Financing of Municipal Services in India - Selected Issues

CONFIDENTIAL REPORT No. 10452-IN MICROFICHE COPY CONFIDENTIAL Report No. 10452-IN Type: (SEC) .1TPII 1 Yqr / i VVA Q / T n()WQ' Q A 0PT FINANCING OF MUNICIPAL SERVICES IN INDIA* SELECTED ISSUES June 22, 1992 Country Operations. Industry and Finance Di'sion India Department South Asia Region Acknowledgements This report was written by Nizar Jetha, based on contributions by Gangadhar Jha, M. Govinda Rao and Chetan Vaidya. The Operations Research Group, Baroda assisted in the collection of background material. PRINCIPAL ABBREVIATIONS, ACRONYMS AND SYMBOLS AIR - All India Reporter AMC - Ahmedabad Municipal Corporation AMTS - Ahmedabad Municipal Transport Service CMA - Calcutta Metropolitan Area CMDA - Calcutta Metropolitan Development Authority GIC - General Insurance Corporation of India GMFB - Gujarat Municipal Finance Board GSRTC - Gujarat State Road Transport Corporation GWSSB - Gujarat Water Supply ard Sewerage Board HUDCO - Housing and Urban Development Corporation IIPA - Indian Institute of Public Administration KSRTC - Kerala State Road Transpor,; Corporation KUDFC - Kerala Urban Development Finance Corporation KWA - Kerala Water Authority LIC - Life Insurance Corporation of India MMC - Madras Municipal Corporation MMDA - Madras Municipal Development Authority MMWSSB - Madras Metropolitan Water Supply and Sewerage Board NIPFP - National Institute of Public Finance and Policy NIUA - National Institute of Urban Affairs ORG - Operations Research Group, Baroda PTC - Pallavan Transport Corporation Ltd. RGS - Revised Grant Structure (West Bengal) SC - Supreme Court SDP - State Domestic Product TWAD - Tamil Nadu Water Supply and Drainage Board n.a. - not available sq.ft. - square feet sq.mt. - square meters .- negligible - - nil FISCAL YEAR April 1 to March 30 FINANCING OF MUNICIPAL SERVICES IN INDIA: SELECTED ISSUES Table of Contents Page No. EXECUTIVE SUMMARY ................................................. i CHAPTER 1: INTRODUCTION .......................................... 1 Evolution of Urban Local Government ............................. 1 Le.al and Administrative Framework ............................. 3 CHAPTER 2: MUNICIPAL FINANCES--STRUCTURE, TRENDS AND ISSUES ...... 7 Structure of, and'Trends in, Municipal Finances ................ 7 Salient Features of Municipal Finances in Gujarat, Kerala and Tamil Nadu ................................................ 10 Main Issues of Municipal Finances ............................... 19 CHAPTER 3: PROPERTY TAXATION ..................................... 25 Structure of Property Tax ....................................... 25 Tax Base ...................................................... 25 Exemptions .................................................... 27 Tax Rates ..................................................... 27 Taxation of Vacant Land ....................................... 28 Taxation of Government Property ............................... 28 Periodic Revision of Rental Values ............................ 29 Judicial Decisions on Property Tax .............................. 29 Rent Control Laws in India: A Review ........................... 32 Property Tax Reform ............................................. 35 Alternative Tax Bases ......................................... 35 Delinking of Annual Rental Value from "Fair Rent" or "Standard Rent" ............................................. 36 Tax Base ...................................................... 37 Valuation and Assessment ...................................... 37 Rate Structure ................................................ 39 Tax Administration ............................................ 39 Con lusions ..................................................... 41 -2- Page No. CHAPTER 4: COST RECOVERY ........................................ 42 Present Role of Cost Recovery ................................... 42 Water and Sewerage .............................................. 44 Service Charges ................................................. 53 Urban Land Development .......................................... 54 Development and Related Charges ............................... 54 Town Planning Schemes ......................................... 56 Urban Bus Transport ............................................. 58 Involvement of the Private Sector and the Community ............. 60 Conclusions ..................................................... 62 CHAPTER 5: STATE ASSISTANCE TO MUNICIPALITIES .................... 63 State Gdvernment Transfers to Municipalities: Present Arrangsments ................................................... 63 Gujarat ....................................................... 63 Kerala ........................................................ 68 Tamil Nadu .................................................... 70 Maharashtra ................................................... 72 West Bengal ................................................... 74 State Government Transfers to Municipalities: General Considerations ........................................ 77 Planning and Financing of Capital Expenditures .................. 78 Municipal Finance Commissions ................................. 79 Planning ...................................................... 79 Financial Institutions for Urban Development .................. 80 Conclusions ..................................................... 80 CHAPTER 6: OTHER SELECTED ISSUES ................................. 82 Octroi .......................................................... 82 The Professions Tax ............................................. 85 Accounting Practices ............................................ 87 Urban Finance Statistics ........................................ 91 STATISTICAL APPENDIX .............................................. 94 SELECT BIBLIOGRAPHY .............................................. 125 -3- List of Tables in Text Table No. Page No. 2.1 Summary of Public Finances of Municipalities in India, 1979/80 .... 8 2.2 Importance of Local Government Expenditures in Selected Countries.. 9 2.3 Per Capita Current Revenues and Expenditures, 1979/80 and 1983/84.. 10 2.4 Revenues and Expenditures of Urban Local Bodies and State Governments in Gujarat, Tamil Nadu and Kerala ................... 12 2.5 Summary of Public Finances -- Ahmedabad, Madras aid . Trivandrum Corporations ......................................... 14 2.6 Trends in Current and Capital Expenditures -- Ahmedabad and Madras Corporations ........................................... .. 15 2.7 Current Expenditures of the Ahmedabad, Madras and Trivandrum Corporations, 1988/89 ........................................... 16 2.8 Current 1eceipts of the Ahmedabad, Madras and Trivandrum I Corporations, 1988/89 ............................................. 18 3.1 Contribution of Property Tax in Selected Municipal Corporations ... 26 3.2 Property Tax Rates in Ahmedabad, Madras and Trivrdrum ............ 28 3.3 Property Tax Demand and Collections in Selected Muricipal Corporations .................................................... 40 4.1 Revenue from Service Charges and Fees in Ahmedabad .r Madras, 1989/90 ................................................ 43 4.2 MMWSSB--Statement of licome and Expenditure, 1988/89 .............. 45 4.3 AMC--Expenditure On, and Income From, Water Supply Services, 1985/86 - 1991/92 ............................................... 45 4.4 Water and Sewerage Charges and Taxes in Ahmedabad, Madras a-d Trivandrum ...................................................... 47 4.5 MMC--Water Metering, and Revenues from Water and Sewerage Charges and Taxes ............................................... 50 4.6 Annual cost of Water Metering per Connection ...................... 52 4.7 Development Charges in Madras and Building Permission Fees in Trivandrum ..................................................... 55 4.8 Financial Aspects of Selected Town Planning Schemes-- Maharashtra and Gujarat ........................................ 57 4.9 PTC--Operational and Other Statistics ............................ 59 4.10 Financial Performance of City Transport Undertakings in Gujarat, 1988/89 ............................................... 60 5.1 Average Annual Shared Taxes and Grants to Urban Local bodies in Gujarat, 1983/84 - 1985/86 .................................. 64 5.2 Determination of Weights for the Allocation of GMFB Grants for High Priority Projects ........................................ 66 5.3 Per Capita Revenues and Expenditures of Urban Local Bodies in Gujarat, 1988/89 ............................................ 68 5.4 Current Revenues of Municipalities in Kerala, 1989/90 ........... 