5.5 Revenue Powers ofMunicipalities across Major States

TABLE 5.5 Revenue Powers ofMunicipalities across Major States

Type oftax

State Compulsory Discretionary Fee

Andhra Pradesh Property: lighting,a Advertisement Advertisement, mutation, water,a scavenging,a drainage,a general registration, market, trade license, purposesa, vehicles, transfer ofimmovable compounding, slaughterhouse, property, animals license

Assam Property: water,a lighting,a drainage,a License for carts, carriages, markets, bridge toll, transfer of animals, dogs and cattle, boats, property betterment, fire brigade, public health

Bihar Transfer ofproperty On persons in sole or joint occupation Registration ofdogs, carts, ofholding according to their vehicles, and vessels circumstances and property; property: water,a lighting,a latrine,a vehicle, animal, professional, dog

Goa Consolidated property: general,a general Vehicle, boat, animal, dog, garbage water,a lighting,a sanitary,a advertisement, treatment, latrine, drainage, special profession, theater water, pilgrim, special education, octroi 182

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Gujarat Property, vehicle, boat, animal, motor Registration, license, swimming vehicle, octroi, dog, special and bath, slaughterhouse, building general sanitary, lighting, sale of construction, shop registration, cattle in market, betterment water or connection, cattle pound

Haryana Property, octroi, transfer ofimmovable Professional, vehicle, animal, dog License, building application, property show, boat, electricity consumption teh bazari, b extension, advertisement, slaughterhouse, cattle pound, registration, street

Himachal Pradesh Property, transfer ofimmovable properties Professional, unmotorized vehicle, Pilgrim, drainage, lighting, animal, dog show, vehicle, boat, scavenging, latrine, nature and electricity consumption, cost ofinternal service advertisement, building application, education

Karnataka Property, advertisement, boat, License (building, trade, hotel); animal, lighting, vehicle, transfer of building betterment; birth and immovable property death registration; food and adulteration; slaughterhouse; compounding

Kerala Property: water,a general purpose,a License, building, dangerous and lighting,a drainage,a sanitary,a offensive trade license, market, professional, animal, vessel, show, slaughterhouse advertisement, timber, transfer of property

(continued) Local Government Organization and Finance: Urban India

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TABLE 5.5 Revenue Powers ofMunicipalities across Major States (continued)

Type oftax

State Compulsory Discretionary Fee

Madhya Pradesh Property, water, light, sanitary, fire, Latrine, conservation, drainage, License, market, animal entry ofgoods professional, vehicle, animal, registration, hotel or restaurant betterment, pilgrim, people occupying license, composting, teh bazari,

b houses, building, land, new building application, compounding bridge toll, entertainment, advertisement, terminal

Maharashtra Consolidated property tax: general,a

Vehicle, boat, animal, dog, latrine, License, slaughterhouse, building general water,a lighting,a sanitary,a drainage, special water, pilgrim, permission, sale ofgoods, water octroi, professional, theater, special educational, fire brigade connection, warrant, prevention advertisement offood adulteration license, cattle pound, swimming pool, birth and death registration, betterment and development

Orissa Property: latrine,a water,a light,a License, advertisement, drainage,a animal, vehicle, registration, market, slaughterprofessional, poll, octroi, education house, pound, dog registration, cart stand, building planning

Punjab Property, professional, vehicle, License, slaughterhouse, building animal, menial domestic servant, application, composition, teh scavenging, building application bazari, b connection, copying 184

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Rajasthan Property, octroi, professional and Vehicle and other conveyance, dog, Advertisement, permission, vocationalc animal, boat, scavenging, latrine, license, registration, cattle pound, sanitary, lighting, water, trade and bus stand, copying calling, artisan

Tamil Nadu Property, professional, carriage and License (building, hotel, animal, care, advertisement, servant restaurant, dangerous and offensive trade), market, slaughterhouse, cart stand, encroachment

Uttar Pradesh Property, trade, calling, vocation remunerated by salary or fees, entertainment, vehicle, boat, dog, animal, inhabitants assessed on property and circumstances, water,a drainage,a scavenging, conservation, transfer ofproperty

West Bengal Property, advertisement, vehicle, ferry License, advertisement, building and bridge toll, professional planning and development, house connection, permission, market and slaughterhouse, birth and death registration, burning ghats

Source: State municipal acts. Note: Vehicles imply unmotorized vehicles, unless otherwise specified. a. Included under a consolidated property tax. b. Charged to hawkers. c. Tax on trade and calling differs from professional and vocational tax, which is compulsory. Local Government Organization and Finance: Urban India

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provisions,the state governments determined the expenditure responsibilities and fiscal powers and authority ofmunicipalities and defined the degree ofautonomy with which they could function.Discussions on how to improve the financial viability ofmunicipalities or streamline the flow of funds to them or carry out municipal tax reform took place within the parameters ofstate control over municipalities.In principle,the state governments assumed responsibility for the financial viability ofmunicipalities, using transfers as an instrument for bridging the gap between what the municipalities needed to carry out their mandated functions and what their revenue powers yielded.They also assumed responsibility for meeting the financial needs ofmunicipalities with cost disabilities.

Transfers to municipalities before 1992 accrued under two major headings:transfers through tax-sharing arrangements and transfers through grants.Tax-sharing arrangements specified how and in what proportion state taxes were to be shared with municipal governments.Tax-sharing arrangements were thus different from the use ofthe same tax base,tapped by different levels ofgovernments.Grants were the second,widely prevalent form oftransfers.Grants were nonmatching general or unconditional,special-purpose or conditional,and compensatory—that is,given in lieu oftax bases appropriated by the higher levels ofgovernments.Some grants also required matching contributions from the municipal governments.

