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While the Constitution of India specified the taxes to be divided between the Centre and State Governments, it does not specify the revenue base for urban local bodies. Even the 74th Amendment Act does not make specific recommendations about the type of taxes that urban local bodies should have. It simply states that the Legislature of a State may, by law, i) authorize a municipality to levy, collect and appropriate such taxes, duties, tolls and fees, ii) assign to a municipality such taxes, duties, tolls and fees levied and collected by the State Government, iii) provide for making such grants-in-aid to the municipality from the consolidated fund of the state and iv) provide for the constitution of such funds for crediting all cash received. Hence, the power for determining the revenue base of Urban Local Bodies rests with the State Governments. Further, it is recommended to set up States Finance Commission once in five years to decide the distribution of taxes between State and local bodies.
The importance and significance of municipal finances arises in the context of fiscal decentralization (and also urbanization). Therefore, it is pertinent to start with examining the theoretical aspects of fiscal decentralization so that the role and relevance of the municipal finances can be established on a sound footing. The ‘Decentralization Theorem’, formulated by Oates (1972) states:
The resource base of ULBs typically consists of their own sources, state revenue, government grant, loans from state governments, and market borrowings. The urban local bodies are sometimes not even aware of the opportunities and avenues of generating revenues through taxes and non-tax charges. Even if they are aware, they do not have the skill to optimize tax collection. ULBs in India, therefore, have a minimal revenue base and largely dependent on Central and State grants, which constrained the ability of ULBs to invest adequately in capital expenditure like creating infrastructure and, thereby, improve quality of life in the city.
The existing pattern of municipal finances has not been able to meet the required expenditure on infrastructure development in urban areas. Revenues of municipalities come from different sources but are limited in amount. RBI has broadly classified municipal revenue sources consisting of Tax Revenue (property tax, vacant land tax, tax on animals, taxes on carriages and carts; Non-Tax Revenue (user charges, lease amounts); Other Receipts (sundry receipts, lapsed deposits, fees, fines and forfeitures); Assigned (shared) Revenue (profession tax, surcharge on stamp duty, entertainment tax, and motor vehicles tax; borrowings and Grants-in-aid both Plan Grants and Non-Plan Grants.
Central Finance Commissions have also recommended for financial strengthening of ULBs from time to time. The Tenth Finance Commission was the first to recommend grants for rural and urban local bodies. The Thirteenth Finance Commission recommended allocation of Rs. 23,111 crore to ULBs with the aim of strengthening municipal finances and urban governance in India. Taking this forward, the 14th Finance Commission awarded total grants of Rs.87,144 crores to Urban Local Bodies in all States/UTs as Basic Grant (80%) and Performance Grant (20%) which linked to ULBs increase in revenues, ensuring audit of accounts and notification of Service Level Improvement Plans in respect of basic services.
The Urban Rejuvenation Mission (Smart City Mission, AMRUT, HRIDAY and PMAY-U) is another initiative to empower the urban local bodies. The outlays for Smart Ciites Mission and AMRUT are Rs.48, 000 crore and Rs.50,000 crore, respectively, over five years of the Mission period. GOI funds and the matching contribution by the States/ULB will meet only a part of the project cost. Balance funds are expected to be mobilized from other resources including private investment. Successful implementation of these missions finally rests on ULBs efficacy in resource mobilization and service delivery. Hence, financial empowerment of ULBs when seen from this perspective is no larger a matter of choice, it is a necessity. This also requires strong governance in ULBs for efficient delivery of services.
But, Municipalities in India have a long way to go in gaining access to buoyant revenue sources from states, utilizing such revenue sources optimally through effective assessments, billings and collections, discovering and implementing cost recovery mechanisms for service delivery and fully utilizing schemes and missions of central and state governments. They also have to explore innovative financing mechanisms like PPP, Municipal bonds, venture capital financing, crowd source financing etc. All of the above however depend on robust financial management systems and processes and high quality talent.
AMRUT reforms are some of the steps taken by Government towards financial strengthening of these ULBs. The recent updates like 94 cities in 14 states of India receiving credit ratings from rating agencies such as Crisil; as part of the cities’ preparations for issuing municipal bonds and Pune Municipal Corporation raised Rs. 200 crore by issuing 10-year municipal bonds are welcoming steps towards the financial empowerment of ULBs. CARE estimation that of Rs. 1,000- Rs. 1,500 Cr. per annum over the next five years would be raised by way of Municipal bonds is an indication of the expected growth in the market in the years to come.
Way Forward
By: Abhishek Sharma ProfileResourcesReport error
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