levying states in India showed that it Government of India).

Domestic Product, various years (Mumbai: Direccontributes to about 50% to 90% of the total tax GoM (1987): Report of the Committee (Kasbekar

torate of Economics and Statistics). revenue (NIUA 1998). 12 As on 31 October 2004; Source: MCGM (2005):

Committee) on Substitution of Octroi (Mumbai: 2 This was announced by the finance minister of Government of Maharashtra).

Budget Statement (A, B, and G) for 2005-06, the state during the annual budget speech in


– (2006): Report of the Study Group (Subodh

2008. 13 In Madhya Pradesh and Karnataka octroi was

Kumar Committee) on Devising an Alternative to

abolished from 1 May 1976 and April 1, 1979,

3 In 2008 and 2007, respectively.

Octroi (Mumbai: Government of Mumbai).

respectively and the entry tax was introduced

4 In 1998-99, the municipal councils raised around

JBC (1994): Report of the Chief Minister’s Committee to

(GoM 1987).

Rs 2.7 crore from octroi. The state compensates

Examine the Issues Relating to Octroi (New Delhi:

14 The current tax rates are as high as 112.5 and

these local bodies for the revenue loss by Jyoti Basu Committee, Ministry of Surface Trans

320.5 for non-residential properties with and

considering some annual growth rate. The state port, Government of India).

without water meter, respectively.

compensation to these bodies now stands at around Rs 5 crore (This information was collected

15 Information for Delhi is for 2000-01 and was ob-MCGM (2003): Octroi Rules: 1965 (Mumbai: Municitained from Expert Committee on Property Tax pal Corporation of Greater Mumbai).

from the Directorate of Municipal Administra

(2003): Property Tax Reforms: Report of the Expert – (2007): Budget Statement: 2007-08 (A, B & G)

tion, Maharashtra). All 22 municipalities in the Committee, Municipal Corporation of Delhi; (Mumbai: Municipal Corporation of Greater state collected around Rs 4,395 crore from octroi Data for Hyderabad is for 2007-08 (Revised Esti-Mumbai).

in 2004-05 and the 15 D category cities collected

mates) and was downloaded from http://www.

around Rs 700 crore (GoM 2006). Table 3 reveals Marshall, A H (1969): Local Government Finance (The

ourmch/budget2008-09.ppt#259,11,slide11; Data

that the octroi receipts of no municipal corpora- Hague: International Union of Local Authorities).

for Chennai is for 2005-06 and was downloaded

tion except MCGM exceeds Rs 350 crore. Fifteen NCAER (1979): Road Transport Industry: A Review

from http://www.chennaicorporation.com/abt_

cities, where octroi is being abolished, earn less (New Delhi: National Council of Applied

revenue_receipt.htm; Data for Bangalore is for

than Rs 100 crore from Octroi. Economic Research).

2008-09 (Budget Estimates) and was accessed 5 The comparison is based on the average figure from http://www.bmponline.org/account-dept/ NIUA (1998): Abolition of Octroi: A Study of its Impact for five years, 2000-01 to 2004-05, as per the

Budget%20Estimates%20for%202008%20-%20 on Municipal Finances and Transport Efficiency information provided in GoM, 2006.

2009.pdf. (New Delhi: Resesarch Series No 68, National 6 It would be six if the check naka at Bal Rajeswar Road Institute of Urban Affairs). is included, which contributes only marginally.

Oommen, M A (2006): “Fiscal Decentralisation to 7 The consumer price index of non-manual employees

the Sub-State Level Governments”, Economic &


(CPINM) was used here as the deflator. For 2007-08,

Political Weekly, 41(10), 897-903. the CPINM is the average for nine months. The Bahl, R W (1975): Urban Public Finances in Developing

Rao, N R (1986): Municipal Finance in India (New source for this data has been GoM (2008): Eco-Countries: A Case Study of Metropolitan Ahmeda-

Delhi: Inter-India Publications).

nomic Survey of Maharashtra, 2007-08, Mumbai. bad, Urban and Regional Report 77-4, Develop-

Schama, Simon (1989): Citizens: A Chronicle of the

8 As the ad valorem system assesses the commodi-ment Economics Department (Washington DC: French Revolution (New York: Knopf).

ties as per the value of the product inclusive of World Bank). other taxes. Bahl, R W and J F Linn (1992): Urban Public Finance in Shyam, Nath and Tapas K Sen (1989): “Business Prop-Developing Countries (New York: Oxford Univer-erty Tax as an Alternative to Octroi”, Economic &

9 The octroi rates have been revised on 1 April 1964; 1 April 1969; 1 April 1970; 1 August 1976; 1 June 1982;

sity Press). Political Weekly, 24(9), 473-78. 1 April 1983; 1 June 1989; 2 February 1993; 21 GoI (1983): Task Forces on Housing and Urban Deve-Ulbrich, Holley H (2003): Public Finance in Theory August 1998; 26 April 2000; 1 August 2002. lopment II: Financing of Urban Development and Practice (Ohio: Thomson).

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