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Expanding the Resource Base of Panchayats: Augmenting Own Revenues

Fiscal decentralisation to rural local governments in India is meaningful only when the panchayats have adequate untied funds to provide public services assigned to them which require the assignment of tax powers. This paper shows that revenue mobilisation by rural local bodies is abysmally low. The assignment does not include any important revenue handles and the panchayats are not able to exploit properly even the only notable tax base assigned to them - the property tax. The paper argues that it is necessary to take a re-look at the tax powers of panchayats. It is also important to build administrative and enforcement capacity. An essential precondition for building such capacity is to create a reliable data and information system.

SPECIAL ARTICLEJanuary 26, 2008 Economic & Political Weekly54The paper was presented in a seminar on ‘Revenues of Rural Local Governments: Assignment, Effort and Reforms’, organised by the National Institute of Public Finance and Policy, New Delhi for the ministry of panchayati raj on July 6-7, 2007. Detailed discussions with T R Raghunandan have been extremely helpful. The authors wouldlike to thank the participants of the seminar and Raghunandan with the usual disclaimers. M Govinda Rao ( is at the National Institute of Public Finance and Policy, New Delhi. U A Vasanth Rao ( is in the Fiscal Policy Analysis Cell, Finance Department, government of Karnataka.Expanding the Resource Base of Panchayats: Augmenting Own RevenuesM Govinda Rao, U A Vasanth Rao1 IntroductionAcommon feature of all multi-level fiscal systems is the existence of vertical fiscal imbalance. It is well acknow-ledged that while decentralised governments arebetter suited to deliver public services and, therefore, efficient conduct of allocative function of the government requires assignment of many functions to them. At the same time, significant redistribu-tive and stabilisation functions have to be undertaken by the higher level governments and this bestows comparative advan-tage to them in raising revenues and borrowing [Oates 1972]. The mismatch between the functional assignment and financial powers causes vertical fiscal imbalance. Furthermore, within decentralised levels, the capacity to raise resources is different and therefore, different government units within a level cannot provide comparable levels of public services at comparable tax rates and this is termed as horizontal fiscal imbalance. Each decentralised system has devised a mechanism to resolve verti-caland horizontal fiscal imbalances and this mechanism has important bearings on adequacy, equity and efficiency in public service provision.It is possible to minimise the vertical fiscal imbalance by assign-ing important revenue handles to the local governments or a mechanism could be devised to resolve the imbalances through fiscal transfers. Dependence on fiscal transfers could reduce fiscal autonomy and if the transfers are conditional and purpose specific, it could reduce the autonomy of local governments to allocate resources according to their own priorities. At the same time, assignment of broad based and redistributive taxes to local governments could cause tax disharmony, poor tax compliance and resource misallocation. Thus there can be a trade-off between fiscal autonomy and harmony in the tax system. Therefore, it is important to have a judicious mix of assigning revenue powers to decentralised governments and making intergovernmental transfers [Rao 2006] In the Indian context, decentralisation to rural local govern-ments is meaningful only when the panchayats have adequate untied funds to provide public services assigned to them. Untied funds would imply that either the panchayats should be able to raise tax and non-tax revenues from the sources assigned to them or higher level governments should provide unconditional transfers by way of share in taxes or block grants. Even though transfers are inevitable at local levels as they do not have compar-ative advantage in raising revenues, requiring them to mobilise “own” revenues is important both for reasons of efficiency and accountability.Fiscal decentralisation to rural local governments in India is meaningful only when the panchayats have adequate untied funds to provide public services assigned to them which require the assignment of tax powers. This paper shows that revenue mobilisation by rural local bodies is abysmally low. The assignment does not include any important revenue handles and the panchayats are not able to exploit properly even the only notable tax base assigned to them – the property tax. The paper argues that it is necessary to take a re-look at the tax powers of panchayats. It is also important to build administrative and enforcement capacity. An essential precondition for building such capacity is to create a reliable data and information system.
