Rural Local Finance: Need, Mechanism

Sources of Income of Panchayats

Panchayats can discharge their functions efficiently only if they have sufficient financial resources.

For resources, Panchayats depend mainly on grants from State Government. They also have taxation powers and have some income from owned or vested assets.

They may get a share in the taxes, duties, tolls and fees that are levied and collected by the State Government. Let us now see what financial resources Panchayats have, to perform their functions.

  1. Gram Panchayat: In most States the power of levying taxes is vested in Gram Panchayats. House tax, tax on cattle, immovable property, commercial crops, drainage tax, sanitation fee, tax on produce sold in the village, a fee for supply of water to households, lighting tax are some of the taxes and fees levied by Panchayats. Panchayats can also levy entertainment tax on temporarily stationed theatres, taxes on animals and non-mechanically propelled vehicles. Gram Panchayats also receive funds as income from property owned by them as common grounds, jungles, cattle ground etc. The sales proceeds of dung refuse and carcasses (dead bodies of animals) are also retained by Gram Panchayats. They also receive their share in land revenue from the State.
  2. Panchayat Samiti: Panchayat Samitis can impose tax on facilities provided by them as water for drinking or irrigation purposes, lighting arrangements, tolls for bridges maintained by them. The property of Panchayat Samitis includes public buildings, public roads constructed or maintained out of their funds and all land or other property transferred to them by the  Panchayats receive income from the property vested in them. They also receive grants from the State Governments. Funds are transferred by Zila Panchayats or State Governments along with schemes to be implemented by the intermediate institutions of Panchayati Raj.
  3. Zila Parishad: Zila Parishads are also authorized to impose taxes. They may impose taxes on persons carrying on business in rural areas for six months, taxes on brokers, commission agents in markets established by them, also the tax on the sale of goods in these markets. Tax on land revenue can also be imposed by Zila Parishads. When development schemes are entrusted to them, necessary funds are also provided. They also receive grants from the State, donations from charitable institutions, and may also raise loans.

Problems with Finances of Panchayats

Across the country, States have not given adequate attention to fiscal empowerment of the Panchayats. Some of the issues associated with their finances are discussed below:

  1. Heavy dependence on upper tiers of government: Panchayats are heavily dependent on government grant and internal resource generation at the panchayat level is weak. This is partly due to a thin tax domain and partly due to Panchayats’ own reluctance in collecting revenue.
  2. Inflexibility of funds: A major portion of the grants both from Union as well as the State Governments is scheme specific and panchayats have limited discretion and flexibility in incurring expenditures in such schemes
  3. Responsibilities do not match finances: In view of their own tight fiscal position, State Governments are not keen to devolve funds to panchayats. In most of the critical Eleventh Schedule matters like primary education, healthcare, water supply, sanitation and minor irrigation even now, it is the State Government which is directly responsible for implementation of these programmes and hence expenditure. Overall, a situation has been created where panchayats have responsibility but grossly inadequate resources.

Way ahead with Finances

  1. Explore additional sources: In order to widen their tax base the PRIs will need to explore additional sources of revenue. Rural bodies need to look beyond the traditional areas of lands and buildings and augment their resources by operating in newly emerging sectors through innovative tax/non-tax measures e.g. fee on tourist vehicles, special amenities, restaurant, theatre, cyber café etc.
  2. Incentivising Better Performance: The Ministry of Panchayati Raj has evolved a Panchayats Empowerment and Accountability Fund (PEAF) to incentivize both empowerments of the Panchayats by the States, on the one hand, and accountability on the part of the Panchayats to Gram/Ward Sabhas on the other.
  3. Royalty from minerals: The role of State Governments should be limited to prescribing a band of rates for these taxes and levies. g. PRIs should be given a substantial share in the royalty from minerals collected by the State Government. This aspect should be considered by the SFCs while recommending grants to the PRIs.
  4. Primary authority over taxation: In the tax domain assigned to PRIs, Village Panchayats must have primary authority over taxation. However, where such taxation has inter- Panchayat ramifications, the local government institutions at higher levels – Intermediate Panchayat and Zila Parishad could be given concurrent powers subject to a ceiling. Whenever a tax/fee is imposed by the higher tier, such taxes should be collected by the concerned Village Panchayats.
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