Municipal Finances in India

Structure, Status, Issues

and Way Forward
Ravikant Joshi

28 January, 2017
Presentation to MHM CEPT Students
 Urban / Local / Municipal Public
Finance
 The modern economics literature on local public
finance begins with Charles Tiebout’s classic 1956
article, which argued that local governments
provided an ingenious way of embedding choice
and competition into the provision of public
services.
 One essential feature of cities is that people and
capital can readily leave them; greater factor
mobility is a key feature of urban, as opposed to
national, public finance (Wildasin 1986)
Why Municipal Finance?

 Local budgets account for an average of 25

percent of public expenditures in the
European Union, for example, but less than 5
percent in many developing countries.
 If fiscal decentralization is evaluated in terms
of expenditure and revenue autonomy, there
has been progress, albeit uneven and greater
on the expenditure side.
 Why Municipal Finance?

 Core rationale - Local Government is positioned to

improve how public resources are used and citizen
needs are satisfied.
 Secondary rationale - the role that local
governments could potentially play in dealing with
several significant contemporary global challenges
 global warming, energy shortages and food security
concerns,
 Increasing urbanisation and increasing urbanisation of
poverty
 a considerable backlog of infrastructure demands and
anticipate the emergence of new ones.
 mitigating the effects of the global financial crisis started
in 2008
Why Municipal Finance ?
Core Rationale
 First MG are closer to the people than the
central governments, and they have superior
access to local information that allows them
the better respond to the needs of citizens.
 Second MG face stronger incentives to
perform well on local matters than the central
government, so that they are in a better
position to derive the most from public
resources at their disposal and are more
likely to seek innovative means of doing so.
 In sum - access to local information and
incentives to use it well
 Why Municipal Finance? – the core
fiscal structure requirements
 At a minimum, there must be
 Functions appropriate in terms of their relevance for
localities and their suitability for local implementation.
 Clarity of functional assignment
 Sufficient autonomous local government powers and
resources (expenditure autonomy)
 Access to funds/resources (IGFT) to discharge their
functions and to meet evolving expectations of their
constituents.
 Access to infrastructure finance governed by a suitable
framework and adequate fiscal responsibility
safeguards.
 Adequate incentives (electoral and beyond) for local
governments to be held accountable to their
constituents and to behave in a fiscally responsible
manner
Why Municipal Finance? – the core
non- fiscal system requirements

 Need appropriate organizational structures,

 Well defined systems and procedures for
managing public resources,
 Suitable frameworks and mechanisms for
engaging with other levels of government,
private sector firms and non governmental
actors.
 Satisfactory local technical and managerial
capacity, and
Municipal Government Fiscal Structure

Taxes Taxes Taxes

Shared
Fees
Shared
Taxes Taxes
Transfers Transfers
Services
Accountability Accountability Accountability
Accountability

Shared Taxes /Transfers

Why Municipal Finance Matters
for India?

 Improving municipal finance is central to the

achievement of India’s economic growth
objectives.
 A robust municipal finance system is
necessary for effective implementation and
management of India’s urban policy agenda.
 Sound municipal finance is a pre-requisite for
improved service delivery.
Why municipal finance matters
for India?

 While the economic base has shifted

inexorably to cities, India’s recognition of the
role of cities in promoting and accelerating
economic development and subsequent
prioritization of the municipal sector to
manage the process of growth and
urbanization has proceeded slowly.
 Cost of weak local infrastructure is very high
and is holding back India’s economic growth
Municipal Finances in India
Structure - Resources
Municipal Finance – Components
Municipal Resources-Typology
Municipal Resources - Conventional
Municipal Resource in India
Conventional Sources - Tax Revenues

 Major Municipal Taxes are as follows

 Tax on property including service levy for water
supply, conservancy, drainage, lighting, fire and
garbage disposal etc.
 Octroi; (abolished in most of the cities)
 Tax on Professions;
 Tax on vehicles (other than motor vehicles).
 Toll
 Advertisement
Municipal Resources in India
Conventional Sources - Non Tax