69 5.5 Per Capita Receipts of Municipalities in Tamil Nadu, 1988/89 ..... 72 5.6 State Transfers to Local Bodies in Maharashtra, 1990/91 .......... 73 5.7 Per Capita Current Receipts of Urban Local Bodies in West Bengal, 1989/90 ................................................ 76 -4- Table No. Page No. 6.1 Bombay Municipal Corporation -- Octroi Revenue from the Ten Main Commodities, 1986/87 ...................................... 83 6.2 Ahmedabad Municipal Corporation -- Octroi Revenue, 1984/85 ....... 83 6.3 Rates of Profession Tax in Madras and Trivandrum ................. 85 6.4 Income Tax and Hypothetical Profession Tax Payable by Salaried Taxpayers ............................................. 87 6.5 Corporation of Trirandrum -- Annual Accounts for 1986/87 ......... 89 EXECUTIVE SUMMARY Introduction 1. India's urtia -opulation, which constitutes just over one-quarter of the total populatien of 344.3 million (1991 cansus), has been growing rapidly. Over the last two decades alone, it nearly doubled, rising from 109.1 million (1971) to 217.2 million (1991). The urban population growth is expected to continue unabated in the 1990s. By the end of this century, India's proje ted population of over one billion is likely to contain 350 million town-dwellers; there would then be 40 cities with population exceeding one million, compared to 12 such cities in 1981. Tackling the challenge posed by the country's burgeoning urban population will require major departures from the past policies for financing urban services. 2. Urban local government in India comprises municipal corporations (for the larg'r towns) and municipal councils. Local government falls within the s7islative competence of State Governments, so that there is considerable inter- variation in the functions, structure* of revenue, the system of state qfers and the sources ofi capital finance of local bodies. The major . 3ns that municipalities may undertake are public health, water supply and newt._ie, primary education, roads, solid waste management and street lighting. Except whrire octroi (the tax on goods imported into a local authority area) is levied, the irope.- tax is the most significant tax at the local level. Non-tax receipts frnm (in tources come from user charges and fees. Resources for current purposes a-e trangferred to municipalities through tax assignment (that is, transfer of certA."a taxes to municipalities for levy by them), tax sharing (that is, transfer of ..proportion of revenues from certain taxes to municipalities), and grants. Tax-.s, user charges and 3rants typically account for about two- thirds, one-tenth and one-quarter of current receipts, respectively. Capital grants and loans from the states provide most of the resources for municipal capital expenditures; only the largest municipal corporations are perm-'tted to undertake market borrowing. There is no direct financial relationship between local authorities and the Central Government. 3. The limited role of municipalities relative to other tiers of government is striking. Total municipal expenditures, which were equivalent to under one percent of GDP, constituted a mere 3.5 percent of total expenditures by Central, State and municipal governments in 1979/80, the latest year for which comprehensive data on municipalities are available. The situation was not much better in relation to the states alone: municipalities accounted for about 6 nercent of the combined state and municipal expenditures. In the three states of special interest for the purposes of the study -- Gujarat, Kerala and Tamil Nadu -- municipal expenditures currently vary from 2 to 10 percent of the combined state and municipal expenditures. Even in federal countries, local authorities are frequently more important than in India. 4. The financial position of municipalities deteriorated seriously over the past decade. With current receipts lagging behind current expenditures, current budget surpluses dwindled or turned into deficits, and capital spending stagnated. The trends in urban finances, though a cause for concern, cannot fully reflect the deteriorating urban services and crumbling infrastructure widely encountered in India. Municipalities are generally required to present balanced budgets, so that their financial difficulties will not be primarily reflected in budget deficits but in a declining range and quality of services, variables notoriously difficult to measure. However, given glaring deficiencies in the coverage of even the most basic services -- for example, at least 20 percent of the urban population is not served by piped water, and only 30 percent has access to sanitary sewerage and drainage -- there can be no doubt about the urban areas' formidable financial requirements. 5. The last few years have seen a resurgence of political interest in the reform of local government. Although the Nagarpalika Bill of 1989, which aimed at improving the machinery for assessing the municipalities' investment and financial needs as well as realizing ideals of local self-government more fully, failed to become law, the Parliament is shortly to consider a modified bill introduced by the present Government. The main financial proposals of the original bill were a periodic appointment of municipal finance commissions in the states to recommend revenue sharing with, and payment of grants to, municipalities; and the con1titution of committees in metropolitan areas to prepare development plans. The prbvisions of a political nature were even more siMnificant. Elections were to be held every five years for all municipal bodies, and within six months for municipal bodies that had been superseded (that is, where elected councils had been replaced by appointed administrators). 6. These and similar proposals should be viewed against the backdrop of declining role of municipalities in the delivery of urban services, and weakening of democratic processes at the local level. The municipalities' weak finances and their perceived administrative inefficiency have prompted many State Governments to provide major services of a local nature through their departments or through special institutions (such as water boards). In the period since independence, about one-half of the municipalities have remained superseded at any given time; all municipalities have -ced this fate at one time or the other, some for more than a decade. 7. Revitalization of municipal governments will require a wide range of measures. In the financial area, new policy initiatives in the areas of resource mobilization and state assistance to municipalities will be crucial. Reform of the property tax should be given the highest priority in view of the absence of suitable alternatives to the tax. User charges for services must increasingly supplement revenues from property tax if municipalities are to finance a reasonable proportion of expenditures from own resources. As for state assistance, institutional arrangements must be strengthened, so that its magnitude and allocation can be based on suitable principles. Without major reforms of property taxes, user charges and systems of state assistance, the future of local government in India is likely to be bleak. 8. This study is mainly concerned with providing an overview of trends, issues and options in municipal finances. The financing of some of the key services of a local nature provided by State Government and autonomous agencies is also discussed. However, the broader question of an appropriate division of responsibilities among different tiers of government is outside the scope of the study. Taxation 9. Property tax receipts -- whose contribution to current receipts varies from one-fifth to one-third in the selected states -- have generally stagnated or declined relatively to other receipts. This has been largely due to judicial decisions or, the appropriate tax base for municipal assessment in the context of rent controls. The rent control acts of most states limit "standard rents" to a proportion of the cost of buildings or to rents realized when buildings are first let, often permitting revisions in standard rents only when improvements and additions are made to buildings. The courts have ruled that municipal assessments cannot exceed standard rents. Neither property taxes nor rent controls distinguish between residential and non-residential buildings. By constraining the property tax base for most properties to rental values in the year of construction or first letting, thereby freezing standard rents of a sizable proportion of properties for decades, the judicial decisions have had a devastating effect on the equity and elasticity of property taxes. 