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Octroi: An obnoxious levy

T. C. A. Ramanujam

T. C. A. Sangeetha

``Octroi represents the remains of a barbarous system of universal taxation.'' -- Sir Charles Trevilion

THE CORPORATION of Chennai has resolved to augment its revenue through the imposition of, hold your breath, octroi. This in 2001. How ante-deluvian can our corporators and their advisors get? Who put this evil idea into their heads? At a time when most S tates, which were used to the levy of octroi, have resolved to drop the levy and become modern, the Chennai Corporation, with an existence of 300 years, has thought of going backwards in time reflecting the backward ideology that rules them. Way back in 1925, the Indian Taxation Inquiry Committee declared, ``No country can be progressive that relies to any extent upon octroi which has nearly every vice.'' Octroi is the only tax which has been unanimously and unequivocally condemned by several high-power bodies which went into the desirability of its continuance. In the graphic words of Nani Palkhivala, ``It is the only impost which taxes the people to a tolerable extent in terms of money and to an intolerable extent in terms of time and energy.''

In 1950, the Motor Vehicles Taxation Enquiry Committee referred to the highly deleterious effects of octroi on trade and commerce and observed: ``Evidence before the present committee indicated that in some areas, the ill-effects on trade of local octroi , terminal tolls and similar taxes on goods-in-transit are today perhaps even greater than they were when the 1924-25 committee commented so adversely on this form of taxation.''

Even in 1959, the M. R. Masani Committee on road Transport Reorganisation considered the levy of octroi a national waste and suggested its immediate abolition. The Planning Commission had this to say in 1966, ``There has been general agreement on the vex atious and inhibitory nature of Octroi duties and the abuses to which they are prone. From the point of view of intra state movement, the first recommendation we would reiterate concerns the need to do away with Octroi duties.''

Octroi, it is agreed on all hands, constitutes a major hindrance to the free flow of traffic and trade and, hence, retards the growth of commerce and industrial activities. Many advanced countries in the West realised the futility of levying octroi and a bolished it long ago. The Keskar Committee condemned the ``canker of octroi'' which had spread through the body politic of local administration, and called it a grave danger to the civic life of the community. The Lok Sabha Estimates Committee was more s pecific in 1975: ``One of the main obstacles in the way of quick and rapid movement of road transport in the country is the multiplicity of check-posts and payment of octroi duties at these check-posts.''

The Constitutional provision

The Constitution does not refer specifically to octroi as such. It is covered by Entry 52 in the State List in the VII Schedule. ``Taxes on the entry of goods into a local area for consumption, use or sale therein. ''

Entry 89 in List I is as under: ``Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights.''

Entry 60 in List II: ``Taxes on professions, trades, callings and employments.''

The Supreme Court had considered these levies in a number of cases and pointed out that terminal tax and octroi, though different, resembled each other in that they were leviable in respect of goods brought into a local area. Terminal taxes were leviable on goods imported or exported from the municipal limits, denoting thereby that they were connected with the traffic of goods.

Octroi was leviable in respect of goods brought into a municipal area for consumption or goods and not re-exported out of the area. Terminal taxes were also in a sense in the nature of octroi. Entry 49 in List II , without mentioning octroi, describes it as ``Cesses on the entry of goods onto a local area for consumption, use or sale.'' A thin line, thus, divides a terminal tax and octroi. The Constitution provides for the levy of octroi without mentioning it so. The power to levy entry taxes covers onl y carriage by railway, sea or air and carriage by road is not included in List I, Entry 89.

All these levies will have to abide by the provisions of Articles 276, 301 and 302. Several taxes have been challenged under Article 276 as void on the ground of being tax on business. Article 301 guarantees freedom of trade and free inter-State movement of goods. In the leading case of Atiabari Tea Company Ltd., AIR 1961, SC 232, the Supreme Court laid down that the tax imposed by Assam on carriage of goods was unconstitutional as it was a tax on transport or movement of goods affecting directly the fr eedom of trade contemplated by Article 301.

Article 302 permits the imposition of restrictions on the freedom of trade, commerce or intercourse between one State and another in public interest. Article 302 is an exception to Article 301. The levy of octroi or entry taxes will have to be justified as being in public interest. Is it so justifiable?

In 1965, a Committee of Ministers was appointed to go into the question of augmentation of financial resources of urban local bodies. The Committee concluded thus: ``The levy of octroi constitutes a restriction on through trade. The national economy shou ld be safeguarded as an entity by facilitating the smooth flow of trade and commerce amongst states and also among different parts of the same State and preventing the raising of bottlenecks through local government regulations.'' A committee of five Chi ef Ministers endorsed the suggestion for discontinuing octroi in 1976. The Conference of Chief Ministers, in September 1980, resolved to abolish octroi, the then Prime Minister calling it a regressive and retrogressive levy.

How will the Chennai Corporation justify the levy as being in public interest?

The curse of corruption

Experience of the levy in other States shows how corruption is fed by this impost. The Keskar Committee summed up its investigation in these words, ``Side by side with detention, a general practice has developed to give some sort of gratification to the person in charge of the post without paying which the vehicle is not allowed to cross the barrier.''

The Estimates Committee in 1975 was of the view that octroi tended to generate nepotism and corruption and also resulted in a large scale leakage of revenue. Palkhivala recounts the Maharashtra experience. ``The employees of the municipal corporation of greater Bombay went on a strike, leaving the octroi check-posts to be manned by temporary recruits. During the period, the check-posts were controlled by raw recruits who were innocent of the usual practice, and the collection of octroi duties increased four-fold.''

Delays at check-posts accounted for 73 per cent of effective travelling time of commercial vehicles. The fuel consumption at the check-posts resulted in a wastage of 15 per cent. The National Council for Applied Economic Research worked out that these ch eck-posts virtually employed the carrying capacity of 80,000 trucks being idle. According to Palkhiwala, for every rupee of net revenue derived from octroi, the net burden is Rs 6.27.

Finance Commission's recommendations

The Finance Commission referred to the fact that along with property taxes, octroi remained a major source of revenue for the municipalities and panchayats. However, many States have abolished octroi to remove impediments to the physical movement of good s, and were given grants in lieu of octroi. The local bodies felt the grants did not have as much buoyancy as octroi had. It concluded: ``While we do not advocate reintroduction of octroi, we do feel that there is a need for replacing it with a suitable tax that is buoyant and can be collected by a local body.'' It suggested modification of legislation relating to property taxes and collection of better user-charges by revising the rate structure to keep pace with inflation. ``People will be willing to pay if they get better services.''

Singara Chennai

For the past five years, Chennaiites have been hearing ad nauseum about the Corporation's resolve to create Singara Chennai (Beautiful Chennai) by 2001. Early morning walkers on the Marina beach find the atmosphere nauseating and confine themselves to th e pavements. Parking slots all over the city in the main commercial areas and railway stations are subjected to a harassing levy by discourteous collectors. The Cooum river continues to stink. The import of Singapore-based technology has not helped much in cleaning it up. If revenue is the constraint, there are ways and ways of raising funds.

Like the temples in Tamil Nadu, the corporations and municipalities do not know the extent of the vacant land they own. Does any one have a census of the poramboke land (commons) belonging to local bodies? Commercial exploitation of this land can yield s izeable revenues. In Singapore, the ERP is levied on vehicles moving on fast-track roads. The levy is successful because the administration is known to be strict and clean. If only we had a similar administration in our corporations and municipalities.