 The own resources other than tax

 Municipal Act provides for issuance of licenses and
collection of fees for it
 Fee is a charge made in return for a benefit allowed or
conferred.
 When the service is extensively used, becomes a public
utility, then the fee charged is called a user charge or user
fee.
 It is charged for public utilities, parking, entry fees for play
ground, swimming pools etc.
Municipal Resources
Non Tax Resources of ULBs
Municipal Resource
Conventional Sources - Grant-in-Aid
 Types of Grant – in – aid
 General-purpose grant (GPG) - to augment the
revenue of the local bodies for discharging their
normal functions
 Specific purpose grant (SPG) - for specific
requirements, e.g. the increase of wage bills due
to inflation, education grants, public health, road
maintenance etc
 Revenue Grant – may be general specific purpose
but is not subject to repatriation if not spent
 Capital Grant – may be general but mostly
specific purpose and is linked to performance
and spending of funds in a time frame
Grants – Matrix Structure
 Fund Flow in the Gujarat Urban Sector
Levels of government
 Fund Flow in the Karnataka Urban Sector
Levels of government
Fund flow in West Bengal Urban Sector
 Municipal Resources
Conventional Sources - Borrowings
 The borrowing power of a local government is
regulated under Local Authorities Loans Act (1914).
 This act provides that Municipal Corporations can
borrow for development activities and for payment
of debt charges
 State Municipal Acts put lot of adhoc, non-
performance based curbs rather than prudential
norms on borrowing powers of the municipal
bodies
 However forced lending happens to ULBs by State
Governments which are not borrowing worthy.
Municipal Alternative / Non-
Conventional Resources

 Why alternative sources of financing?

 Inadequacy of conventional sources.
 Bridging of resource gap.
 Improving the financial and project
management capabilities.
 Inculcating financial discipline.
 Attaining objectives of accountability,
transparency and efficiency.
Municipal Alternative /
Non-Conventional Sources
Municipal Finances in India
- Status
 Municipal Finances in India – Status*
Year Municipalities own Relative shares of own
revenue revenues (%)
Rs. Crores As % of Municip State Central
GDP alities governm governm
ents ents
1997/98 8,434.90 0.61 2.84 33.4 63.8
1998/99 9,451.70 0.59 2.97 34.3 62.7
1999/00 10,372.70 0.59 2.8 34.4 62.8
2000/01 12,018.40 0.63 2.98 35.1 61.9
2001/02 12,748.10 0.68 3.07 39.5 57.5
Local bodies dependence on
Government Support (2002)
Punjab

Maharashtra

Gujarat

Assam

Goa

Haryana

Orissa

Kerala

Tamil Nadu

Andhra Pradesh

Karnataka

Chattisgarh

Madhya Pradesh

Himachal Pradesh

Uttaranchal

West Bengal

Jharkhand

Bihar

Uttar Pradesh

Rajasthan

Jammu & Kashmir

0 20 40 60 80 100
% Reliance on State Transfers
Trends in Municipal Finance – Revenue Base 2002

 Total municipal sector revenue < 0.75% of India GDP

 Municipal revenue CAGR ~ 9.57%
 Composition of municipal revenues
Property tax,
Non-Plan Grants octroi,
made available to advertisement
compensate tax, vacant land
against the loss of tax, taxes on
income and some animals,
specific transfers. carriages and
carts

Entertainment
tax, surcharge
on stamp duty, User charges,
profession tax, municipal fees,
motor vehicles sale & hire
tax charges, lease
amounts
Trends in Municipal Finance – Expenditure Base 2002

 Total municipal sector expenditure < 0.79% of India GDP

 Municipal expenditure CAGR ~ 9.76%
 Composition of municipal expenditure
Municipal Finances in India
- NIPFP study for ADB (2011)
- HPEC Report (2011)
- JNNURM Data Analysis
Municipal Finances in India

Country % of GDP
India 1.09
Australia 2.3
Spain 6.4
Belgium 6.9
Germany 7.2
Canada 7.2
Austria 7.4
Switzerland 9.7
 12 & 13 CFC Data on Municipal Finance*
Details! 2002-2003 2007-2008 2002- 07
Amount Per Amount Per CAGR %
Rs. crore Capita Rs Rs. crore Capita Rs
Own Tax 8,838.13 311@ 15,277.72 492 % 11.57
Own Revenue 13,279.97 466 # 23,521.38 757 & 12.11
Total Reve Income 20,919.69 733 44,429.05 1430 16.26
Revenue expenditure 15,691.46 550 28,431.45 915 12.62
Capital expenditure 5,938.28 208 18,594.08 598 25.64
Total expenditure 21,629.74 758$ 47,025.53 1,513 ** 16.80
(GDP) (India) 22,61,415 21,415 43,20,892 37,969 13.83
Status of Municipal Finance
 Urban Share of Net Domestic Product
Year % Share
1980-1981 41.1
1993-1994 45.7
1999-2000 51.9
2004-2005 52.0
Source: Central Statistical Organisation
 Municipal own revenue contribution to India’s GDP
is minimal (0.54 percent of the GDP) in 2007
 Municipal Finances in India
% Share of each government level in Tax Revenues
Year Centre States Muni Bodies Panchayats