10. There is a growing consensus that municipal assessments must be delinked from standard rents. This is a significant development since actual rents for a large proportion of property exceed standard rates. It is also being recognized that municipal assessments should be indexecL to some measure of annual price increases. At the same time, Government committees and commissions have generally come to the conclusion that the reform of property taxes should take the form of strengthening of existing taxes rather than the adoption of a capital value base. In the light of these considerations, it is recommended that: (i) Municipal legislation should be amended to provi0e for the assessment of property tax on the basis of "actual :ent or market rent, whichever is higher"; (ii) Municipal legislation should incorporate a non-obstante clause to the effect that "notwithstanding anything contained in any other law for the time being in force", the property tax assessment will be based on the tax base defined in the municipal legislation; (iii) Since the courts tend to give precedence to social legislation over municipal laws, rent contral laws should be amended to state that the determination of standard rents has nothing to do with the municipal assessment of property tax; and (iv) Municipal legislation should provide for partial or full annual revisions in property tax assessments based on the rate of inflation. These measures should be accompanied by relaxation of rent controls. 11. To broaden the tax base further, reform of the tax treatment of owner- occupied houses, vacant land, and government property will be needed. Owner- occupied houses are normally accorded a preferential treatment, either through tax rates or through assessment procedures. Vacant land is taxed in many states, but generally at nominal rates. The treatment of all Central Government property is not uniform doe to historical reasons, and the treatment of State Government property varies from state to state. The preferential treatment of owner- - iv - occupied houses should be discontinued, vdcant land should be adequately taxed, and the taxation of goverument property should be rationalized. 12. With collections rarely exceeding 50-60 percent of the amounts due (including arrears), delinquency in the payment of property taxes constitutes a serious problem. The following measures are worth adonting for improving compliance: maintenance of 1roper records, through computerization where relevant; introduction of inceutives for prompt payment of taxes; charging of market rate of interest on arrears of taxes; requiring payment of at least three- quarters of the tax assessed before the filing of an appeal; and provision of a wide network of centres, possibly including commercial tAnks, for the payment of taxes. 13. The professions tax, especially following the constitutional amendment that raised its maximum annual rate ten-fold to Rs 2,500, is anothe' tax whose revenue potential has not been adequately utilized. Since the tax is related to income and is deductitfle for the purposes of income tax, it is important that the two taxes neatly dovetail into each other. In particular, the steady increase in personal exemption under the income tax in recent years provides an opportunity to capture part of the gains accruing to taxpayers through higher professions taxes. To keep the operation of the tax simple, there should be only a few tax rates; and the maximum amount of tax shouid become payable at annual incomes close to Rs 100,000, since relatively few taxpayers have incomes above this level. Last but not least, businesses should be taxed more eifectively either through the professions tar or through separate business licenses. 14. Renewed efforts are needed to replace octroi (which accounts for about one- half of current receipts of some cities) in the few states that still levy it. Octroi, in view of its serious disadvantages -- the considerable economic coots entailed by loss of time and waste of fuel due to long delays at octroi checkposts, and the vulnerability of the tax to corruption and evasion--cannot be countenanced as a permanent feature of the tax system. It has been found that surcharges on s'ate sales taxes would not raise sufficient revenues at realistic rates. However, entry taxes, which are similar to octroi but are collected on the basis of returns made by dealers, have been adopted in some states. An entry tax is not a genuinely local ax, since an individual local authority can neither vary its structure nor rates in line with its needs. Moreover, entry taxes, like octroi, tend to distort the structure of production. While taxes such as entry taxes may have to be t-terated in the short run, the long-term objective should be to replace octroi .e-.-enues by strengthening property taxes and user charges. Cost Recovery 15. Cost recovery presents a dismal picture. Few water authorities cover more than one-half of their costs, and most bus companies also incur heavy losses. Fees and charges for other services rarely finance more than 10-15 percent of total current expenditures. Setting of user charges at inadequate levels and infrequent revisions in them are the main reasons for this. Finally, despite the generally high cost of land d-velopment projects, the substantial benefits accruing to private landowners, and the levy of betterment charges in some states, only a small proportion of the costs are recovered. -v - 16. The issues of cost recovery point to three broad conclusions. First, special attention needs to be given to cost recovery for water, sewerage, bus transport and land development. Second, user charges for services should be delinked from property taxes and levied with reference to consumption to the extent possible. The distortions in property taxes created by rent c3ntrols should not be imported into user charges. Third, prices should not only generally cover costs, but should also be revised annually in light of inflation. Infrequent price revisions are giving rise to deficits that are unsustainable. Greater reliance on cost recovery will be facilitated by improvement in standards of services. 17. On the critical question of pricing of water, the following conclusions emerged: (i) Figh pri3rity should be given to universal water metering; *(ii) The main reliance should be 'on water charges that vary with consumption rather than on taxes based on standard rents; (iii) Any differentials in water charges for different types of consumers should be modest; (iv) The unit price of water should rise rather than fall with consumption for both economic and environmental reasons; (v) Service charges tied to water usage should be utilized to recover the cost of sewerage facilities; and (vi) The supply of a certain amount of water at nominal charges is preferable to providing it free of charge. The Private Sector 18. Many of the services provided by local bodies, especially water and transport, are in essence private goods: user charges can be levied for them, and the benefits can be withheld from consumers who do not pay for them. It is, therefore, to be expected that lacunae in local services would be filled by the private sector where feasible. This, indeed, has been the case. 19. The private sector is not o.'y playing a significant role in the provision of some types of services (e.g., bus transport and solid waste management), but its role has also been growing. However, given the financial difficulties being experienced by local authorities in providing even the most basic urban services, this role must be much larger in the future. Despite this, little thought seems to have been given in India to either the possible areas of such involvement or to the measures needed to bring about the increased involvement. Policies on the possible future role of the private sector in the delivery of urban services need early attention from the Central, State and municipal governments. - vi - State Government Assistance 20. State Government assistance has been characterized by inadequate availability, especially for capital development; uncertainty over its annual levels, uhich has hampered planning at the local level; and deficiencies in the structure of current transfers. Three policies are worth considering to deal with these problems. First, the involvement of urban local bodies in the planning of capital development should be increased. One way of doing this would be to strengthen the planning capabilities of the larger municipalities, and to give greater assistance in planning to other municipalities. Second, municipal finance commissJoas should be more widely used. Finance commissions that emulate the methodology of the Federal Finance