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 to make their own decisions about their requirements while the higher level rural governments fix the priorities and spend the funds. A large fraction of PRI spending is on staff salaries financed from grants from higher level governments implying thereby a low degree of expenditure autonomy. In 1999-00 general administration, most of which goes on salaries, and expenditure on (tied) development grants constituted more than 80% of total spending of PRIs in most states. Most of the remaining expenditure was towards obligatory services leaving less than 2% for services at the discretion of the panchayats.
Fiscal Devolution to Rural Governments
Fiscal decentralization to rural local government in India is meaningful only when the panchayats have adequate untied funds to provide public services assigned to them which requires assignment of tax powers to them. The fiscal decentralization envisaged in the Constitutional Amendment has the potential to significantly improve the efficiency of public services delivery in the country. The resources of the panchyats broadly comprise internal revenue mobilized by themselves through the exercise of tax and nontax powers, and resources received from the state in the form of devolution and grant from both the state and the Union Governments. There are essentially three type of taxes which devolve on panchayats; own taxes- the levy, collection and use of which vests in the panchayats by statute; assigned taxes- the levy and collection of which vests in state but its use vests in the panchayats and shared taxes, the levy and collection of which vests in the state government but shared with local bodies. The non-tax sources for PRIs consists of revenues from licence fees, fines and penalties, rent/leases on governmental properties. But the taxes, duties, tolls and fees to be levied by them and assigned to them and the grant-in-aid to be given to them are left to the discretion of the state governments. Therefore the fiscal mismatch not only between own revenue and total expenditure but also between total revenue and total expenditure of panchayats present very interesting picture and demonstrates that panchayats are facing a huge deficit and their own resources are meager to meet out the emerging fiscal needs and even the meeting out the committed liabilities.
Issues and Challenges
As per the implementable rules of fiscal decentralization,financesshouldfollowfunctional assignments. But PRIs are marked by their poor internal revenue effort and high dependence on grants-in-aid and assigned revenues from both Central and state governments. Improving own resources strengthen the link between revenue and expenditure decisions of the rural local bodies at the margin, which is extremely important to promote both efficiency and accountability in the provision of services. But the resource mobilisation by the PRIs is limited as the taxes like land revenue, house tax etc transferred to them by the state governments are less buoyant in nature. For local governments to fully deliver the potential benefits of decentralization, they need to be fiscally empowered. There is considerable need to rationalize the assignment system to enable the decentralized governments to raise revenues and incur expenditure according to the preference of their citizens. Expenditure functions remain non-transparent and very little expenditure autonomy has been given. It is important to specify expenditure responsibilities to enhance accountability, reduce unproductive overlap, duplication of authority and legal challenges. It is believed that more local control over expenditure decisions can make things better and improve service delivery. As state governments themselves are faced with several resource constraints, the revenue accruals to the local bodies are not adequate to enable them to effectively deliver the required standards of public services. An effective institutional mechanism is required for facilitating fiscal decentralization, for enabling the state to monitor the fiscal performance of local governments, identify those in financial difficulties as well as those exerting weak revenue mobilization efforts. It is also important to monitor the success of central government instruments (transfers, subsidies, local taxes) on a periodic basis.
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