2002-03 44.1 53.2 2.5 0.2

2007-08 50.0 48.1 1.7## 0.2

## result of abolition of Octroi , must have gone down

further as in 2007-08 Gujarat abolished Octroi fully

Sources: Indian Public Finance Statistics. Government of

India and Thirteenth Finance Commission
 Municipal Finances In India
Municipal Spending Levels
Tier of Share of Urban Share of Municipal Expenditure
Government Population % 2002-03 % 2007-08

Muni Corp 41.2 66.0 71.9

Municipalities 38.8 27.0 22.5
Nagar Panchayats 11.5 6.3 5.0
Notified Area
Committees 0.9 0.7 0.5
Non-municipal
Census Town 7.5 - -

Total 100.0 100.0 100.0

Source: Thirteenth Finance Commission and Census of India

13 CFC Data on Municipal Finance*
 13 CFC Data on Municipal Finance
2 Large inter-state differences in the
levels of municipal own revenues
and municipal expenditures.
i Four states accounting for 33% of urban
population, generate 75% of municipal
resources; five states accounting for
26% of urban population are able to
raise just 3.4% of revenues
ii Fall in “municipal own revenue” across
states; insufficiency of own revenues for
meeting revenue account expenditures.
iii State transfers maintaining the level of
municipal spending.
iv Central government grants contributing
to meet municipal requirements for asset
creation.
13 CFC Data on Municipal Finance
 Municipal Corporations (large-sized
municipalities) which consist of 41 percent of the
country’s total urban population account for 72
percent of total municipal spending.
 Central government transfers increased from Rs.
308 crore in 2002-03 to Rs. 2372 crore in 2007-
08.
 municipal own source revenues have declined
10.54 percentage points over the 2002-03 to
2007-08
 High and rising inter-state disparities in the
management of municipal finance.
13 CFC Data on Municipal Finance
 Only 38 JNNURM cities with per capita
operative surplus above Rs. 25 and only 23
cities with per capita surplus of Rs. 100 and
above
 25 JNNURM cities have operative loss even
after receiving sizeable government grants
 No AAA rated ULB, highest rating so far
AA+(SO)
 MOUD – Credit Rating of 63
JNNURM Cities (mid-2008)
Rating No. Financial health implication
Category Cities
AAA -- No ULB in this category
AA 10
A 10
BBB 18 weak financial profile, high dependence on
government grants/transfers
BB 17 negative operating surpluses, limited ability
to borrow or service debt
B 07 inadequate and volatile grant support

C 01 no position to repay debt.

14th CFC Data on Municipal Finance
Structures Year 2007–08
Year 2012–13
Own Sources
INR Per INR (Crore) Per cent
(Crore) cent
Tax revenue 18,366 37.2 30,912 32
Non-tax revenue 9,134 18.5 19,002 19.7
Sub total 27,501 55.7 49,913 51.6
Transfers
Government of India 3,515 7.1 5,387 5.6
Finance Commission 986 2 3,760 3.9
State devolution and 9,342 18 18,537 19.2
assignments
State grant-in-aid 6,653 13.5 14,809 15.3
Others 1,355 2.7 4,232 4.4
Sub total 21,851 44.3 46,727 48.4
Total 49,352 100.0 96640 100.0
Own source revenue as 0.60 0.48
per cent of GDP
Total municipal revenue 1.08 1.03
as per cent of GDP
Municipal Finances in India

Centre’s States’ Municipa

Share in Share in Municip l Share
Total
Centre Publicly- Total
States Publicly- al in Total
Year (Rs. in raised (Rs. in raised Bodies Publicly-
crore) Resource crore) Resourc raised
(Rs. in Resourc
s (in per es (in crore) es (in per
cent) per cent) cent)