Commissions -- that is, projection of revenues and ex:enditures, and provision of assistance to fill the projected gaps -- will have a limited contribution to make. On the other hand, finance commissions that focus on issues and policies, examining expenditure needs, the scope for additional resource mobilization, progress in cost recovery and possibilities of improvement in the systems of assistance, will have a major contribution to make to the strengthening of urban public finances. Third, specialized urban finance institutions can help mobilize resources and can contribute to much-needed improvements in project appraisal and cost recovery, and their establishment might be worth considering in somc of the larger states. The need for a national urban finance institution should be reviewed in a few years' time. 21. Tax sharing, tax assignment, general and specific grants all have a role to play in a well-designed system of current transfers, but their relative roles need to be decided with care. Tax sharing based on suitable taxes has the advantage of providing relatively elastic sources of revenue, but the allocation of proceeds from shared taxes according to the origin of revenues will tend to favor the relatively better-off local bodies. The importance of tax assignment arises from the fact that it provides local bodies with independent sources of revenue, that is, taxes whose structure and rates could be varied by local authorities in line with thei- requirements; heavy reliance on tax assignment will, however, not be desirable since the proceeds of taxes levied by local authorities are, in effect, allocated on the basis of origin. Specific grants, which provide a valuable means of influencing the pattern of expenditures, will also favor the relatively better-off areas, unless the matching ratios (that is, shares of expenditures financed by State Governments) embody substantial differentiation in favor of relatively poor municipalities. General purpose grants, often meant to take account of the needs of financially weaker municipalities, can be made more flexible by relating their level to receipts from a tax, but then they would be no different from tax sharing. The existing systems, with their high reliance on specific grants and emphasis on the allocation of revenues on the basis of origin, have tended to favor the relatively better-off municipalities. 22. The examination of transfer systems suggests the desirability of following policies: (i) One or two taxes (e.g., the professions tax) should be assigned to municipalities, especially in states where the property tax is the only significant tax; - vii - (ii) Proliferation of specific grants should be avoided, confining them to a few services of national importance such as education; (iii) Given large disparities in service levels among different municipalities, matching ratios for specific grants should embody substantial differentiation; (iv) Revenue from shared taxes should be distributed largely on criteria other than the origin of revenues (e.g., population); and (v) Grants that automatically cover "dearness" (cost of living) allowances and budget deficits should be avoided. Accounting Practices 23. Appropriate accounting practices can contribute to efficiency in municipal operations. Most municipalities maintain cash accounts, though many municipal enterprises are required to adopt some kind of accrual accounting. Aesides taking account of depreciation, accrual accounting facilitates proper allocation of various costs to different activities. Accrual accounting should, therefore, be adopted at least for public enterprises, and for services where user charges are relevant. Proper interpretation of accrual accounts requires that they should be accompanied by information on flow of funds or sources and uses of funds. Statistics 24. The paucity of statistics is hampering an adequate understanding of urban finances. Available statistics suffer from a lack of comprehensiveness and timeliness. Comprehensive national statistics on municipal finances have not been published for over a decade, and statistics for most states are out of date by the time they are published. At a minimum, states need to issue data on municipal finances each year in a timely fashion, and national statistics should be published at least every two to three years. Better and more timely information is a prerequisite for coming to grips with the country's deteriorating urban problems. CHAPTER 1: INTRODUCTION 1.1 India's urban population -- broadly, population of mainly non- agricultural settlements of over five thousand persons -- has been growing rapidly. Over the past five decades, while total population grew from about 360 million to over 840 million, the urban population grew from about 60 million to nearly 220 million, or much faster. Between 1981 and 1991, the urban population grew by 3.1 percent annually compared to the growth of 2.1 percent annually for the population as a whole. The country's burgeoning population has placed growing strains on infrastructure and administrative structures. To make matters worse, the arrangements for financing municipal services have been woefully inadequate. 1.2 The urban population growth is expected to continue unabAted in the 1990s. According to the National Commission on Urbanisation,1 India's population of over one billion in 2001 is likely to contain 350 million town dwellers. The Commission also visualized that at the beginning of the twenty- first century, there would be 40 cities with population exceeding one million, compared to 12 such cities in 1981. The continued rapid growth of urban' population will doubtless pose a major challenge to urban authorities and State Governments over the next decade and beyond. 1.3 The main purpose of this study is to provide an overview of trends, issues and options in municipal finances. The study will be concerned with the financing of key local government services, even if these are provided by specialized bodies such as water boards. The study will not, however, deal with the broader issue of an appropriate division of responsibilities among different tiers of government. The remainder of this chapter outlines the historical, legal and administrative aspects of municipal government. Chapter 2 examines the structure of, and trends in, municipal finances, identifying the main issues. Chapter 3 is concerned with the structure, issues, recent developments and options in property taxation. Chapter 4 reviews the prevalence and revenue potential of user charges. The systems of State Government assistance to municipalities are examined in Chapter 5. Chapter 6 discusses other selected issues of municipal finances. The sparsity of national statistics and other data on municipal finances makes it necessary to concentrate on a few states; the study will give special attention to urban local finances in the states of Gujarat, Kerala and Tamil Nadu. Evolution of Urban Local Government2 1.4 The beginnings of modern local government in India can be traced to the setting up of a municipal corporation in Madras in 1687. In 1726, municipal corporations for Calcutta and Bombay were set up, and the Madras Corporation 1 Report of the National Commission on Urbanisation. Chairman: C.M. Correa (Government of India, 1988). 2 Parts of this section draw on Hugh Tinker, The Foundation of Local Self-Government in India, Pakistan and Burma (Lalvani Publishing House, Bombay, 1967); and Percival Spear, A History of India, Volume Two (Peq-*-4L Books, 1965). -2- reconstituted. Municipal governments made an appearance in other towns from the early 1800s. The municipal committees responsible for the administration of towas were largely nominated and official (i.e., were part of the civil service). 1.5 The next significant development in the evolution of local government came with the introduction of Lord Mayo's Resolution of 1870. It was proposed to enlarge the activities of local authorities so as to make them responsible for education, roads and medical services, and to transfer part of provincial revenues to them. The financial stringency that followed the Mutiny provided the main motivation for these reforms. 