SPECIAL ARTICLEEconomic & Political Weekly January 26, 200855Revenue-Expenditure LinksThus, a critical factor necessary for strengthening panchayats is to enable and empower them to enhance their own revenues. Improving own revenues strengthens the link between revenue and expenditure decisions of the rural local bodies at the margin, which is extremely important to promote both efficiency and accountability in the provision of services. Linkingthedecisionto provide public services with raising revenues at the margin is extremely important to ensure efficiency and accountability in public service provision. Although it is not possible to raise the entire revenue required to finance expenditures at subnational levels, the system should ensure that the burden of public services provision is not shifted to non-residents. To minimise the “common pool” problems associated with local public goods, the revenue assignment should ensure that beneficiaries of public services should, by and large, pay for the public services consumed [Bahl 2002]. Assignment of adequate and appropriate revenue sources to rural local governments is extremely important in the Indian context. The inability to assign potent revenue sources has led to local governments carrying on unfunded mandates and this has resulted in poor service delivery. Inadequate assignments combined with low levels of effort by the rural local governments have led to high levels of transfer dependence and low fiscal autonomy. The practice of scheme-bound transfer of resources to rural local governments has reduced them to the role of agencies of the state governments [Rao Amar Nath and Vani 2003]. At the same time, insignificant locally raised revenues have not only robbed them of flexibility and autonomy on the one hand but also reduced efficiency and social accountability on the other. From the viewpoint of minimising common pool problems, enhancing efficiency in public service delivery and improving accountability and incentives, it is important to identify the ways and means to improve the own revenues of the local governments. On the whole, poor revenue collections at the local level has been a major constraint in realising the benefits of fiscal decentralisation. Keeping the above considerations in view, the first Round Table of state ministers of panchayati raj at Kolkata recommended that steps should be taken to encourage panchayati raj institutions (PRIs) to raise their own resources, especially through the provi-sion to “appropriate” revenues raised by them for their own purposes, in accordance with Article 243-H of the Constitution. The Empowered Subcommittee of the National Development Council agreed in its meeting on June 12, 2006 to the proposal of the ministry of panchayati raj (MoPR) to conduct a seminar on local taxation and evolve a national policy or guidelines in this regard. This seminar was the culmination of that proposal.Empowering PanchayatsAs mentioned above, the strategy of strengthening of panchayats is inextricably intertwined with empowering them to raise revenues from tax and non-tax sources assigned to them. In several states, this is a neglected aspect of panchayat empower-ment. There are two diametrically opposite points of view regard-ing raising revenues by panchayats. The first is the assertion that panchayats are disinterested in collection of taxes, that the poor would suffer and that this is politically inadvisable. The alter-native viewpoint is that given the possibility of linking taxes withbenefits from public services at local levels, it is possible to ensure better compliance of tax payments at local levels. Indeed, the actual revenue raising depends on a variety of factors includ-ing the visibility of benefits, rate of tax imposed, culture of tax payments vis-à-vis “free riding”, capacity of panchayats to administer and enforce the tax which, inter alia, depends on the power structure in the villages. Indeed, there are a slew of good practices emerging where panchayats on their own have collected taxes. It is important to understand these practices to evolve policies and institutions with the appropriate incentive structure. Empowering the panchayats is a necessary condition to strengthen decentralisation. The issue gains additional focus as over Rs 50,000 crore are likely to be transferred to the panchayats from the centre for implementing various flagship programmes. Failure to evolve a proper incentive structure at the panchayat level could lead to diversion of these funds from these programmes to other activities. It is therefore, opportune to explore the appro-priate tax and non-tax revenue handles to be assigned to the panchayats and the ways and means of administering and enforc-ing them to achieve a greater linkage between revenue raising and spending decisions at the local level. Indeed, it is important also to build capacity in the panchayats to administer and enforce the tax to elicit compliance. Requiring matching contributions from the panchayats while funding various schemes like the “swajal dhara” scheme of the department of drinking water supply