2012/13 741,877 42.46 974,239 55.77 30,912 1.77

Municipal tax
revenue as a 4.2 per 3.2 per - -
percentage of cent cent
Centre
2007/08 439,547 49.45 430,782 48.48 18,366 2.07
Municipal tax
revenue as a 4.2 per 4.3 per - -
percentage of cent cent
States
 Sub Mission Urban Sub Mission Integrated
for Urban Infrastructure for Basic Housing and
Progress as on
Infrastructure Development for Services to Slum Total
March 2013 and Small and the Urban Development
Governance Medium Towns Poor Program
Total Allocation Rs. 315.00 bn Rs. 114.00 bn Rs. 163.56 bn Rs. 68.28 bn Rs. 660.00 bn
Envisaged
Cost of Projects Rs. 625.51 bn Rs. 141.21 bn Rs. 297.70 bn Rs.119.36 bn Rs. 1183.78 bn
approved
Rs. 285.23 bn Rs. 113.19 bn Rs. 147.00 bn Rs. 76.45 bn Rs. 621.87 bn
ACA committed
90.55 % 99.29 % 90.0 % 112.0 % 94.2 %
Rs. 187.04 bn Rs. 94.65 bn Rs. 97.09 bn Rs. 57.05 Rs. 435.83 bn
Funds released
59.38 % 83.0 % 59.0 % 74.6 % 66.03 %
Not Avai Not Avai Not Avai Not Avai
Funds spent
lable lable lable Lable
Numbers of Projects 553 807 525 1083 2,968
approved Projects Projects Projects Projects Projects
30 30 30
States / UTs covered
States/UTs States/UTs States/UTs
Cities / Towns covered
62 Cities 640 Towns 62 Cities

Rs. 432.00 bn Rs. 115.23 bn Rs. 183.45 bn Rs. 82.21 bn Rs. 812.89 bn
Total Funds Released
69 .0 % 81.6 % 61.6 % 68.9 % 68.7 %
JNNURM Progress during the year (Rs. Crores)
Particulars 2009-10 2010-11 2011-12 2012-13
Total Project Cost 8117 2725 1890
approved
ACA (UIG) Approved 924 923 -360
ACA (UIG) Released 2711 3220 1485

Total ACA Approved 3644 1735 283

Total ACA Released 5856 6441 5435
Total Funds Released 16868 9555 14881
Municipal Finances in India
- Resource Requirement
 Alternative Estimates of Urban Infrastructure
Source Sectors Period Estimates
(Rs crore)
Committee of Ministers Water Supply 211.3
Constituted by the Sewerage at 1960-61
Central Storm Water Drains prices
Council of Local Self Urban Roads (annual)
Government (1963) Street Lighting
Zakaria Committee
India Infrastructure Water Supply 1996-2006 56000
Report (1996) Sewerage at 1995-96
(Rakesh Mohan) Solid Waste prices
Management
Urban Roads
Mohanty et al. Water Supply 2004-2014 630000
(2007) Sewerage at 2004-05
Solid Waste prices
Management
 Alternative Estimates of Urban Infrastructure
Source Sectors Period Estimates
(Rs crore)
MOUD – Estimates O&M of Core Urban 2005-2012 791080
2008 Services
HPEC Report Water Supply 2012-2031 3918670
Estimates Sewerage at 2009-10 prices
(2011) Solid Waste Management
Storm Water Drains
Urban Roads
Urban Transport
Traffic Support
Infrastructure
Street Lighting
Renewal and
Redevelopment
(including Slums)
Other sectors
HEPC Report O&M of Core Urban 2012-2031 1812638
Estimates Services
 Resource Requirement - MOUD
On the basis of data collected from 19 states, the ministry
estimates the resource gap of the urban local bodies as
under: (Rs. crore)

 (i) Requirement for all 28 states based on a uniform

per capita requirement of Rs. 1578 per annum for
provision of core services 63,893
 (ii) Requirement of O&M for new assets funded
under central schemes 20,000
 (ii) Requirement under state schemes 16,400
 (iv) Impact of the Sixth Pay Commission 24,288
 (v) Capacity building 1,290

Total 1,25,871

 For the (JNNURM) cities for 2005-12 estimated at 2,76,822

 The requirement for all urban areas is projected at 7,91,080
HPEC - Capital investment estimate (2012-13 to
2031-32 at 2009-10 prices)sectoral breakup
Capital
Relative share
Sector expenditure
(per cent)
Total (Rs crore)
Water supply 320908 10.4
Sewerage 242688 7.8
Solid Waste Management 48582 1.6
Urban Roads 1728941 55.8
Storm Water Drains 191031 6.2
Urban Transport 449426 14.5
Traffic Support Infrastructure 97985 3.2
Street Lighting 18580 0.6
Total 3098141 100
HEPC - Capital investment estimate (2012-13 to
2031-32 at 2009-10 prices) - City-wise breakup
Relative share
Class-wise estimates Total (Rs crore)
(per cent)
Class IA (>5million) 860136 27.8