1.6 Lord Ripon's Resolution on Local Self-Government of May 18, 1882 laid the foundations of a democratic system of local government. Its main premise was that political education was the primary function of local government, of greater importance than even administrative efficiency. Some of the other major principles laid down therein were that municipal boards should have mostly elected non-official members, and that the chairmen of municipal boards should be non-officials whenever possible. Except in a few large cities, progress towards the realization of a larger role for non-officials was slow. 1.7 In 1907, the Royal Commission on Decentralization was set up to enquire into the financial and administrative relations of the Government of India and the Provincial Governments. The spirit of its recommendations was embodied in the Government of India Act of 1919. The act introduced "dyarchy" or double government, under which control over some matters was retained by the Governor's Executive Council, while that over others was transferred to popularly elected ministers responsible to provincial legislatures with large elected majorities. Local self-government became a "transferred* subject. Local government saw a widening of elected elements, franchise, functions and powers. Another significant feature was that tax sources for the local bodies were clearly delineated. 1.8 The Government of India Act of 1935 replaced dyarchy by a system of provincial autonomy. Provincial ministries assumed responsibility for all important subjects. The provincial franchise, while still based on property, was widened by reforms to 35 million voters, an increase from three percent to 14 percent of the population. The Act of 1935 specified activities and financial sources over which the Federal and Provincial Governments had exclusive or concurrent powers. Provincial finances were strengthened by an allocation of a portion of income tax receipts. Local bodies were placed under the jurisdiction of Provincial Governments; there was no separate allocation of tax sources for local bodies. 1.9 The achievement of independence in 1947 brought about the adoption of adult franclise for elections in almost all states. The Constitution allocated responsibilities and resources to the Central and State Governments'(under the Union List, State List, and Concurrent List). Local government was made a state subject, with no constitutional provision made for either the responsibilities or revenues of local bodies. 1.10 In the post-independence period, urban local government has prompted much thought but limited reforms. Urban public finances received attention from -3- the Local Finance Enquiry Committee (1951), the Taxation Enquiry Commission (1955), the Rural Urban Relationship Committee (1963), the Committee on Augmentation of Financial Resources of Urban Local Bodies (1963), the Seventh Finance Commission (1978), the Planning Commission's Task Force on Housing and Urban Development (1983), and the National Commission ou Urbanisation (1988). 1.11 The 1980s ended with unsuccessful efforts to reform local governmeat. The Nagarpalika Bill of 1989,3 which aimed at improving the machinery for assessing the municipalities' investment and financial needs as well as realizing ideals of local self-government more fully, failed to become law. The main financial proposals were a periodic appointment of municipal finance commissions in the states to recommend revenue sharing with, and payment of grants to, municipalities; and the constitution of committees in metropolitan areas to prepare development plans. The provisions of a political nature were even more significant. Elections were to be held every five years for all municipal bodies, and within six monthq for municipal bodies that had been superseded (that is, where elected councils had been replaced by appointed administrators).4 1.12 These proposals should be viewed against the backdrop of declining role of municipalities in the delivery of urban services, and weakening of democratic processes at the local level. The municipalities' weak finances and their perceived administrative inefficiency have prompted many State Governments to provide major services of a local nature through their departments or through special institutions (such as water boards). In the period since independence, about one-half of the local authorities have remained superseded at any given time; all local authorities have faced this fate at one time or the other, some for more than a decade. Municipal legislation empowers State Governments to supersede municipalities where they perform unsatisfactorily or exceed their powers. Legal and Administrative Framework 1.13 Urban local government in India comprises municipal corporations, municipal councils, town area committees, notified area committees and cantonment boards. Municipal corporations, which are constituted for the larger towns, enjoy greater responsibilities and autonomy in decision-making than municipalities and other urban authorities. However, the tax powers of municipal corporations and municipalities are similar. Town area committees and notified area committees are constituted for the development of specific areas, while cantonment boards come under the jurisdiction of the Ministry of Defense. A distinguishing feature of the urban local government in India is the absence of a tiered structure: only a single local authority operates in a given geographic area. 3 The Nagarpalika Bill, the Constitution (Sixty-Fifth Amendment) Bill, 1989. 4 The Parliament is shortly to consider the Constitution (Seventy-Third Amendment) Bill, 1991, a modified bill introduced by the present Government. -4- 1.14 The Constitution (Article 246(3) and entry 5 of the State List) places local government within the legislative competence of State Governments. Both the expenditure responsibilities and the revenue powers of municipalities are therefore determined by State Governments. Consequently, there is considerable inter-state variation in the functions, structure of revenue, the system of state transfers and the sources of capital finance of local bodies. 1.15 At the central level, the institution responsible for urban local government is the Ministry of Urban Development. At the state level, the frequent practice is to place the responsibility for urban local government within a Department of Local Self-Government (which is normally responsible for all local bodies) or within a Department of Urban Development. State Governments delegate many of their powers of supervision and control to Directorates of Municipal Administration. 1.16 Mun.cipal legislation generally classifies municipal functions into obligatory and discretionary. Such a classification is not of much relevance today, given the paucity of municipal resources. The major functions that municipalities may undertake are public health and sanitation; water supply, drainage and sewerage; primary education; roads and public works; solid waste management; and street lighting and cleaning. Some of these services are performed by the states, directly or through special institutions. In India, municipal responsibilities are subject to the doctrine of ultra vires, so that municipalities can only perform functions specifically delegated to them. 1.17 Except for the few states where local bodies still levy octroi (the tax on goods imported into a local authority area), the property tax is the most significant tax at the local level. Local authorities levy property taxes and retain revenues from them. For other taxes in the State List, the arrangements vary widely: a tax may be retained by a State Government, assigned (for levy by them) to local authorities or shared with local authorities. Legislation or regulations may prescribe the form of taxes, specific or minimum and maximum tax rates, and procedures for the introduction, moditication and abolition of taxes. Other revenues from own sources come from user charges and fees as well as from the ownership of property. 1.18 The financial relationship between municipalities and states takes many forms. Resources for current purposes are transferred to municipalities through the assignment of certain taxes, sharing of revenues from certain other taxes, and grants. So far as grants are concerned, the greatest emphasis is on specific purpose grants, with general purpose block grants playing little or no role. There is no direct financial relationship between municipalities and the Central Government. The use of municipal finance commissions to determine the magnitude and allocation of transfers to local authorities has not found much favor. 6 The term "municipalities" will include municipal corporations unless otherwise specified. - 5 - 1.19 Capital grants and loans from the states provide most of the resources for municipal capital expenditures. Loans may also be obtained from the Housing and Urban Development Corporation and the Life Insurance Corporation. All municipal borrowing must be approved by the relevant State Government, and borrowing beyond a certain level must also be approved in terms of the provisions of the Local Authorities Loans Act, 1914, a central legislation. Only the largest municipal corporations are permitted to undertake market borrowing. Municipal capital spending is not well integrated with state and national plans. 