could be replicated in other schemes as well.This paper explores the ways and means of empowering the panchayats to enhance their contribution to financing public services with a view to enhance efficiency and accountability in public service delivery. Section 2 shows that current levels of raising revenues is wholly inadequate and underlines the need to undertake reforms to empower the panchayats to augment revenues for them to play a meaningful role in the development of the country. Section 3 underlines the appropriate revenue handles for the panchayats and examines the revenue sources assigned to them in various state acts. It also summarises the salient features of the revenue raising powers of panchayats. In Section 4, appropriate revenue handles that could be assigned to panchayats and the mechanisms to empower them to raise revenues are discussed. The final section summarises the strat-egy of empowering panchayats to raise revenues.2 Current State of Panchayat Revenues A major handicap in analysing panchayat revenues is the paucity of information and data on the panchayat finances. The states, on their part, have not found it necessary to compile the data on panchayat revenues. The Eleventh Finance Commission (EFC) underlined this as an area of concern and recommended a grant of Rs 200 crore for the creation of database at the local body level of which the share of rural local bodies was Rs 197.06 crore which amounted to about Rs 8 lakh per panchayat. Similarly, the EFC allocated Rs 483 crore for the maintenance of accounts to local bodies. The Twelfth Finance Commission (TFC) in its report
SPECIAL ARTICLEJanuary 26, 2008 Economic & Political Weekly56stated that, of the Rs 200 crore allocated for the creation of database, the actual utilisation was only Rs 93 crore or 30 per cent. In the case of funds allocated for maintenance of accounts too, the utlisation rate was 30 per cent. Commenting on the issue, the TFC stated, “Most states do not have accurate informa-tion on the finances of their local bodies” (p 153). The TFC reiterated, “It is…imperative that high priority should be accorded to creation of database and maintenance of accounts at the grass-roots level”. It further recommended that a permanent state finance commission(SFC) cell may be created in the finance departments of state governments as the collection and collation of data would have to be done constantly. Not much seems to have been done in this direction. In the meantime the entire discussion, debate, planning and policy calibration at the local body level is being done without any reliable data. Most of the SFCs make their recommendations on transfer of resourcesto panchayats without any reference to the revenue potential and expenditure needs of panchayats.The TFC also attempted to compile the information on panchayat finances and has published data on revenues and expenditures of the panchayats for the period from 1998-99 and 2002-03. A close scrutiny of the data brings out a number of shortcomings in the data casting serious doubts on their reliability. The important shortcomings of the data are: (i) a number of smaller and special category state governments did not submit informa-tion to the TFC and therefore, the data have not been reported. These include Arunachal Pradesh, Jharkhand, Jammu and Kashmir, Manipur, Meghalaya, Mizoram and Nagaland. (ii) The data on panchayat finances reported for the remaining states is much too aggregative to undertake any meaningful analysis for policy. The data are published for the village, intermediate and district level panchayats together and no separate information is available. (iii) In some states, own non-tax revenue is shown as zero. (Karnataka, Tripura) which is simply not the case in reality. In part, this is due to the fact that the reporting formats appear to have been ambiguous and partly because the states simply fulfilled the formality of supplying the information to the commission and did not take care to check the accuracy of the figures. Similarly, a comparison of data among different states casts serious doubts on their reliability. Thus, total revenue in Kerala in 2002-03 was just Rs 960 crore whereas, in Karnataka it was more than four times higher at Rs4,303 crore. In Tamil Nadu, the total revenue was just Rs 592.76 crore in 2000-01, but declined to Rs 325.63 crore next year before increasing steeply to Rs 825.14 crore in the following year. All these cast serious doubts on the reliability of the data. Negligible RevenuesIn the absence of any other information available, we have analy-sed the data put out by the EFC and the TFC. Given the doubts about the reliability of data outlined above, the analysis should be taken with some measure of caution. Own revenue collections and revenue accruals of panchayats from 2000-01 to 2002-03 as a ratio of primary sector gross state domestic product (GSDP) (which is taken to be a proxy for rural GSDP) is presented in Table 1. Similarly, comparison of revenue collections and accru-als per rural person at constant prices is presented in Table 2. The analysis of the data shows