Resource mobilization of local self governments:

Problems and remedies

• With the 73rd and 74th amendments to the Indian constitution, Local Self-Governing Bodies (LSGBs) have come to be recognized as vehicles of socio-economic transformation in India.

• Government of India had decentralized political, administrative and fiscal powers to urban and rural local self governing bodies.

• Fiscal decentralization leads to the empowerment of local governments and is therefore absolutely inevitable in a democratic nation.

• As governing bodies they require adequate authority and autonomy in the management of their revenue and expenditure.

• The delivery of local government services can happen only with adequate finances available to them.

• The Local self governments cannot become fiscally healthy unless they have a strong financial base with clearly defined sources of revenues.

• one crucial step towards this direction is to encourage the LSGBs to generate their own resources in a sustainable way to perform their statutory functions.

• As per the provisions of the Constitution, these institutions has given the power to levy and assign taxes, fees, fines etc. But in actual practice, these institutions lack autonomy to expand their tax base and tax rates.

• Weak financial position of the LSGBs makes them largely dependent on the State Government grant not only for undertaking developmental works but also for other small functions like providing civic amenities to the local people.

• So, efforts must be taken to improve their capacity to raise own resources and utilize this for local development.

• Besides mobilization of financial resources, another important aspect is proper management of the mobilized resources by them.

• Objectives

• To examine and understand the resource mobilization capacity of the LSGBs in the state.

• To identify the factors responsible for poor mobilization and suggest policy measures to strengthen their finances.

• Resource base of Local Self Governing bodies:

• Own revenue source:- Tax and non tax revenue

• State transfers

• Central assistance

• Borrowings

• Own resource base of Local Self Governing bodies:

• The financial resources of LSGBs –

tax revenue and non- tax revenue.• Taxes - property tax, professional tax,

entertainment tax, advertisement tax, Service Tax, Show Tax, Cess on Conversion of Land Use and Surcharge

• The non-tax revenue includes revenue from license, gate fees, income from rented property-rent, permit and registration fees, service or user charges, fines and penalties etc.

Structure and composition of Revenue of ULGBs

Source: 4th State finance commission

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Own Source Revenue

141,53,40,151(30.7)

151,95,02,120(30.9)

185,35,82,192(35.7)

199,75,89,457(34.2)

224,45,81,303(34.2)

State Transfer

2563636363(55.6)

2850784838(57.8)

2856147713(55.3)

3269192752(56.0)

3455476455(52.7)

Centrally Sponsored Schemes

498295934 (10.8)

410522546 (8.3)

328883707 (6.4)

404430716 (6.9)

647654093(9.9)

Borrowing 54731777 (1.2)

68366351 (1.4)

34409511 (0.7)

55644835 (1.0)

64058989(1.0)

Other receipts 77920360 (1.7)

809,80,712 (1.6)

91479117 (1.8)

111431128 (1.9)

150310710(2.3)

Total Receipts 460,99,24,585(100)

493,01,56,567(100)

516,45,02,240(100)

583,82,88,888(100)

656,20,81,550(100)

Structure and composition of Revenue of ULGBs

34%

53%

10% 1%2%

2008-2009

Own Source Revenue

State Transfer

Centrally Sponsored Schemes

Borrowing

Other receipts

Structure of Own Source Revenue (OSR) of RLGBs

Source: 4th State finance commission

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2099

Own source revenue

204,20,79,565(12.0)

217,33,47,684(11.2)

256,65,85,831(13.4)

295,68,01,895(13.2)

315,37,27,483(12.5)

StateTransfer

1299,86,03,688(76.1)

1526,79,08,816(78.4)

1470,73,38,829(76.6)

1617,20,78,429(72.3)

1738,05,85,328(69.3)

CentralTransfer

162,17,64,555(9.5)

164,91,01,872(8.5)

159,32,60,264(8.3)

287,49,45,325(12.8)

414,06,18,128(16.5)

Borrowing 828,71,719 (0.5)

5,35,51,618(0.3)

3,50,43,431(0.2)

4,28,68,274(0.2)

