Urban Local Bodies Finances

Subject: Polity

Section: PRI & ULBs

Context: CAG reports that TN Urban Local Bodies face shortage of funds

Present Status of Urban Local Bodies Finances:

Study conducted by the 15th Finance commission, highlight the following concerning trends in Municipal finances:
- Low municipal revenue to GDP Ratio, which has remained stagnant at around 1% of GDP during the period from 2007 to 2017-18
- The same ratio is 6% for South Africa, 13.9% for United Kingdom
Declining own revenue: The share of municipal own revenue in total municipal revenues has declined significantly from 55% in 2007-08, to 43% in 2017-18
Low diversification of tax resources
- At present, property tax remains the only major tax in the municipal portfolio in India, and it has contributed to about 60% to municipal tax revenue in India
- By contrast, municipalities in other parts of the world have access to a much wider basket of taxes
Inadequate intergovernmental transfers: While share of intergovernmental transfers in municipal revenue has been increasing since 2010-11, it still remains insufficient
Low per capital expenditure
- Even though per capita municipal expenditure has increased in India, it still lags far behind in per capita spending when compared to other countries
- India’s per capita spending is $17, as against $116 of China

State Finance Commissions

Financial Power of Municipalities

1. Authorize a municipality to collect, collect and appropriate taxes, duties, tolls and fees.
2. Allocate the taxes, duties, tolls and taxes collected and collected by the state government to a municipality.
3. Granting of aid to municipalities from the Consolidated Fund of the State.
4. Establishment of funds for the credit of all municipal funds.

Ways for raising finances

Mobilise their own resources by increasing their tax base in terms of property tax, service tax so on
Issue Municipal Bonds to mobilise funds
Land monetisation and betterment levy may be tried to ensure land values used for socially relevant purposes.
Regular Constitution of State finance commission by governor to devolve funds to Local bodies on time.