that the revenues raised by panchayats from the sources assigned to them are abysmal. These constituted 0.07 per cent of GDP and 0.35 per cent of the total public revenues (centre, state and local revenues taken together) in the country. Even as a ratio of total revenues accruing to panchayats during 1998-99 to 2002-03, the revenues raised by panchayats constituted just 6.4 per cent. Although this was marginally higher than 4.2 per cent witnessed during 1990-91 to 1997-90, the contribution of own revenues can be considered negligible [GoI 2004].The analysis presented in Table 1 shows that the revenues mobilised by the panchay-ats have shown increase over the years and yet, the contribution continues to be negligi-ble. The revenues raised by panchayat as a ratio ofGDP increased from 0.04 per cent in 1997-98 to 0.07 per cent in 2002-03. Commensurately their revenue accruals increased from 0.8 per cent to 1 per cent during the period. Irrespective of the trend what these estimates show is that despite all the emphasis on decentralisation, rural local governments play an abysmally small part in public service provision and the principal reason for this has to be found in the negli-gible revenue mobilisation from them.Table 2 presents information on the revenues collected by panchayats in differ-ent states as a ratio of their state domestic products from the agriculture and allied activities. We have taken the latter variable in the denominator to broadly represent the rural incomes which is the relevant indica-tor. The data presented in the table bring out three important features. First, it reiter-ates the point made above that the revenue mobilisation by the panchayats is abysmal. Second, the revenue mobilisation has shown increase over time. The all-state average revenue as a ratio of agricultural GSDP actually decline from 0.23 per cent in 1990-91 to 0.16 per cent in 1995-96, but Table 2: Own Revenues(as % of agricultural GSDP)States 1990-91 1995-96 2000-01 2001-02 2002-03Andhra Pradesh 0.51 0.52 0.33 0.33 0.36Bihar 0.67 0.49 0.56Goa 0.390.600.700.710.81Gujarat 0.450.350.410.440.44Himachal Pradesh 0.00 0.02 0.10 0.10 0.13Karnataka 0.620.661.481.411.48Madhya Pradesh 0.08 0.16 0.62 0.48 0.69Maharashtra 0.270.300.300.230.36Rajasthan 0.22 0.18 0.16 0.14 0.18Tamil Nadu 0.23 0.10 0.24 0.26 0.32Tripura Pradesh 0.01 0.09 0.09 0.09 0.09Uttaranchal 0.10 0.11 0.13West Bengal 0.12 0.02 0.08 0.07 0.07All states 0.23 0.16 0.34 0.32 0.37Coefficient of variation 0.798 1.271 1.090 1.103 1.062Sources: 1Report of the Eleventh Finance Commission (2000). 2 Report of the Twelfth Finance Commission, ministry of finance, government of India (2004). 3 Central Statistical Organisation, ministry of statistics and programme implementation, government of India.Table 1: Revenues of Different Levels of Government (% of GDP) Level of Government 1997-98 2002-03 Revenue Revenue Revenue Revenue CollectionAccrualCollectionAccrualCentre 11.4 6.8 11.8 7.74States 6.310.96.79.63Local-urban 0.5 2.1 0.3 0.51Local-rural 18.3 19.8 18.87 18.86Revenue collection represents own revenues. Revenue accrual includes revenue from assigned taxes, share in taxes and grants from higher levels of government. Sources: 1 Public Finance Statistics, 2005-06, ministry of finance, government of India. 2 Reports of Eleventh and Twelfth Finance Commissions, ministry of finance, government of india .
SPECIAL ARTICLEJanuary 26, 2008 Economic & Political Weekly58levy by local governments could also result in tax induced mobil-ity of the bases leading to significant distortions. Therefore, generally, the local governments are assigned relatively less mobile tax bases. In general, the principle of assignment that is followed is that the tax burden should fall on the local residents so that there is some relationship between the community’s contribution and the benefits received by the community [Musgrave 1983]. The three most important considerations in assignment are: (i) the local governments should have revenue powers that enable them to finance a significant proportion of the cost of the public services that they provide; (ii) the assignment of tax powers to local governments should not result in large scale mobility of economic agents and tax induced distortions; and (iii) the burden of raising revenues for financing public services by local govern-ments should fall by and large on the residents who are the beneficiaries of these public services.At present, the rural local bodies in India at the district and block levels do not have own sources of revenue that are worth-while. They can raise revenues, albeit meagre, from rents on the buildings let out by them. They virtually depend on the transfers made by the state governments and to some extent, the central government. In some states, block and district level rural local governments receive shares in some of the state taxes such as entertainment tax or stamps duty. From the viewpoint of raising revenues, only the village panchayats have been assigned the power to levy, collect and appropriate revenues. However, the amount of revenue raised by them , as