Mobilization of Resources for Local Bodies: Various Issues

The Economic Survey for 2017-18 pointed out that the local bodies in India appear to not to be collecting the revenues from taxes to the extent they can. This has somewhat rekindled the debate on mismatch between powers of taxation and mobilization of resources for local bodies.

Resources for Local Bodies

The sources of funds for local bodies are as follows:

Tax Revenue

Although local bodies like the Municipalities and Panchayats were always a part of the decentralized system of governance, their role in the system was given constitutional backing via the 73^rd and 74^th amendments.

• The 73^rdamendment, 1993 added Part IX which provides for the composition, duration, disqualification of membership, powers and responsibilities and sources of finance for the Panchayats.
• The 74^thamendment, 1992 provided for Municipal Corporations and their related provisions as like as Panchayats.

These two amendments also provided for 11^th and 12^th schedules (Article 243-H and 243-X) listing the subjects on which local bodies (rural and urban respectively) have power of taxation.

The tax revenues of panchayats and municipal bodies include various types of the local taxes such as house tax, profession tax, vehicle tax, Tax on agricultural land for specific purposes, pilgrim tax, water tax etc. as listed in 11^th and 12^th schedule. These subjects in these lists are as follows:

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Non-tax Revenue

The non-tax revenues of the local bodies can be either internal or external. Internal non-tax revenues are derived from various fees collected for providing citizen services at Gram Panchayat or Municipality level or miscellaneous revenues such as sale of some assets, fines etc. External non-tax revenues are grants from central and state governments and borrowings.

Grants-in-aid

These are some of the grants made to the Panchayats / Municipalities from the Consolidated Fund of the state. These are of two categories:

• Plan grants-These are the planned transfers of the state to the local bodies for the projects, programmed and schemes which will be put in force or have already put in force.
• Non plan grants-These are the additional transfers that are given to compensate the loss of income and some other contingency transfers.

Borrowings

These local bodies are authorized to take some loans from the central and state governments, banks or through municipal bonds. These are mainly taken to undertake some long term capital project.

Major Issues in Resource Mobilization of the Local Bodies – Non-Tax Revenues

Majority of the funds of the local bodies in India comes from non-tax revenue of which major portion is of devolved funds.  There is a general trend of the state governments to be reluctant to share more resources with the local bodies. There is also inadequacy in the funds allocated to these bodies by the Finance Commission.

Steps that can be taken to augment non-tax revenues of local bodies

Previous finance commissions have suggested some major steps that can be used to augment the non-tax revenues (i.e. devolved funds). These are as follows:

• 10^th Finance Commission
  • Local bodies should be given sufficient grants in four instalments for their easy management.
• 11^th Finance Commission
  • The grants must be used in providing core civil services such as drinking water, street lights, primary education, sanitation and primary healthcare.
  • This commission also recommended Rs. 10000 Crore as devolution to local bodies (Rs. 8000 cr to rural while Rs. 2000 crore to urban)
• 12^th Finance Commission:
  • Proper databases should be made for keeping accounts of expenditures. (12^th finance commission). This commission doubled the grants to local bodies to Rs. 20000 crore including Rs. 5000 crore for municipalities.) This commission also recommended that:
  • Composition of State Finance Commissions should be improved to correctly determine amount for local bodies.
  • Local bodies should not be given harsh conditions for accessing grants.
• 13^th Finance Commission
  • States should be incentivized to delegate more funds to local bodies. The states, while giving them enough powers to augment tax revenues, should pull them up to increase their own revenues.
  • Implementation of national rural schemes through the Panchayats so that they determine their own budgetary needs and adequate help is then provided by the state.
  • The Centrally Sponsored Schemes must take into account the financial needs of the local bodies also.
  • Allowing construction and maintenance of assets.

Major Issues in Resource Mobilization of Local Bodies: Tax Revenues

Since the terms and conditions for exercising autonomy in collection of revenues is subject to the discretion of state legislatures, states give varying degrees of financial autonomy. In some states like Kerala, Rajasthan the autonomy and devolution of funds is somewhat sufficient, in most states, it is still insufficient.

Mismatch between powers of taxation and mobilization of resources – The Low Equilibrium Trap

Although the Constitution gives considerable powers for mobilization of resources, the power is inefficiently exercised.  Some of the areas of utilization of the resources are health, public works, general administration, urban forestry etc. But there is a wide disparity in the utilization of the resources. For example, the Mumbai and Pune Municipalities have limited power of taxation but they mobilize the resources in a very efficient manner, while the Kanpur and Dehradun Municipalities have greater taxation powers but the mobilization of the resources are slightly limited.

The Economic Survey 2017-18 highlights this issue and calls it the “Low Equilibrium Trap”. Survey points that most state governments have not devolved enough taxation powers to the Panchayats. Some states have given these powers but collection is low and despite of the powers to collect taxes, such panchayats are lazy enough to wait for devolved funds only.

The low level of tax collection by local bodies has put them into a low equilibrium trap and this is detrimental for fiscal federalism and accountability in the country.

Steps that can be taken to augment tax revenue of the local bodies

The thirteenth finance commission had recommended raising the profession tax collection to Rs 2500 per annum for local bodies. As per that survey, local bodies should be allowed to impose property tax on the properties of Central Government situated within their jurisdiction. The FCs must assist in setting up of Geographic Information System for efficient collection of property tax, the main source of tax revenue of the local bodies.