Class IB (1-5 million) 690463 22.3

Class IC (100000-1 million) 883346 28.5

Class II (50000-100000) 174072 5.6

Class III (20000-50000) 280541 9.1

Class IV +(<20000) 209583 6.8

Total 3098141 100

 HPEC - O&M investment estimate (2012-13 to
2031-32 at 2009-10 prices) - Sectoral breakup

O&M Expenditure Relative share

Sector
Total (Rs crore) (per cent)
Water supply 546095 30.1
Sewerage 236964 13.1
Solid Waste Management 273906 15.1
Urban Roads 375267 20.7
Storm Water Drains 34612 1.9
Urban Transport 304386 16.8
Traffic Support Infrastructure 36690 2.0
Street Lighting 4717 0.3
Total 1812638 100
HEPC – Resource Requirement
 The average investment per person for the eight sectors
of urban infrastructure at all India level is estimated to be
Rs 43,386, and it ranges from Rs 29,900 to Rs 60,425
across city size classes, based on the service standards
assumed for different city size classes
 40% of the total investment of Rs 31 lakh crores is
required to address the unmet demand
 Rs 8.5 lakh crores required for slum population,
assuming universal standards, thus in all Rs. 39.5 lakh
crore are required.
 Beside this Rs. 18.13 lakh core will be required for O&M
of Core Urban Services
Sufficiency of Actual Revenues

 Actual municipal revenues are failing short

by half against the present actual
expenditure.
 Actual municipal revenues are less than a
third of what are needed to maintain
services at standardized levels (Normative
Expenditure).
 Financing Urban Infrastructure Needs

Expenditure Pattern as a percentage of GDP 2011-12 2021-22 2031-32

Municipal Own Revenue 0.50 1.17 1.47

Revenue from entities other than ULB 0.33 --
State Government Transfers 0.32 0.16 0.16
Other GOI Grants 0.13 0.13 0.13
JNNURM 0.10 0.25 0.25
Deficit 0.21 0.39 0.15
Total Expenditure as a percent of GDP 1.59 2.10 2.16
Municipal Finances in India
- Issues
MOUD presentation to 13th CFC

 Fiscal space of municipalities is shrinking

 Internal resources provide less than half of the
total expenditure
 Octroi abolished without viable alternative
 ULBs are under exploiting property tax
 Transfers by states and centre are inadequate
 A significant part of resource transfer is tied and
non-discretionary, limiting the abilities of the
urban local bodies to match resources to locally
felt needs.
 Earlier CFC adopted adhoc approach, 13th CFC
should adopt structured approach
ULBs presentation to 13th CFC
 States should be incentivised to delegate funds,
functions and functionaries to the local bodies.
 The maximum limit of profession tax collectable
should be raised from the present value of Rs.
2,500 per annum.
 Local bodies should be permitted to levy tax on
the properties of the Central Government.
 Earmarking of funds should not be confined to
water supply and solid waste management.
 Grants should be untied.
 Grant should be given in single annual grant
 5% of grant should be allowed for administrative
expenditure
 Municipal Finances In India – External Issues

 Inferior nature of local taxes

 Based on wealth or property and not on income (ability to
earn) or expenditure Single tax dominated system
 Proximity to people
 Revenue-yielding potential is short by 30-80 percent of
the standard municipal expenditure norms, meaning that
even if municipalities use their revenue-raising powers
optimally, they will not be generate enough to reach the
norms.
 Inadequate local resources – not updated since
Charter of Lord Rippon of 1882
 Inroads by state governments on local resources
 Appropriation of professional tax, entertainment tax and
toll by the state governments
Municipal Finances In India – External Issues

 Absence of autonomy with local bodies in

respect of tax rate setting, rate revision and
other spheres of working
 Inadequate borrowing powers and options
 Supply side constraints with regard to
borrowing or market based finance by ULBs
 Failure of SFC to revamp municipal
finances
 Inadequate devolutions, transfers, grant-in-
aids (ad-hoc, uncertain, non-formulae
based), tide and conditional nature
Municipal Finances In India – Internal Issues

 Poor administration in all respect of tax and other

powers
 Property tax – unquestionably a prime revenue source,
19% of total revenue incomes, but characterized by
huge inefficiencies
• the problem of free riders – 41% properties not on Municipal house
tax register
• exemptions from payment of property taxes wipes out 11% of
revenues from property taxes
• high collection inefficiencies – only 46% of tax demanded is
collected
 Large subsidy on service provision – conservatively
estimated at 35 percent of the cost incurred on their
operation and maintenance
Municipal Finances In India – Internal Issues