mentioned above, is not very significant.Few Sources of Revenue A close perusal of the various taxes levied by panchayats in different states shows that, altogether there are as many as 66 different types of taxes, user fees and charges. Most of the levies are only in the statute books and are just not levied. Though the list of tax and non-tax revenues are extracted from the respective State Panchayat Act, we do not have full information from the respective state governments of how many taxes, fees and fines, user charges and other miscellaneous receipts the gram panchayats have actually been exercising. But going by the infor-mation received from 10 states, it is the property tax that accounts for the major source of revenue for the gram panchayats in all the states. However, in some states gram panchayats also have signi-ficant sources of revenue from octroi (Gujarat, Maharashtra and Rajasthan), professional tax (Assam, Bihar, Himachal Pradesh, Kerala, Madhya Pradesh and Punjab), and entertainment tax (Assam, Gujarat, Kerala, Punjab, Uttar Pradesh and Tamil Nadu). Barring these taxes there is no separate information on the revenue realised by the gram panchayats on the other tax handles that find an entry in the respective acts. Of these, the property tax is the only important tax. These taxes are not important either because the tax base is negligible or the local bodies do not have the capacity to administer them. In respect of property taxes too, the village panchayats can levy and collect this tax subject to the specified exemptions and ceiling rate specified. In most states the state governments specify both the maximum and minimum tax rates and stipulate a variety of other conditions in respect of taxes and fees including the property tax. There are two important problems with respect to the assign-ment of tax powers to panchayats. The first is that although in terms of numbers there are quite a few taxes and fees, none of the revenue handles is significant from the viewpoint of generating revenues except the property tax. Thus, any serious attempt to improve the fiscal autonomy of the panchayats should ensure greater tax powers to them. It is only when the tax powers are assigned to the panchayats that they would be able to improve the standards of public services, ensure greater efficiency and account-ability, as there would be greater correspondence between tax payments and the benefit from public services.Problem of EnforcementA more serious problem, however, is the capacity of rural local governments to administer and enforce the levy. At present, even in the case of property tax, administration and enforcement of the tax has left much to be desired. Here, the example of Karna-taka highlights the seriousness of the issue. First of all, average per capita tax collected in the sample of 700 village panchayats in 2000-01 was as low as Rs 8.21 and almost 80 per cent of the panchayats paid less than Rs 10. The situation in the poorer districts of the state was worse. Although virtually all the pancha-yats levied the tax at the stipulated maximum rate in nominal terms (10 per cent) the significant undervaluation of the property has rendered the effective rates much lower. Thus, the demand for property tax collections is much less than that should be expected when a more realistic valuation is made. What is more, even the low level of tax demand is not actually collected by the panchayats. In Karnataka, for example, in 2000-01, collection efficiency measured in terms of actual collections to demand, in Table 4: Per Capita Revenue of Panchayat(at current prices in rupees)States 1990-91 1995-96 2000-01 2001-02 2002-03 Own Total Own Total Own Total Own Total Own Total Revenue Revenue Revenue Revenue RevenueRevenue Revenue Revenue RevenueRevenueAndhra Pradesh 12.90 205.80 20.60 319.37 27.73 708.26 19.29 767.25 30.44 815.83Bihar 0.000.620.0069.179.892.080.4815.850.8838.83Chhattisgarh * 34.94 202.07 34.07 165.39 34.30 166.43Goa 15.22 53.23 44.39 112.25112.33197.83 110.32308.53 118.52 418.02Gujarat 10.14 376.2112.33 809.4624.30 1554.78 22.60 1072.08 21.66 1023.96Harayana 23.68 37.30 28.74 45.31 47.57 144.83 50.73 232.39 51.15 245.67Himachal Pradesh 0.04 8.55 0.92 12.40 6.20 48.06 7.75 56.31 9.69 69.80Karnataka 5.58423.068.39 858.5519.38 1368.05 15.01 1253.55 16.85 1219.13Kerala 14.62 45.11 35.01 125.4394.08 356.97 82.18 356.2994.96 403.62Madhya Pradesh 1.12 1.12 1.12 1.12 1.17 1.17 1.26 1.26 1.06 1.06Maharashtra 7.07 215.97 14.93 484.69 59.64 723.1168.90 825.39 83.09 943.38Orissa 2.1564.952.49181.732.9337.542.8243.441.7459.25Punjab 15.09 68.20 33.32 118.3850.72 86.04 40.40 68.36 60.63 109.61Rajasthan 7.15222.317.05342.778.73387.488.58417.358.49408.40Tamil Nadu 4.27 75.99 8.92 94.01 16.29 185.13 17.86 111.11 18.84 256.35Tripura 0.045.340.2020.911.87180.011.96207.732.23229.65Uttar Pradesh 2.15 40.49 3.23 61.94 4.57 47.54 4.50 48.70 4.70 46.32Uttaranchal * 51.66 51.66 36.88 36.88 95.91 95.91West Bengal 2.88 14.62 2.83 104.32 5.72 108.71 5.82 79.69 5.33 30.21All states 5.89 105.18 8.06 202.17 21.15 346.60 21.01 329.53 23.70 346.29*Newly constituted states.