12,65,28,895(0.5)

OtherReceipts

32,13,93,904(1.9)

34,21,04,582(1.8)

29,12,47,393(1.5)

33,32,27,190(1.5)

29,32,47,017(1.2)

Total Receipts

1706,67,13,431(100)

1948,60,14,566(100)

1919,34,75,740(100)

2237,99,21,106(100)

2509,47,06,845(100)

13%

69%

17%1% 1%

2008-2009

Own source revenue

State Transfer

Central Transfer

Borrowing

Other receipts

Structure of Own Source Revenue (OSR) of ULGs

Source: 4th State finance commission

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Tax Revenue 98,30,22,254(69.5)

104,33,49,553(68.7)

127,26,03,886(68.7)

135,07,31,578(67.6)

145,85,19,491(65.0)

Non-Tax Revenue

43,23,17,897(30.5)

47,61,52,567(31.3)

58,09,78,306(31.3)

64,68,57,879(32.4)

78,60,61,812(35.0)

Own SourceRevenue

141,53,40,151(100)

58,09,78,306(100)

185,35,82,192(100)

199,75,89,457(100)

224,45,81,303(100)

Structure of Own Source Revenue (OSR) of RLGBs

Source: 4th State finance commission

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2099

Tax revenue 118,43,97,838(58)

123,77,94,807(57)

152,04,15,211(59)

160,36,70,438(54)

160,13,16,605(51)

Non- tax revenue

85,76,81,727(42)

93,55,52,871(43)

104,61,70,612(41)

135,31,31,450(46)

155,24,10,872(49)

Own source revenue

204,20,79,565(100)

217,33,47,684(100)

256,65,85,831(100)

295,68,01,895(100)

315,37,27,483(100)

• A standard measure of the autonomy of any government is the share of own source revenue to the total expenditure.

• Increasing functions of LSGBs imply increasing need for resources. But, unfortunately local bodies are unable to raise resources on their own to meet their expenditure needs.

• A comparison of total own source revenue and total expenditure of LSGBs reveal this fact.

Own Source Revenue and Total expenditure of ULGs

Year Own Source Revenue

Total Expenditure

OSR as a % of Total Expenditure

Growth rate of OSR

Growth rate of Expenditure

2004-2005 141,53,40,151 367,04,75,258 38.56

2005-2006 151,95,02,120 400,46,66,621 37.94 7.36 9.10

2006-2007 185,35,82,192 415,66,13,291 44.59 21.98 3.79

2007-2008 199,75,89,457 451,09,50,014 44.28 7.76 8.52

2008-2009 224,45,81,303 532,94,50,775 42.11 12.36 18.14

Growth rate of Own Source Revenue and Total expenditure of ULGs

2005-2006 2006-2007 2007-2008 2008-20090

5

10

15

20

25

7.36

21.98

7.76

12.36

9.1

3.79

8.52

18.14

Growth rate of OSR Growth rate of Expenditure

Own Source Revenue and Total expenditure of Gram Panchayats

Year Own Source Revenue

Total Expenditure

OSR as a % of Total Expenditure

Growth rate of OSR

Growth rate of Expenditure

2004-2005 204,20,79,565 1338,18,45,722 15.26

2005-2006 217,33,47,678 1514,65,54,700 14.54 6.42 13.18

2006-2007 256,65,85,823 1717,84,89,337 14.94 18.09 13.41

2007-2008 295,68,01,888 1981,88,31,676 14.91 15.20 15.37

2008-2009 315,37,27,477 2373,51,33,942 13.29 6.7 19.76

Growth rate of Own Source Revenue and Total expenditure of Gram Panchayats

2005-2006 2006-2007 2007-2008 2008-20090

5

10

15

20

25

6.42

18.09

15.2

6.7

13.18 13.4115.37

19.76

Growth rate of OSR Growth rate of Expenditure

• The ministry of Urban Development stated that expenditure of local bodies has significantly increased in the recent past due to three reasons:

• The impact of the recommendations of Pay Commission;

• Additional operation and maintenance costs due to larger investments in civic infrastructure, and

• Additional investments necessary for improving the accounting system, computerization of operations, tax administration, and project monitoring.