1.20 State Government financial control over municipalities is broader than that exercised 'through regulations on expenditures, taxation and borrowing. It extends to the scope and form of reporting, budget approval, sanctioning of expenditure, and the appointment of auditors. Municipalities must normally submit an administrative report each year. State Governments can direct municipalities to modify their budget estimates. The control of State Governments over individual items of municipal expenditures is-also substantial: estimates exceeding specified amounts must be sanctioned by them (through Directorates of Municipal Administlation). Final ly, external audits of municipal accounts are normally undertaken by state finance departments through the Examiner of Local Fund Accounts. 1.21 It is convenient to conclude these introductory remarks with the recommendations of the National Commission on Urbanisation on municipal finances. The recommendations are of interest because of their recentness, and because the issues to which they relate help to define the scope of this study. The major recommendations, some of which will not be supported by the analysis in this study, are as follows: Property Tax - Rent control acts should be amended to facilitate proper valuation of property; - The system of assessment should be simplified through standardization; - Vacant land should be taxed; - Exemptions should be drastically reduced; and - Government property should be made taxable. Octroi - Any substitute for octroi should provide for local body control over the tax, including its rates. Cost Recovery - Adequate user charges should be levied; and - Service taxes forming part of property taxes should be consolidated into a single rate and levied even on tenants and owners of properties exempt from property taxes. -6- Current Transfers - Finance commissions should be set up periodically by State Governments to lay down principles of devolution of state funds on local bodies. Capital Finance - Municipal capital development plans should be incorporated in state and national plans; and - One or more development finance institutions should be created for financing urban capital development. -7- CHAPTER 2: MUNICIPAL FINANCES -- STRUCTURE, TRENDS AND ISSUES 2.1 This chapter gives an aggregative picture of municipal finances in India. It then examines the structure of, and trends in, municipal finances in the states of Gujarat, Kerala and Tamil Nadu, with special reference to the capital cities of Ahmedabad, Trivandrum and Madras. Based on these discussions, it identifies the main issues of municipal finances in India. Property taxation, cost recovery and state assistance to municipalities are considered to be the most critical issues. Structure of, and Trends in, Municipal Finances 2.2 The latest year for which comprehensive data on municipalities are available is 1979/80, when NIUA surveyed about 1,500 municipalities or 80 percent of the total at the time.6 The basic pattern of municipal finances is not' thought to have changed substantially since then. 2.3 The total expenditures (current and capital) of municipalities amounted to Rs 10 billion (Table 2.1), or under 1 percent of GDP. They constituted about 3.5 percent of total expenditures by the Central, State and municipal governments (after adjusting for inter-governmental transfers). The situation was not much better in relation to the states alone: municipalities accounted for about 6 percent of the combined state and municipal expenditures. Services of a local nature such as water supply and bus transport provided by State Government institutions are not treated as municipal services. Available evidence suggests that municipalities lost ground, in terms of their share in total expenditures, in the 1980s. 2.4 Judged by their shares in public expenditures, in India local authorities are less important and State Governments more important than in other federal countries. Local authorities frequently undertake 10 to 20 percent of public expenditures in federal countries (Table 2.2). The performance of many services of a local nature by State Governments through specialized institutions or their departments is largely responsible for the relative insignificance of general-purpose local authorities. 2.5 Municipalities in India derived 60 percent of current revenues from taxes and 15 percent from non-tax sources, with State Government grants providing a further 25 percent of revenues. Octroi and the property tax (and related taxes) dominated the tax structure, each accounting for about 40 percent of tax revenues (25 percent of current revenues). The reliance on taxes such as the entertainment and professions taxes was, however, beginning to increase. The relatively low non-tax receipts reflect in part the limited coverage and low rates of user charges for services. A Study of the Resources of Municipal Bodies (NIUA, New Delhi, 1983). -8- Table 2.1: SUMMARY OF PUBLIC FINANCES OF MUNICIPALITIES IN INDIA, 1979/80 (million rupees) 1. Current revenue 8.507.5 Tax receipts 5,140.5 Property tax /a 2,020.1 Octroi 2,237.6 Entertainment tax 210.0 Professions tax 75.4 Other 597.4 Non-tax receipts 3,366.8 Transfers from the States 2,100.0 Assignment of tax revenues (537.6) General and specific grants (r,562.4) Own non-tax receipts /b 1,266.8 2. Current expenditure 3. Current account surplus (1 minus 2) 941.1 4. Capital expenditure 5. Financing (4 minus 3) 1 515.7 Loans from the States 342.8 Grants from the States 223.1 Other loans 351.3 Advances and deposits 639.4 Other -40.9 /a Including related taxes such as water and sewerage taxes. /b Charges, fees and rental income. Source: A Study of the Financial Resources of Urban Local Bodies in India, and the Level of Services Provided (NIUA, 1983). 2.6 More striking than the size of state transfers, which was moderate, was their form. Although part of the revenues from a number of taxes (entertainment tax, motor vehicle tax, etc.) were assigned to municipalities, the reliance on revenue sharing was much less (25 percent of transfers) than on grants (75 percent transfers). The grant system depended heavily on specific grants (for purposes such as education and roads); general purpose block grants accounted for under 10 percent of total grants. 2.7 Aside from general administration, which claimed 12 percent of current expenditures, the main current expenditures were in respect of public health (21 percent), roads and other public works (15 percent), water supply and drainage (14 percent), and education (10 percent). Table 2.2: IMPORTANCE OF LOCAL GOVERNMENT EXPENDITURES IN SELECTED COUNTRIES Relative to Total Relative to Public Expenditures GDP (percent) (percent) Australia (1988) /a Local 7 2 State 44 15 Brazil (1989) Local 11 4 State 25 8 Canada (1989) /a. Local 19 8 Province 41 18 India Local (1979/80) 3.5 /b 1 /b State (1987/88) 50 15 U.S.A. (1988) Local 23 8 State 18 6 /a Provisional. /b Relate- to urban local bodies. Source: Most expenditure data taken from Government Finance Statistics Yearbook, 1990 (IMF). 2.8 Capital expenditures were dominated by outlays on water supply, drainage and sewerage (39 percent of total capital expenditures), with roads (18 percent) and public health (7 percent) also absorbing sizable resources. 2.9 The most important t-urce of capital finance was a current budget surplus of about Rs 940 million, which financed nearly two-fifths of capital expenditures. The next main source was borrowing. State Government assistance took the form of loans and grants, with the former accounting for more than one- half of the assistance. 2.10 The financial position of municipalities seriously deteriorated in the 1980s. Another study by NIUA, which provides 1983/84 data for 210 municipalities included in the previous study, brings this out clearly. The worsening of municipal finances was due to a large disparity in the growth of current revenues and expenditures, which virtually wiped out current budget surpluses of past years. Between 1979/80 and 1983/84, while current revenues grew at an average 7 The Nature and Dimension of the Urban Fiscal Crisis (NIUA, New Delhi, 1987). - 10 - rate of 13.8 percent annually, current expenditures grew at an average rate of 24.3 percent annually. Expenditures on general administration, health and water supply, and education, each of which grew by over 30 percent annually, provide the main explanation for the rapid growth of total current expenditures. 