SPECIAL ARTICLEEconomic & Political Weekly January 26, 200859almost 30 per cent of the panchayats, was less than 50 per cent. The average collection efficiency, however, was 69 per cent. On average, about 72 per cent of the revenue was spent in collecting the taxes. In respect of 42 per cent of the village panchayats, cost of tax collection was higher than the tax collected [Rao, Amar Nath and Vani 2003]. The analysis of property tax as also other revenues brings to the fore the inability of the panchayats to enforce the tax. The question is unless the system is reformed to ensure better compliance and the panchayats are empowered and their capacity is developed to administer and enforce the tax,giving them additional tax handles may not enhance fiscal autonomy and efficiency in local governments nor add to the revenue collections. The only important non-tax revenue at the village panchayat level is the water charge. While in principle, it should be possible to collect user charges for the services rendered at local level because of the strong correspondence between tax payment and benefit of public service levels, in actual practice, village panchayats have found it difficult to collect the user charges. In Karnataka for example, in 2000-01, over 99 per cent of the panchayats collected less than Rs 10 by way of water charges, and almost 44 per cent of the panchayats did not collect any user charges for supplying water. 4 Extending the Revenue EnvelopThe forgoing analysis shows that in order to augment the revenue powers of the panchayats it is necessary to take a re-look at the tax powers assigned to them and examine the possibility of assigning additional productive revenue handles. In addition, it is important to build the capacity of the panchayats to administer and enforce the taxes assigned to them. The basic requirement in building their capacity is to create a reliable data and information system. Unlessattempt is made to build the basic infor-mation system, and update it from time to time, it will be impossible to create the capacity to levy administer and enforce any tax. Building the Information System: The information system to be organised for the tax administration cannot be a stand-alone project. It should be a part of the general statistical information system necessary for planning and delivering public services at the panchayat level. It should be developed in such a manner that it is useful for planning and should be subject to norms of accountabil-ity. The report on planning at the grassroots level has provided a detailed strategy for building the information system [GoI 2006]. To begin with, it is important to devise a simple accounting format particularly at the gram panchayat level. As regards the district and block level panchay-ats are concerned, much of the revenues come from devolution from the state government. They do not have worthwhile revenue sources of their own and in most of the states the transfers given to the panchayats are for specified programmes or expenditure items and very little is allocated for general purpose (lump sum). Given the strong linkage of district and block panchayat finances with that of the state budget, it would be necessary to devise a harmonised system for the purpose of accounting the transac-tions in block and district panchayats with that of the state government. As regards gram panchayats are concerned, they do have revenue sources of their own and also receive some lump sum transfers from the state governments. The gram panchayats receive a bulk of their revenues for implementing the flagship programmes. It should be possible to devise a simple accounting system to show own revenues and lump sum transfers received from above under both plan and non-plan heads. It is necessary to emphasise that the system of classification should be very simple and should be within the capacity of the panchayat administration to compile. In designing the format, it would be easy to look at the existing accounting system. Therefore, the first task is to get the details of the existing accounting system in the gram panchayats and devise a system based thereon. The variables for which data should be collected include on the revenue side, own revenues and transfers. Under own revenues, data needs to be collected inter alia, on property tax collections, water cess and water charges. Under the transfers head, we need information on the lump sum transfer in the form of tax devolution/and grants