Urban Local Finance: Mechanism, Problems, Way Forward

Municipal Corporations and Municipalities raise their own resources from a variety of sources, as provided for in the respective municipal laws.

Their own revenue sources are income from

(i) taxes, (ii) fees and fines, and; (iii) earning from municipal enterprises like land, tanks, markets, shops, etc.

Besides these bodies receive grants from the State.

Property tax on land and buildings is the most important source of income of most urban local bodies. Other taxes levied by them are advertisement tax, professional tax etc. Octroi still remains an important source of income of municipalities in Western India.

Now, the trend is toward abolishing this tax as it obstructs the free flow of traffic on highways. Municipalities also charge fines for breach of municipal rules and regulations. From municipal shops and markets and rest houses, municipalities often earn considerable sum of revenue.

It is a general practice for States to give grants to their municipal bodies to improve their revenue position. State grants-in-aid may be on ad hoc basis; or, it can be on the basis of certain principles like size of population, slums concentration, location of town, etc.

Some of the taxes and rates collected by urban bodies are: Property Tax; Water tax for water supplied; Sewerage Tax, Fire Tax; Taxes on animals and vehicles; Theatre Tax; Duty on transfer of Property; Octroi Duty on certain items brought into the city; Education Cess (Tax); and Professional Tax.

Some other sources of income are fines and fees such as Fees on Tehbazari on takhats and chabutras (in market area); licence fees – on cycle rickshaw , bicycles etc.; rent from municipal shops; and fines imposed for violation of municipal by-laws.

Problems with Finances

One of the biggest problems which the urban local bodies face is the scarcity of finances. Their sources of income are inadequate when compared to their functions therefore putting pressure on them.

  1. Lack of sources: As discussed above, their sources of income are varied. Yet, most of the income generating taxes are levied by the union and state governments and the taxes collected by the urban bodies are not sufficient to cover the expenses of services provided. ULB’s hesitate in imposing taxes because of the fear of backlash of the electorate. Further, the position of the smaller municipal institutions is much worse and at times they find it difficult to even meet their establishment costs.
  2. Ill-equipped staff: The staff at the disposal of these bodies is ill-trained and ill-equipped to effectively collect the taxes levied.
  3. Problems with property tax: With the abolition of Octroi by most States, Property Tax is the most important source of revenue for local governments. There have been substantial reforms in Property Tax administration in recent years. Earlier, ‘Annual Rental Value’ was the basis of levy of this tax. This mode of assessment had many drawbacks – the manner of assessment was opaque and gave a lot of discretion to assessing officials and it was inelastic and non-buoyant.
  4. Smaller tax base: It is estimated that only about 60%-70% of the properties in urban areas are actually assessed. There are several reasons for low coverage. The boundaries of municipal bodies are not expanded to keep pace with the urban sprawl; as a result, a large number of properties fall outside the legal jurisdiction of the municipal bodies.
  5. User charges: There has been a tendency to charge for various services at rates that are much lower than the actual cost of provisioning such services. These user charges include water charges, sanitation and sewerage charges, waste collection charges, charges for street lighting, fees for parking, fees for use of congested roads by motorists etc.

 Way Ahead with Finances

  1. Creating a separate tax domain for local governments, by amending the Constitution, is not practicable. However, States should ensure that the law gives sufficient powers to the local bodies regarding taxes that are more appropriately collected at local levels.
  2. Steps are already being taken under JNNURM for reforms of the property tax regime including use of GIS for the purposes of mapping of all properties in order to improve the efficiency of collection of property tax. Property tax details for all properties should be placed in the public domain to avoid any type of collusion between the assessing authorities.
  3. Introduction of the new simplified and transparent system of taxation would definitely improve the collection efficiency. A periodic physical verification of the properties and taxes levied on them should be carried out in each municipal area by a separate wing directly under the control of the Chief Executive.
  4. Octroi should be abolished, but the States should evolve mechanisms to compensate the local governments for the loss of revenue caused by such abolition.
  5. An impact study should be carried out for all major developments in the city. A congestion charge and/or betterment levy in relation to such projects may be levied wherever warranted.
  6. The power to impose fines for violation of civic laws should be given to municipal authorities. The relevant laws may be suitably modified
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