2.11 Data in constant per capita terms shed further light on these trends (Table 2.3). These show that while per capita current expenditures grew substantially, per capita current revenues actually declined. The poor performance of current revenues was due to stagnant tax receipts and grants. Even receipts from property taxes fell in per capita terms. Most affected by these trends were the relatively small municipalities (with population of under 50,000), which experienced only a marginal increase in real per capita expenditures. Table 2.3: PER CAPITA CURRENT REVENUES AND EXPENDITURES, 1979/80 AND 1983/84 (1979/80 rupees) Municipal Size Current Revenue Current Expenditure By Population 1979/80 1983/84 1979/80 1983/84 Above 1 million 166.5 162.8 107.0 156.6 100,000 - 1 million 83.0 83.2 66.9 82.8 50,000 - 100,000 65.2 64.4 51.3 66.6 20,000 - 50,000 48.6 47.1 41.8 44.7 Under 20,000 46.0 44.6 42.0 46.4 Total 128.0 125.0 87.4 121.6 Source: The Nature and Dimension of the Urban Fiscal Crisis (NIUA, 1987). Salient Features of Municipal Finances in Gujarat, Kerala and Tamil Nadu 2.12 The states of Gujarat, Kerala and Tamil Madu are sufficiently different to encompass a wide range of urban conditions. Gujarat (1991 population of 41.2 million) and Tamil Nadu (55.6 million) are relatively large in terms of population, while Kerala (29 million) is medium-sized. The former are also more urbanized, with urban/total population ratios of one-third compared to Kerala's ratio of about one-quarter. Of the three states, Gujarat (per capita SDP of Rs 3,610 in 1987/88) is the richest, but Tamil Nadu (per capita SDP of Rs 3,386) is not far behind; Kerala's per capita SDP (Rs 2,739) is substantially below Gujarat's.a Total State Government expenditures are significantly higher in 8 The SDP figures issued by different states are not wholly comparable. The roughly comparable estimates for 1984/85 by the Central Statistical Organization give per capita SDP of Rs 3,145 for Gujarat, Rs 2,464 for Tamil Nadu and Rs 2,388 for Kerala. - 11 - Gujarat and Kerala (26-27 percent of SDP) than in Tamil Nadu (22 percent of SDP). Another significant feature is that Ahmedabad and Trivandrum have elected councils whereas the Madras Corporation has been superseded since 1973. 2.13 The situations in selected states epitomize the wide variety of institutions involved in the provision of urban services as well as the considerable diversity in the division of functions between municipalities and State Governments in different states. The substantial municipal responsibilities in Gujarat, the high reliance on State Government institutions in Tamil Nadu, and the limited nature of municipal functions in Kerala stand out. 2.14 Besides undertaking the traditional local functions of sanitation, solid waste management, street lighting and road maintenance, the Ahmedabad Corporation plays a major role in education (especially primary education)9 and health (including hospitals). It also undertakes a number, of functions that are performed by State Government institutions ir. many states; thus, i.t:is engaged in the provision of services such as water supply and bus transport ('through the Ahmedabad Municipal Transport Service), and it also undertakes town planning functions which are exercised by area development authorities in some states. The Madras Corporation's activities are confined to the traditional functions (including preventive health and #amily welfare) due to the importance of state- level institutions: the Madras Metropolitan Water Supply and Sewerage Board for water and sewerage; the Madras Metropolitan Development Authority for the planning and control of land use; and the Pallavan Transport Corporation for bus transport. Responsibility for the financing and administration of education was taken over by the State Government from 1990/91.10 2.15 The Trivandrum Corporation undertakes only the most basic services, the main examples being nursery schools, preventive health, roads, sanitation, solid waste management, town planning and street lighting. The Kerala Water Authority and the Kerala State Road Transport Corporation have state-wide responsibilities for water and bus transport, respectively. Although in most states, State Government agencies are active in housing and slum clearance and upgradation (through a housing board or through a housing board and a slum clearance board) and in the construction and maintenance of municipal roads (through public works departments), there are significant exceptions: the construction and maintenance of local roads in Gujarat, and slum clearance in Kerala are undertaken exclusively by municipalities. 2.16 Of the three states, municipalities in Gujarat play the most important role in the provision of services and those in Kerala the least important, with About 55 percent of students enrolled in primary schools in Ahmedabad attend municipal schools. 10 Subsequently, municipal corporations were asked to resume the administration of education (hiring of teachers, transfers, etc.). The present position is, therefore, that the State Government is responsible for the financing of education in all municipalities and for the administration of education in all municipalities except the municipRl corporations. II - 12 - municipalities in Tamil Nadu falling in between. Municipalities in Gujarat account for 10 percent of combined (municipal and state) revenues and a similar proportion of combined total (current and capital) expenditures (Table 2.4). The comparable proportions for Tamil Nadu and Kerala are estimated at under 6 percent and 3 percent, respectively. That municipalities in Gujarat undertake 10 percent of the combined current expenditure on education and over 30 percent of that on public health, water supply and sanitation, underscores the major role that urban local bodies play in the provision of social services in the state. Table 2.4: REVENUES LND EXPENDITURES OF URBAN LOCAL BODIES AND STATE GOVERNMENTS IN GUJARAT, TAMIL NADU AND KERALA Gujarat Tamil Nadu Kerala 1989/90. 1984/85 1985/86 (million rupees) 1. Tax revenues of urban local bodies 2,378 783 249 2. Own tax revenues of State Governments 18,710 12,976 7.305 3. Total tax revenues of State Governments 22,688 17,423 9,390 4. Current expenditures uf urban local bodies 3,515 1,006 209 5. Current expenditures of State Governments 33,624 23,103 14,453 6. Capital expenditures of urban local bodies 671 630 113 7. Capital expenditures of State Governments 7,808 5,948 2,665 8. Total expenditures of urban local bodies 4,186 1,636 322 9. Total expenditures of State Governments 41,432 28,051 17,118 (percentages) 1 as percent of 2 12.7 6.0 3.4 1 as percent of 3 10.5 4.5 2.7 4 as percent of 5 10.5 4.5 1.5 6 as percent of 7 8.6 10.6 4.2 8 as percent of 9 10.1 5.8 1.9 Sources: Statistical Appendix, Tables 9, 18 and 24; and Reserve Bank of India Bulletin, various issues. 2.17 Like most urban local bodies, the Ahmedabad, Madras and Trivandrum corporations have experienced growing financial strains (Table 2.f), due largely to lagging revenues. The financial situation in Ahmedabad has deteriorated following 1986/87, when enlargement of the municipal boundary resulted in a sharp - 13 - increase in revenues. Between 1986/87 and 1989/90 current expenditures grew at the rate of 16.8 percent annually, while the growth of current revenues was limited to 11.5 percent annually; there have been deficits on both current and capital accounts in recent years. The magnitude of deficits is partly hidden by postponement of debt servicing payments.11 In Madras, between 1982/83 and 1988/89 current expenditures grew by 13.1 percent annually compared to the growth of current revenues of 11.6 percent annually. In recent years, Madras has also experienced overall budget deficits which, because the Corporation has enjoyed a moratorium on debt servicing payments to the State Government, are understated by the statistics. 2.18 Personnel costs have been a major factor in the growth of current expenditures in Ahmedabad and Madras. Such costs have accounted for two-fifths of current expenditures in the former and three-fourths of current expenditures in the latter. The adoption by local bodies of-the salary scales of State Governments (which had previously adopted the Central Government salary,scale) has provided further impetus to the growth of personnel costs. In 1987/88, Ahmedabad equalized its emoluments with those of the State Government, while Madras took the final step toward equalization by adopting the State Government's system of "dearness" (cost of living) allowances. Pay equalization has been a major cause of the growing financial difficulties of municipalities. 