TFC for giving 2.5% of Central tax revenues to local bodies

TFC for giving 2.5% of Central tax revenues to local bodies

New Delhi: Local bodies such as municipalities and village councils should be given as much as 2.5% of Central tax revenues, the 13th Finance Commission (TFC) has recommended, thus providing them with stable and increasing income to offer services to citizens.

“All local bodies need to be supported through a predictable and buoyant source of revenue, substantially higher than current levels, in addition to their own tax revenues and other flows from state and Central governments," the commission said in its report.

Also See Grants Matter (Graphic)

This is a radical departure from the current system of funding local bodies through grants and would enable local administrations to borrow additional money from the bond market.

Previous finance commissions, starting with the 10th, had awarded grants to local administrations that experts said were inadequate in providing basic services.

The panel has also recommended that local bodies set aside 1% of their funds to undertake crucial reforms that include establishing accounting and audition norms, and setting up boards to assess and levy property taxes.

“The amount (for urban local bodies) has gone up from Rs5,000 crore to Rs23,470 crore," said O.P. Mathur, a municipal finance expert and principal consultant with the National Institute of Public Finance and Policy. “I think the recommendations on property tax boards is a major recommendation."

Mathur said the institute had found in a study conducted for the commission that states could raise as much as Rs30,000 crore in property tax revenue without making any major structural changes.

The commission projects that local administrations could get as much as Rs87,519 crore between 2001 and 2015, of which at least 5,000 notified urban areas would get as much as Rs24,000 crore.

A separate special area grant of Rs20 per capita carved out of the basic grant should go to local bodies in tribal areas, it said.

Although the commission’s suggestions are significant, true devolution could only take place when local administrations are allowed to levy taxes on their own, according to K.C. Sivaramakrishnan, associate professor at the Centre for Policy Research.

“Should not the local bodies have an independent domain? One must at least move to a regime where certain kinds of tax accrue directly to local bodies," Sivaramakrishnan said. “Otherwise they become grant-dependent, devolution-dependent bodies. These are some of the important aspects of fiscal federalism."

Photo by Indranil Bhoumik; graphic by Ahmed Raza Khan/Mint