While government may say that it only conceded traders' demand when it scrapped octroi and brought in the local body tax (LBT), the move may also help the state increase its collection of value added tax (VAT), say experts as well as sources in state's ministry of finance. VAT is a state-level tax that garnered over Rs 61,000 crore last fiscal, almost half of the total budgeted revenue of government.

Actually, linking LBT registrations with VAT can increase mop-up of both taxes, say experts. LBT is an account-based tax and liable to be paid by the dealer who imports goods into the city. The trader has to keep complete accounts, submit returns and get registered with NMC. Apart from it, everyone having a turnover up to Rs 3 lakh has to get registered and file returns though they may not pay the tax if they are not an importer.

Registrations for VAT with the sales tax department have already been linked with LBT. With this 28,000 dealers in the city registered for VAT have been included in LBT fold.

Under LBT, each transaction can be traced to last level, businessmen down the line are registered too. NMC expects to get 70,000 registrations of which half, being small businessmen, will be from outside of VAT ambit where threshold is Rs 3 lakh. "With an account-based tax, all deals are expected to be recorded. This would increase the overall turnover of businessmen in case he was concealing the deals. A higher turnover will also increase VAT liability which is a turnover-based tax," said R K Ganeriwala, a chartered accountant and member of the state government's committee on goods and service tax ( GST). Moreover, LBT has to be paid directly by the importer unlike octroi which could be paid by the consigner.

Dealers evading octroi could also evade VAT. VAT is taxed at each stage of transaction, starting from the manufacturer. Still, certain evasion takes place right from manufacturing level. The VAT chain can break in between too. due to lack of resources, the department cannot verify all cases. Moreover certain dealers conveniently sell goods in cash to a different party but bill it to a sister concern or a dummy firm to claim a set-off available under VAT and maintain the chain, a source said. The LBT trail can help plug such leakage.

Ganeriwala explained VAT will also shore up LBT collections, it was a common practice that the goods imported were under-reported to cut the octroi liability. But for VAT the actual value was reported. This was for two reasons-- VAT is subject to audit and under-reporting purchases leads to hassles on the income tax front. Now the amount referred in VAT accounts can be taken as base for LBT. This can help increase LBT collection, he said.

However, he also apprehended that with no octroi posts, there are chances that traders would bring in goods and not report at all. In this way, VAT and LBT both could be dodged. For this, a strong system of physical inspection of business premises has been put in place. This is precisely what traders are opposed to saying it would lead to highhandedness.