Article 243 Y lays down in principle formation of Finance Commission to review the financial position of the municipalities and to make recommendations to the Governor within a year (under amendment 74-1992). It also clarifies that thereafter at the expiration of every fifth year, another Finance Commission will be set to review the financial position of the Panchayats and to make recommendations to the Governor . The Governor in turn with explanatory memorandums shall ensure to the action taken thereon to be laid before the Legislature of the State.
Nearly all states set finance commission to the effect by early 1995.
Every commissions recognized that Municipal bodies were in no position to meet financial demands in even obligatory functions leave aside discretionary functions. The Commissions also noted that even statuary avenues provided for revenue remained unexploited or under exploited.
The three main obligatory taxes levied and collected by the municipalities were land and building tax on annual letting basis, octroi and professional or vocational tax . Most of The first state finance commissions set up did not attempt any headway in exploring more avenues in terms of obligatory tax. The essence was on defining the domains rather than exploring or stretching the limits.
The source of land and building tax has become not only non buoyant but also has run into serious problems of record keeping, assessment, valuation, administration and enforcement resulting in decline in revenue in number of cities and towns. Large number of properties have remained un assessed and under assessed. Further, lower assessment of mixed type of construction of which only a part attracts low rate is also one of the factors for low collection. Government properties are outside the purview of property tax though there does not seem specific constitutional provisions for such exemption . Even the rates of these obligatory taxes are set by state governments . For Revision Urban Local Bodies have to approach the State Governments resulting in delay and loss. There is an initial lay off time where individual houses deliberately delay in paying the taxes.
Enforcement may be better ensured if the collection is handed over to Private parties with incremental service fees based on collection over a minimum service fees. It can be based on the principles of electric bill collections by some power distribution network.Government buildings should be brought under these tax levy structure . Tamil Nadu state commission has requested the Government that Tamil Nadu Electricity Board shall provide the details of service connections given to the new buildings on a monthly basis so as to wake up the revenue wing for assessing the property without waiting . All the cell towers put up by cell phone companies should be subjected to tax. All fee collecting institutions like Nursery, Matriculation schools, Tutorial colleges, self financed Engineering, Medical/Dental colleges, para-medical institutions, teacher training institutions, coaching centers etc should be subjected to Property tax at twice the rates as applicable to commercial buildings.
Octroi on goods and animals brought into municipal area for consumption or use or sale. Many municipal finances depend heavily on octroi income. By early 2000 administrators realized that octroi is a regressive tax which adversely affects integration of the economy and interrupts the free flow of goods. As both octroi and VAT are taxes on commodities and abolishing octroi with corresponding additional VAT levy amounts only to a change in the mode of levy and collection of tax on commodities.It, however, provides liquidity and a healthy cash flow. Any alternative to octroi therefore, needs to match the resources generated through octroi; it should be free from the defects of the current levy; should provide adequate liquidity to the urban local bodies (ULB’s);, it will not be possible for them to discharge their responsibilities unless they are given an equally potent alternative revenue source. Octroi on sale of goods which are worth more than a certain amount per unit , luxurious items can be added to VAT.Of Course Middle class and upward mobility of the middle class will be pinched .
For traders and business establishments, the gross turnover should be taken as the basis instead of income for levying the profession tax. The collection can be done by sales tax department on yearly basis and remitted to local bodies. The income slab rates for salaried class shall be revised and that those in the higher income bracket shall be made to pay slight higher levy. The collection should be done by the employer and remitted to the local body on yearly basis.
The dependence of Urban Local Bodies on obligatory taxes remains very high. The discretionary taxes at most contribute to one tenth of the revenue generated.These type of taxes are surely under exploited. Pilgrimage tax, tax of hired vehicles,water tax ,sewage tax etc come under these obligatory taxes. Many of these can be done with as for eg. Sewage tax collection in small municipalities . Other means to raise revenue can be looked upon.
The power to levy and collect tax on Cable TV from operators at the rate prescribed should be vested on the local bodies instead of State Government. In all Municipal Corporations, parking area may be identified in the business prone locality and parking lot developed. Parking fee may be collected from the owners of vehicles on the basis of the fees fixed by the Council. Special levy may be levied on the commercial business houses which have no parking space or inadequate space . Entertainment Tax shall be transferred to local bodies. With A Collection charge of the tax proceeds of the balance should be transferred to local bodies.
There should be separate detailed heads for Surcharge on Stamp Duty collections and apportionment to local bodies. SIM cards of Mobile phones should be given mandatory on basis of receipt of Phone . Costly mobile phones should be levied a tax which shall be transferred to local bodies. It will also reduce sale of smuggled phones.
Non tax revenue is another area where impetus is needed.One major area to be ventured into by the local bodies should be development of Parks, buildings through public –private partnership. Utilities like conference halls. Marriage halls, recreational facilities can be developed under the scheme and handed over to private entrepreneurs to manage with a fees.Similar attempt in ensuring high end public transport is being carried out.
The external assistance from governments to municipalities both plan and non plan expenditure is insufficient and nearly never forthcoming when needed. An yearly allotment like imprest should form the major part of government assistance by central government. This money can be readily available for Projects which when approved by municipal body and accredited town planners shall be expedited. A minimum amount of central assistance based on population shall be remitted to Municipal bodies directly.
Every year along with the Budget, the State and Central Government must place details of the transfer to the local bodies made during the year. The distribution pattern for the release of assistance should also be looked in.The present practice of releasing the assistance at the fag end of the financial year shall be discontinued .
The important issue remains related to devolution not aid or assistance by state governments.
