[Yojana Archive] Financial Devolution

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November 2021: Panchayati Raj

Financial powers to Panchayat

  • The 73rd Constitutional Amendment Act, 1992, promulgated on 24 April 1993, has been inserted as Part IX in the Constitution that enjoins the States to establish Panchayats.
  • It lays down that “the State shall take steps to organise village Panchayats and endow them with such powers and authority as may be necessary to enable them to function as units of self-government.”

Need for financial devolution:

  • To strengthen democracy at grass root level with more revenue resources for better service delivery.
  • To increase accountability to people so performance can be realized as direct contact with people.

Various Constitutional Provisions

  • Collection of Taxes: States have been provided the powers to authorise the PRIs to levy, collect, and appropriate certain taxes, duties, tolls, fees, etc.
  • Share of revenues: They can also assign to them the revenues of certain State-level taxes, subject to such conditions as are imposed by the State Government.
  • Grant-in-aid: The PRIs may also be provided with grant-in-aid.
  • State Finance Commission for review: In support of these requirements, Article 243-I of the Constitution mandates setting up of the State Finance Commission (SFC) every five years.
  • Central provisions: Under the Article 280(3) (bb) of the Constitution, Central Finance Commissions are required to make recommendations to augment the Consolidated Fund of the State to supplement the resources of the Panchayats in the State.

Central Finance Commission Recommendations

  • Recommendations for devolution to the Rural Local Bodies (RLBs) began from the Tenth Finance Commission onwards (period 1995-2000).
  • Up to the Twelfth Finance Commission (period 2005-10), nominal amounts of devolution were made to the RLBs on a lump sum basis.
  • Thirteenth Finance Commission (XIII FC) made a radical departure by awarding a percentage of the divisible pool.

Fourteenth Finance Commission (XIV FC)

  • It has recommended an amount of Rs 200292.20 crore to the GPs in the country.
  • This amount was divided in Basic Grant (Rs. 180262.98 crores) and Performance Grant (Rs. 20029.22 crore).
  • It adopted a trust-based approach and recommended that the devolutions be made directly to the GPs without any share at the levels of other tiers.

Fifteenth Finance Commission (XV FC)

  • It recommended devolution to all tiers of the Panchayati Raj including the Traditional Bodies of Non-Part IX States and Fifth and Sixth Schedule Areas.
  • XV FC grants are provided in two parts, namely-
  • Basic (Untied) Grant: For general purposes
  • Tied Grant: 30% of the total grants be utilised for drinking water, rainwater harvesting, and water recycling

Own Sources of Revenues (OSRs) of RLB

  • The three tiers of the Panchayats have been provided with own revenue generating powers.
  • However, the GPs in general are empowered to levy the most number of taxes and non-taxes within their jurisdiction.
  • Property tax, cess on land revenue, surcharge on additional stamp duty, tolls, tax on professions, tax on advertisements, non-motor vehicle tax, user charges, etc. contribute the maximum to the OSR.


  • OSR amounts manage to meet only around 10 per cent of the total expenditure of the panchayats.
  • In most States, the property tax generates the maximum revenue. However, this tax remains inelastic and adds to the inefficient ways of its administration.
  • A few progressive States like Karnataka have reformed the tax structure and are using the unit area method in determining the tax base.

Hurdles in Financial Devolution

  • Political will: Reluctance of Politicians and bureaucrats to relinquish power to local bodies remain major hurdle.
  • Lack of resources: Issues like lack of expertise to plan development priorities and use resources optimally, lack of resources to implement development agenda with minimal avenues for taxation and income.
  • Lack of institutional mechanism: Non-uniformity of various programmes at local level can make regulatory oversight difficult.

Way Forward

  • Updating of PRI Acts/Financial Rules and making them available to change in tax and non-tax levy, rate structure etc.
  • Better assessment of properties required for levying Property Tax (classified plinth area-based valuation seems to be the most scientific)
  • Relook on various exemptions to rationalise the taxes/levies
  • Augmentation of Tax Administration Structure
  • Technology-based Tax Administration may also be further expanded to cover even utility charges like water, street lights, sanitation charges, etc.
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