received from the states, lump sum transfer from the centre (Central Finance Commission recommendation), transfers for various flagship schemes for specified purposes. As a bulk of transfers received by panchayats are in the latter half of the financial year, they are unable to spend these funds. It would, therefore, be useful to collect information beginning with the opening balance, receipts during the year, expenditures incurred during the year and the closing balance figures. This would give an indication to the unspent balance with the panchayats for Table 5: Per Capita Revenue of Panchayat(at 1993 prices in rupees)States 1990-91 1995-96 2000-01 2001-02 2002-03 Own Total Own Total Own Total Own Total Own Total Revenue Revenue Revenue Revenue RevenueRevenue Revenue RevenueRevenueRevenueAndhra Pradesh 17.49 279.12 16.94 262.64 17.81 454.89 11.96 475.67 18.25 489.10Bihar 0.000.840.0056.886.351.340.309.820.5223.28Chhattisgarh * 22.44 129.78 21.12 102.53 20.56 99.78Goa 20.6472.19 36.51 92.31 72.14 127.0668.40 191.27 71.06 250.61Gujarat 13.76 510.26 10.14 665.6815.61 998.57 14.01 664.65 12.99 613.89Harayana 32.12 50.60 23.64 37.26 30.55 93.02 31.45 144.0830.66 147.29Himachal Pradesh 0.06 11.60 0.75 10.20 3.98 30.87 4.81 34.91 5.81 41.84Karnataka 7.57 573.806.90706.0412.45 878.649.30777.15 10.10 730.89Kerala 19.83 61.18 28.79 103.1560.42 229.27 50.95 220.8956.93 241.98MadhyaPradesh1.52 1.52 0.92 0.92 0.75 0.75 0.780.780.630.63Maharashtra 9.59292.9212.28 398.6038.31 464.4342.71 511.7149.81 565.58Orissa 2.9288.09 2.05 149.451.8824.11 1.7526.93 1.0435.52Punjab 20.4692.50 27.40 97.35 32.57 55.26 25.05 42.38 36.35 65.71Rajasthan 9.70 301.52 5.79 281.885.61248.865.32258.745.09244.84Tamil Nadu 5.80 103.06 7.33 77.31 10.47 118.90 11.07 68.88 11.29 153.69Tripura Pradesh 2.91 54.92 2.66 50.94 2.93 30.53 2.79 30.19 2.81 27.77Uttaranchal * 33.18 33.18 22.86 22.86 57.50 57.50West Bengal 3.91 19.84 2.33 85.79 3.68 69.82 3.61 49.40 3.20 18.11All States 7.99 142.65 6.63 166.26 13.58 222.61 13.03 204.30 14.21 207.61* Newly constituted states.Deflation has been done using the wholesale prince index.

SPECIAL ARTICLEEconomic & Political Weekly January 26, 200861levels. In 2006-07, the collection from this in the states taken together is estimated at Rs 3,332.44 crore which is substantial as compared to the own revenue collection of panchayats at all the three levels in 2002-03 of Rs 1,643 crore. In addition to the above, a half a per cent levy on the VAT turno-ver at the last point at which a registered dealer sells the commodity to the non-registered dealers or consumers. The tax will be on the turnover and as the levy is at the last point, there will not be further cascading of the tax. In 2006-07, revenue from sales tax collections was estimated at Rs 1,20,709.15 crore. Assuming that the effective rate is about 8 per cent, the turnover is estimated at Rs 15,08,863 crore and a levy of half a per cent on the turnover would work out to Rs 750 crore. For 2008-09 assuming a 15 per cent increase per year, this would roughly work out to Rs 1,000 crore. Of this, the share of urban local bodies could be taken as roughly 70 per cent and the rural local bodies could receive about Rs 300 crore.The intermediate and district level local bodies can also levy local business tax or charges in locations close to urban agglom-erations. In these places, village level panchayats may not have the requisite capacity and district panchayats may be better suited to levy the charges. The additional charges could be imposed on factories, shops and establishments located at 20 km radius outside the municipal jurisdictions in the case of munici-pal corporation areas and 10 km radius outside the municipal areas. The fee may be fixed on the basis of some objective indica-tor (floor area?) and revised every five years. The funds thus collected may be earmarked to augment infrastructure in panchayat areas adjacent to these urban areas to provide a continuum of infrastructure.Capacity Building to Administer and Enforce the Tax at Village Level: At the village level, as discussed in the previous section, there are a number of tax handles but from the viewpoint of revenue, only the property tax is important. Even in the case of this tax, in some states the levy does not exist (Rajasthan, Punjab) and in others, the revenue from the levy is stagnant. There is an imperative need to strengthen the capacity of the village panchayats to levy and administer the tax, to achieve meaningful fiscal