Devolution of Power and Finances up to local levels and Challenges therein.

Sources of Funds

The Amendments left important matters such as implementation, service delivery (including local capacity building) and transfer of responsibilities and powers to rural local bodies at the discretion of the state legislatures. Consequently, while expenditure responsibilities of local bodies are extensively enhanced, there is no law to ensure a corresponding assignment of funds to match the additional responsibilities. The decisions as to which taxes, duties, tolls and fees should be assigned to local governments and which should be shared by the State with them continue to be with the state legislatures. An appropriately designed transfer system is needed to balance spending needs with local resources.

The SFCs are required to recommend financial support from the state and principles for determination of taxes, tolls and fees that could be assigned to or appropriated by the local bodies. At present, not much fiscal power is vested in the hand of the panchayats. Their finances are drawn largely from tax assignment, tax sharing and grants-in-aid from the state and the centre while the share of own tax and non-tax revenue is very small. The non-tax sources include user charges on public facilities, and on the use of common resources in the form of forests, water bodies, quarried materials and minor minerals; and taxes on private property. In addition funds flow from the central government on the basis of the recommendations of the Central (National) Finance Commission and the Planning Commission.

An evaluation of PRIs’ sources of income including their tax powers and the authority to borrow shows that they differ substantially across states as between the fiscal size and sources of revenue available to different levels of PRIs and their administrative set-up. Most powers to levy various kinds of taxes and duties in rural areas are enjoyed by gram panchayats (GPs) whereas the first and second tiers, i.e., zilla parishads (ZPs) and panchayat samitis (PSs) are in general not entrusted with taxing powers. When these two tiers do levy these charges, they are often collected at the village level and then passed on to the higher levels of rural bodies. However, PRIs hesitate to levy and collect taxes.

After tax assignment, tax sharing is the major source of PRI finance. Such revenues are of two kinds. First, the law itself authorizes the state government to levy and collect revenue on its own and pass on a portion of it to the local bodies after deducting collection charges. Land revenue on agricultural land and stamp duty on transfers of property are two such important taxes on private property in rural areas which are shared with panchayats. Seigniorage royalties (royalties on minor minerals and quarried materials like granite and sand) and forest revenue are also shared with PRIs in the same fashion. The second category consists of taxes or fees which normally belong to the local bodies but whose collection is taken over by the state for administrative reasons.

Devolution of Resources and Financial Autonomy of Panchayats

PRIs need additional resources and financial autonomy to fulfill their new functional obligations. But the record on transfer of funds to panchayats for the subjects devolved upon them is not encouraging. Many of the powers given to local bodies are delegated powers and most state governments have retained substantial financial and administrative power which suppresses the autonomy of PRIs. Major areas of rural development expenditure and funds associated with them are kept out of the purview of the locally elected bodies. The earlier “bureaucratic practice” of budgeting for local expenditure has not changed so that even after budget approval, funds are often not made available to rural governments because of cash constraints in a state.

In practice, financial autonomy means release of funds without any technical clearance or conditionalities attached. For example, panchayats in Kerala and Punjab can spend up to Rs 1 lakh and in Madhya Pradesh up to Rs. 3 lakh to take up work without any outside clearance. But in most other states, lower levels of village governments require clearance from the next higher level to spend allocated funds. It is not surprising then to find that the PRIs in most states are restricted in spending their funds. In many cases there is neither a sufficient devolution of resources nor adequate revenue raising power with PRIs, which reinforces their dependence on higher level bodies rather than their empowerment. In Karnataka, e.g., gram panchayats have neither the access to funds from state nor the power