 Property Taxes Revenues (2006-07) estimated between

Rs. 6,275 crore and Rs, 9,425 crore (0.15 % – 0.23 % of
GDP),
 Compared with 0.6 percent for developing countries,
0.68 percent for transitional economies, and 1.04
percent for all countries.
 Assessed value of properties for purposes of taxation
uniformly lags behind the market values; in some places,
it is 8-10 percent of market values.
Municipal Finances In India – Internal Issues

 Non-augmentation of non-tax resource

 Inefficient management of municipal
resources, cost inefficiency, wasteful
expenditure
 Rudimentary and weak financial
administration
 Lack of professional capabilities
The deepest root causes are outside the
municipal finance system
 Lack of fiscal responsibility and budgetary norms
for ULBs/Utilities
 inadequate but free/easy funds are made available to
ULBs/Utilities
 Lack of development or performance accountability
to people
 even ULBs with resources sit on funds rather than
carrying development
 Even if ULB or urban agency fails it does not get out of
business
 People fail reveal demand preference and to
convert their needs in to real demands, fail to
pressurize ULBs/utilities to perform or to deliver
 People fail to own responsibility of paying right
price and demanding right service
Municipal Finances in India
- Way Forward
Improving Municipal Finance – Way forward
India Municipal Finance Report – NIPFP/ADB

 Restructuring and broad-basing of the existing municipal

finance system.
 Tax on Non-commercial motor vehicles registered within the
jurisdictional limits of municipalities;
 Stamp duty on sale and purchase of properties located within
municipal limits.
 Providing municipalities with access to the proposed
Goods and Services Tax (GST).
 A new role for the State Finance Commission and Central
Finance Commission in addressing issues of municipal
finance.
Improving Municipal Finance – Way Forward
India Municipal Finance Report – NIPFP/ADB

 Restructuring of the JNNURM-grant

facility.
 Capacity building aimed at effective
implementation of the municipal finance
reform agenda
 Introduce fiscal responsibility at the level
of municipalities.
and Nigeria – Fis Res Act
 Brazil
 New Zealand and South Africa – Fin Mgt Act
 Improving Municipal Finances – Way Forward
Fiscal Responsibility – suggested ingredient
 Preparation of a Medium Term Fiscal Plan, which would set forth a five
year rolling target for the municipal-level fiscal indicators, along with a
clear target of the physical and financial targets, and adherence to
performance codes/standards.
 Creation of an expenditure stream only against a matching revenue
stream, and managing expenditure consistent with the level of revenue
generated.
 Fixation of ceiling on expenditure on administration.
 Ensure proper procedure for preparation, submission and audit of
accounts, and proper scrutiny and adherence to the audit reports.
 No credit operations without the authorization of Municipal Councils.
 Publication of an annual report on the impact of tax exemptions and
 Price subsidies in the municipal budget.
 Laying down measures to enforce compliance to the provisions of then
Act.
Improving Municipal Finances – Way Forward
HPEC Report

 Securing the revenue base of ULBs through ‘exclusive

taxes’ and a guaranteed and predictable share of ULBs
in tax revenue of state governments;
 A significantly larger scale of financing from NIJNNURM
of the GOI; and
 Reforms in governance and financing at ULB level to
begin a move away from a weak financial base towards
a framework which enhances the creditworthiness of the
ULBs and improves their ability to generate and leverage
revenue surpluses for accessing market funds
Improving Municipal Finances – Way Forward
HPEC Report
Improving Municipal Finances – Way Forward
HPEC Report

 Insert a ‛Local Bodies Finance List’ (LBFL) along the lines of the Union
and State Lists
 Empower ULBs to levy property tax, profession tax, entertainment tax,
and advertisement tax. If states levy and collect then the entire
revenues, net of collection cost, should be passed on
 Constitutionally ensure sharing of a pre-specified percentage of
revenues from all taxes on goods and services (including motor vehicle
tax and stamp duty) levied by states
 Provide for formula-based sharing of the divisible pool with the ULBs
and also grants-in-aid to ULBs for horizontal fiscal imbalance
 The devolution shall be on the basis of a formula designed by the SFC,
taking into account the level of economic activity, population levels,
extent of poverty, capacity to mobilize resources etc.
Municipal Finances in India
Structure, Status, Issues
and Way Forward
Thank You