Problems in resource mobilization and recommendations for revenue enhancement

• It is recognized that there is no substitute to local bodies than raising their own tax and non-tax revenue.

• They must be encouraged to fully exploit those taxation powers which have been assigned to them by the state government.

• There is the need for local governments to broaden and deepen their own revenue receipts through widening of their tax base, improvement of collection efficiency and increase in tax rates.

• Absence of a formal count of properties in municipalities is one of the major handicaps in exploiting the true potential of property tax.

• The Municipality and Panchayat Acts provided for revision of property tax once in five years. However this tax revision was not carried out. The only exercise was for fixing of tax for new buildings.

• KM Act 1994 provides for changing the norms for the levy of Property Tax from ‘Annual Rental Value’ (ARV) method to Plinth (Built up) Area Basis of buildings.

• Coverage of professional tax is narrow.• Government departments and semi-government

offices (KWA/KSEB etc) are generally covered.• However, private offices, trading establishments,

and other private enterprises employing salaried persons are not brought under the tax net.

• The expansion of tax coverage may yield good returns and increase the profession tax revenue of the Municipalities and Panchayats.

• Entertainment tax is mainly collected from the cinema theatres and it constitutes the third largest source of income for LSGBs.

• There is a reduction in the entertainment tax obtained due to the arrival of cable network.

• In Grama Panchayats there are rarely any theatres. Also, the cable television is not currently under the tax net.

• LSGBs have poor performance in the collection of advertisement tax.

• Ground rent for boards constructed on road margins and in public properties are rarely collected.

• Minimum rates of advertisement tax may be revised periodically taking into account the cost of advertisement in the competing advertisement media and the cost incurred by the society from the proliferation of hoardings.

• The major reason for the poor tax effort is the lack of adequate staff. Besides staff shortage, frequent reorganization of wards, lack of training in the use of modern accounting practices and software and frequent transfers of personnel definitely create problems in revenue collection and keeping of accounts.

• In this context we wish to restate the recommendation of the Third State Finance Commission which says: “It is essential to have a Finance and Accounts Wing even in the gram panchayats.

• One important shortcoming in all the Local Governments (LGs) is the failure to use budget as an instrument of financial control.

• There is need to have a periodical review of utilization of funds. The Finance Standing Committee should examine the monthly accounts, point out defects and initiate remedial action.

• Every LG should prepare an ‘Economic Review’ corresponding to those prepared by the state government. It should contain a chapter on Assets and Liabilities.

• Given the rapid growth in urban population and the need to improve urban infrastructure, ULGs need to look for market-based financing to provide additional funds for infrastructure investments.

• But, the municipal bond market is limited.• However, proper accounting and audit mechanisms

and adequate transparency would be critical for the success of the municipal bond issues.

• The State Governments can incentivize own revenue collection by local bodies through a system of matching grants.

• Article 285 (1) of the Constitution exempt all properties of the Central Government from taxation. Local bodies should be permitted to levy tax on the properties of the Central Government.

• The data base of tax shall be computerized and uploaded in the public domain as a proactive disclosure of information to the tax payers.

•  The list of defaulters of tax/non-tax payments should be put on the website of the local government concerned. So, that they may be informed and it may force them to pay the taxes.

• Government may look into the possibility of bringing the land developed for non-agricultural purpose into the property tax domain.

• The land value varies grossly from place to place and hence it is prudent to fix only the minimum rate by Government and to let the LSGBs free to determine the rate according to the land value of the particular LG.

• The local governments can rope with Residents Associations to create tax consciousness among the residents. The local governments can incentivize the revenue mobilization efforts by instituting some awards to Residents Associations.

• It is the need of the time to enhance their capability for income generation by enlarging the tax base and collecting more non- tax revenues.

• Property tax must be properly assessed, profession tax should be widened to include private sector, user charges on various services, etc. should be implemented to enhance the revenue collection.

• Then, the LSGBs become self sufficient to administer their functions, deliver different services and in turn it will promote regional development.