Transfers through the sharing oftax receipts accounted for a relatively small proportion,approximately 15 to 16 percent,oftotal municipal revenue incomes before 1992.The share ofgrants was about 16 to 18 percent. Within grants,the share ofgeneral-purpose,nonmatching grants was about 9 to 10 percent,signaling that grants extended for specific purposes were a dominant form oftransfers at municipal levels in India.This situation generally prevailed;some states,however,preferred to use tax-sharing arrangements for effecting transfers,and others preferred conditional grants.

The main taxes shared between the state governments and municipalities before 1992 included entertainment taxes,motor vehicle taxes,stamp duties,profession taxes,and entry taxes.The mode ofsharing these taxes differed between states.In Tamil Nadu,for instance,where the entertainment tax was shared between the state and municipalities,65 to 70 percent ofthe proceeds ofentertainment taxes were devolved to municipalities.In Maharashtra,entertainment tax receipts were allocated among different types of municipalities on the basis ofvarying proportions ofrevenue collected from their areas:10 percent ofcollections to the municipal corporations,30 percent to larger municipalities,35 percent to medium-size municipalities,and 40 percent to smaller municipalities.In West Bengal,50 percent ofreceipts

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from entertainment taxes were assigned to municipal bodies on the basis of population.In a similar fashion,the mechanism for sharing stamp duties varied between states.The Kerala Stamp Act,for instance,permitted municipalities to levy surcharges on stamp duties on specified instruments related to immovable property situated in their areas.In Tamil Nadu,too,a surcharge was levied on stamp duties that was devolved to municipal bodies after deduction ofcollection charges.For the motor vehicle tax,there was no fixed pattern for sharing proceeds.

Grants were universally used as a mechanism for transferring financial resources to municipalities.A striking feature ofthe grant system was the use ofseveral types ofgrants.For example,in Gujarat,there were as many as 4general-purpose grants,16 special-purpose grants,and 4 statutory grants and shared taxes.In Maharashtra,there were 3 general-purpose grants and 18 special-purpose grants,plus 3 taxes that were shared with municipal bodies.What is important is that barring transfers on account ofthe dearness allowance (an allowance granted to compensate for inflation),primary education,and entertainment,the yield from other grants was extremely low, with most grants yielding no more than 1 or 2 percent oftotal transfers.

There was thus a high element ofdiversity in the system ofstate transfers to municipalities.The diversity was noted not only in the number of transfers made by the different states but also in the share oftransfers in the revenue income ofmunicipalities in the different states,the constituents of transfers and their relative transfers,and the criteria used by states for making transfers under different headings.

Studies pointed to the vulnerability ofthe transfer system on four counts:

The excessively large number oftransfers on different accounts made the system costly and difficult to administer and its impact difficult to measure. The ad hoc and irregular nature oftransfers rendered moot any attempt by municipal bodies to realistically assess their total resource position and consequently to plan their activities.The absence ofpredictability and stability in the level oftransfers was one ofthe most significant weaknesses ofthe transfer system before 1992. Municipal bodies have a natural tendency to substitute their resources and resource mobilization efforts for transfers.On the basis ofdata from four states,a National Institute ofPublic Finance and Policy paper estimated that a 1 percent increase in the state transfers to municipalities replaces approximately 0.22 percent ofthe locally raised revenues (Mehta 1992).Undermining the local tax effort instead ofdesigning the transfer

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system in a way that it strengthened the effort was yet another ofthe deficiencies noted in the transfer mechanisms. The municipal system was overloaded with special-purpose grants for which it was not adequately equipped or which led to diversion from the main statutory tasks.Many ofthe grants were said to have had a distortionary impact on local priorities.

The 74th amendment and related amendments to the constitution (article 280(3)(c)) have,however,altered the fiscal arrangement between the states and municipalities and established,for the first time,a fiscal link between the central government and municipalities.This link is provided through the institution ofthe Central Finance Commission,which is now mandated to “suggest measures needed to augment the consolidated fund ofa state to supplement the resources ofthe municipalities on the basis of the recommendations made by the finance commission ofstates”(Bakshi 2003,237).

Following this provision,the Central Finance Commission making recommendations for the period 2000–0516 provided a sum ofRs 20 billion for municipalities to improve the maintenance ofcivic services such as primary education,primary health care,safe drinking water,street lighting,sanitation,and other common property resources.The grant included a sum of Rs29.4 million for the creation ofdatabases related to the finances of municipalities and such sums as might be needed by municipalities for proper upkeep and maintenance oftheir accounts and audits.The 11th Central Finance Commission has established a comprehensive framework for the allocation ofgrants to states for municipalities.The framework consists ofa set ofcriteria,each criterion assigned a weight (table 5.6).

The principle underlying the framework is that,apart from size— represented by population and geographic area—which is a major determinant ofthe financial requirement ofmunicipalities and which consequently commands a larger weight,the grant should be allocated on the basis ofa set ofcomplementary criteria ofefficiency and equity.Efficiency is measured by the revenue-raising effort ofmunicipalities,and equity is represented by the difference between the average per capita nonagricultural gross state domestic product (GSDP) and the highest average per capita nonagricultural GSDP.The first is meant to serve as an incentive for municipalities to boost their revenue efforts,and the second provides funds for the fiscally disadvantaged municipalities.An important criterion (which commands a 20percent weight in the grant allocation) relates to decentralization as