decentralisation to rural local governments. The critical element in this is the designing of a clear structure of the tax. Experience has shown that area-based property taxation varying with the location of the property, floor area and the type of construction would be appropriate. If the state government issues a guided value in each of the blocks, it should be easy for the local governments to apply them. This will make the tax system simple and transparent. Assurance that the tax will not be revised for five years will also impart stability and acceptability to the tax. The state should only set the minimum rate and not the band as is prevailing at present.As already mentioned, at present even in a state like Karnataka, collection efficiency is low. The reason for this is the poor admin-istrative and even more, the enforcement capacity of the village panchayats. This has more to do with the power structure in the villages rather than the ability of the tax collectors. The way to enforce the tax, therefore, will have to mandate complimentary benefits for payment of taxes and penalties for its non-payment. Some specific measures in this regard can be: (a) If it is feasible, a law should be enacted to disqualify those families defaulting on the taxes from voting and contesting in elections. (b) The default-ers could be made ineligible to receive cooperative credit, suppliesfrom the public distribution system. (c) There could be a one-time settlement of arrears to begin with without any penalty. (d) Panchayats collecting revenues above 80 per cent of the demand could be given a bonus at specified pre-announced rates. Alternatively, matching element could be introduced to the grants to be given from the state governments. In addition to these it is important that there should be trained tax collectors in each of the villages. If one collector for each village panchayat is not viable, a tax collector can be assigned to multiple villages with appropriate specification of responsibility. The training should equip the tax collectors to determine the tax demand for each of the properties. Simultaneously, the infor-mation system necessary to determine the tax demand should be collected and computerised. With regard to water rates, it is important to increase the colle-ction efficiency. The government of India, based on the recom-mendation of the TFC, is initiating measures to moving towards transferring all assets relating to the water supply and sanitation systems to the village panchayats. The panchayats should, however, be required to recover 50 per cent of the maintenance costs by way of user charges. Often, there is a separate special-ised agency for water supply and village panchayats can play an important role as collection agents and commission could be given to the panchayats at predetermined rates. Similar interme-diation is also possible in the collection of electricity bills. The above discussion has been too general and necessarily so. The actual mechanism to augment revenues of panchayats and enhance their fiscal base will depend on the specific revenue handles available and the circumstances faced by the village panchayats. It is nevertheless important to assign clear and productive revenue handles to them, empower them with capacity to administer and enforce the tax and institute an incentive system so that the elected representatives are not left with the choice of not collecting the revenues and continue the syndrome of fiscal dependency. ReferencesBahl, Roy W (2002): ‘Implementation Rules of Fiscal Decentralisation’ in M Govinda Rao (ed), Develop-ment, Poverty and Fiscal Policy, Oxford University Press, New Delhi, pp 253-77. Government of India (2004):Report of the Twelfth Finance Commission, Ministry of Finance. – (2006): Planning at the Grassroots Level, Ministryof Panchayati Raj. Oates, Wallace E (1972): Fiscal Federalism, Harcourt, Brace and Jovanovich, New York.Musgrave, R A (1983): ‘Who Should Tax, When and What’? in Charles McLure (ed), Tax Assignment in Federal Countries, Australian National University Press, Canberra. Rao, Govinda M (2006): ‘Resolving Fiscal Imbalances: Issues in Revenue Sharing’ in Robin Boadway and Anwar Shah, Intergovernmental Fiscal Transfers, the World Bank, Washington DC, pp 319-38.Rao, Govinda M, H K Amar Nath and B P Vani (2003): ‘Rural Fiscal Decentralisation in Karnataka State’, National Institute of Public Finance and Policy, New Delhi (mimeo).

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