Ahmedabad: Octroi, a local tax levied in seven key cities of Gujarat—Ahmedabad, Rajkot, Jamnagar, Bhavnagar, Surat, Baroda and Junagadh—will be abolished from 15 November, ending a practice that has lasted almost 150 years.

Chief minister Narendra Modi’s government had taken permission from the Election Commission before announcing the abolishment.

The move, which will likely put pressure on neighbouring Maharashtra to abolish the tax, was welcomed by companies.

“We are extremely happy with the withdrawal of this tax as it would go a long way in helping us focus on our core activity of doing businessrather than working to meet bureaucratic and accounting needs," says Pankaj R. Patel, chairman and managingdirector of Ahmedabad-based drug-maker Zydus Cadila Healthcare. One of the biggest beneficiaries of the removal of octroi will be the automobilebusinesses in these cities, says Bharat Soni, vice-president, Ahmedabad Automobile Dealers Association. Consumers were paying an octroi of Rs800-1,500 for two-wheelers and Rs8,000-15,000 on cars.

Following the abolition of octroi, the local government bodies could lose as much as Rs1,600 crore in tax revenues.

“The city of Ahmedabad had collected octroi worth Rs508 crore until 13 November. If the octroi had continued, Ahmedabad Municipal Corporation would have collected Rs845 crore by the end of the fiscal year 2008. The state government has assured us that they would compensate us for this loss so there would be no impact on this year’s developmental plans," said I.P. Gautam, municipal commissioner, Ahmedabad.

However, with the Election Commission’s model code of conduct in place due to next month’s assembly elections, it is unlikely the government will be able to disclose any compensation plan. The state government had taken the permission of the commission before announcing the abolishment.

For Zydus, the octroi amounted to multiple taxation, Patel said. This is because when the company brings in raw material into the city, it pays octroi. The same material, if carried outside the municipal limits for processing and brought back, is again charged octroi.

“Most of the cities that had octroi in Gujarat are trading hubs," notes Patel. “So most of the products on which octroi was levied in fact went out of the city."

In order to avoid octroi, most of the industries used to have godowns out of city limits. Now, they will bring them back to the cities.

“This means the real estate costs within the city could go up dramatically as we would definitely want our goods to be close to our shops," said Sunil Motwani, vice-president, Relief Road Electronics Goods Association.

Small towns that have emerged as trading hubs around cities will also feel the impact of the abolition of octroi. “Many traders stored and sourced goods from smaller surrounding towns like Mehsana, Kalol, Kadi and Anand as they did not have octroi. Now the economy of these small towns could be hit as this business would move back to big cities," Motwani pointed out.