2.19 The trends in the public finances of Trivandrum were distinctly different, with both current expenditures and revenues growing slowly. Between 1985/86 and 1988/89, current expenditures increased at an average annual rate of 7 percent,12 or slightly less than the rate of inflation of 9 percent (as measured by the national consumer price index for industrial workers). The growth in current revenues was even slower due to the sluggish growth in property tax receipts of under 2 percent annually. Nonetheless, modest overall surpluses were realized in most years. 11 The 1991/92 budget provided for a postponement of debt servicing payments of Rs 297 million. 12 The rate of increase may be understated because the figures for the first and last years are not wholly comparable; the sources of data Pre given in Statistical Appendix, Table 19. I - 14 - Table 2.5: SUMMARY OF PUBLIC FINANCES -- AHMEDABAD, MADRAS AND TRIVANDRUM CORPORATIONS (milion rupees) 1981/82 1982/83 1983/84 1984/85 1986/86 1988/87 1987/88 1988/89 1989/90 1. Ahmedabad Current Account Revenue 503.1 636.6 680.7 787.4 716.4 978.1 974.0 1,195.8 1,354. Expenditure 539.8 807.6 623.4 774.6 806.1 891.3 1,036.0 1,243.3 1,420. Surplus/Deficit -36.7 -70.9 57.3 12.8 -90.7 86.8 -82.0 -47.7 -65. Capital Account Revenue * 327.6 440.0 392.6 312.9 331. Expenditure 382.6 396.1 255.1 326.0 367, Surplus/Deficit 8.7 97.1 -35.0 43.9 137.5 -13.1 -36.( 2. Madras Current Account /a Revenue 309.9 369.7 403.1 471.1 551.3 662.0 597.1 Expenditure 314.6 361.5 408.4 606.4 543.6 609.7 669.8 /b Surplus/Deficit -4.7 18.2 -5.3 -34.3 7.7 -47.7 -62.8 Capital Account Revenue 118.6 126.7 176.5 302.4 152.6 197.5 241.9 Expenditure 100.0 113.1 178.2 227.0 208.6 200.6 187.1 /c Surplus/Deficit 18.6 13.6 -1.7 75.4 -65.9 -3.1 54.8 3. Trivandrum Current Account Revenue 47.7 52.3 51.4 54.4 Expenditure 39.9 56.3 42.6 48.9 Surplus/Deficit 7.8 -4.0 8.7 6.5 Capital Account Revenue 8.2 4.1 5.5 9.6 Expenditure 13.8 5.3 9.9 11.2 Surplus/Deficit -5.8 -1.2 -4.4 -1.6 /a Including elementary education fund account. /9 Excluding interest due to the State Government. /c Excluding loan repayments to the State Government. Sources: Statistical Appendix, Tables 10, 19 and 25; and AMC. 2.20 Did the relatively fast growth of current expenditures in Ahmedabad and Madras raise standards of services? In the 1980s, per capita real current expenditures in Ahmedabad increased by 2.3Z annually (1980/81 - 1989/90) and in Madras by 1.8Z annually (1982/83 - 1988/89) (Table 2.5). Even these modest increases may c 'erstate improvements in standards of services because of salary revisions. - 15 - Table 2.6: TRENDS IN CURRENT AND CAPITAL EXPENDITURES -- AHMEDABAD AND MADRAS CORPORATIONS 1. Ahmedabad Current Expenditures /a Capital Expenditures /c Total, Per Capita, Per Capita, Total, Total, Current Current 1982/83 Current 1982/83 Prices Prices Prices /b Prices Prices /d (Rs million) (Rs) (Rs) (Rs million) (Rs million) 1980/81 321.7 155.4 188.4 109.9 133.3 1981/82 411.7 188.9 203.6 123.8 134.2 1982/83 476.5 213.7 213.7 140.3 140.3 1983/84 517.6 226.0 200.8 100.1 97.1 1984/85 593.5 254.9 212.9 176.0 145.3 1985/86 634.2 265.4 208.0 246.0 186.5 1986/87 709.8 255.3 184.1 238.9 166.1 1987/88 869.5 305.1 201.5 171.7 112.2 1988/89 1,085.2 371.6 224.9 212.2 127.6 1989/90 1,209.6 404.5 230.7 233.7 131.0 2. Madras /e 1982/83 280.2 82.8 82.8 47.6 47.6 1983/84 314.4 90.7 80.6 83.4 75.6 1984/85 368.5 103.9 86.8 89.3 73.7 1985/86 464.0 127.8 100.2 121.4 92.0 1986/87 498.8 132.9 95.8 200.0 139.0 1987/88 530.7 138.1 91.2 119.0 77.7 1988/89 600.1 152.5 92.3 112.9 67.9 /a Excluding interest payments. /b Deflated by the consumer price index for industrial workers. /c Excluding loan repayments and advances. /d Deflated by the implicit price deflator for gross domestic capital formation. /e Including expenditures financed through the elementary education fund. Sources: Statistical Appendix, Tables 11, 26 and 29; and AMC. 2.21 Data on the structure of current expenditures, though not fully comparable, help to appreciate the wide disparities in the various outlays of the three corporations. In 1988/89, per capita current expenditure in Ahmedabad was Rs 416 compared to Rs 167 in Madras and a mere Rs 90 in Trivandrum. Differences in the functions performed by the corporations probably provide the main explanation for such large differences in per capita expenditures. - 16 - Table 2.7: CURRENT EXPENDITURES OF THE AHMEDABAD, MADRAS AND TRIVANDRUM CORPORATIONS, 1988/89 Ahmedabad Madras Trivardrum (percent of current expenditures) Administration 11.1 13.1 14.5 Public health 15.8 12.8 9.8 Education 24.4 26.0 3.3 Water supply 8.0 - - Roads 2.8 3.6 10.2 Conservancy: 5.8 n.a. 38.2 Street lighting 2.4 6.6 , 13.5 Public debt 12.7 3.3 4.3 Other 17.0 34.6 6.2 (per capita current expenditures in rupees) Administration 46.3 21.8 13.1 Public health 66.0 21.4 8.9 Education 101.6 43.4 3.0 Water supply 33.1 - - Roads 11.5 5.9 9.2 Conservancy 24.1 n.a. 34.5 Street lighting 10.1 11.0 12.2 Public debt 52.9 5.5 3.9 Other 70.5 58.0 5.5 Total 416.2 167.0 90.2 Sources: Statistical Appendix, Tables 11, 20, 25 and 26. 2.22 The relative dependence on different taxes varies a great deal (Table 2.8). In Ahmedabad, the almost complete dependence on two taxes -- octroi and the property tax -- for tax revenues is striking. Octroi dominates the tax structure, providing nearly 50 percent of total current receipts (about 70 percent of tax receipts). It is worth noting that per capita receipts from octroi in Ahmedabad are higher than per capita receipts from all taxes in the other two corporations. The property tax accounts for about 22 percent of current receipts (about 30 percent of tax receipts). Property taxes are relatively more important in Madras (37 percent of current revenues) and Trivandrum (28 percent of current revenues), which also possess more diversified tax sources. Both corporations derive revenues from the entertainment tax, the duty on transfer of property and the profession tax, with the sales tax providing further revenues to Madras and the motor vehicle tax to Trivandrum. - 17 - 2.23 The professions tax is the tax on "professions, trades, callings and employments" assigned to the states under Article 276 of the Constitution. The tax is levied on employees, the self-employed and businesses. The tax rates vary widely; for example, in Madras they range from Rs 9 on income above Rs 1,800 to Rs 125 on income above Rs 15,000, while in Trivandrum the tax rates rise from Rs 9 on income above Rs 3,600 to Rs 1,250 on income above Rs 126,000; both the income and tax rates are expressed in half-yearly terms. The entertainment tax applies to cinema shows, sport and other entertainment to which persons are admitted on payment. Madras and Trivandrum benefit from the duty on transfer of property in a different manner; the former receives the proceeds from an additional duty on stamp duties collected from its area, while the latter is permitted to levy a surcharge on stamp duties on specified instruments. The state sales taxes, the backbone of state finances, and state motor vehicle taxes, which are sometimes shared with local bodies, show considerable variation in structure and tax rates from state to state. 2.24 Cost recovery, which is effected through special property taxes or user charges, is in a most unsatisfactory state. A few examples should make this clear. Elementary education and basic health services are normally free, whether provided by municipalities or the states. The situation with regard to other educational and health services is also not much better. Ahmedabad Corporation, for example, spent Rs 83.5 million on medical services (excluding basic health services) in 1989/90 but earned only Rs 19 million from them (Statistical Appendix, Table 14). Water supply in Madras normally covers costs (but capital funds are subsidized) through water and sewerage taxes and charges, but this is not the case in Ahmedabad and Kerala. The three bus services (PTC, AMTS and KSRTC) normally make losses. To give another example, the special lighting tax levied by some municipalities finances nearly all costs of operating and maintaining street lighting in Madras but only two-fifths of the costs in Trivandrum. 2.25 Few features of municipal finances display as much diversity as the systems of State Government transfers to municipalities. Broadly, general purpose bl6ck grants are rarely utilized and, as is to be expect .d, grants play a limited role where revenues from specific taxes are fully or partially shared with municipalities. Beyond this, there is little similarity between the different systems. 2.26 Gujarat relies mainly on specific grants--the bulk of which are for education -- using neither block grants nor revenue sharing. In Tamil Nadu too, specific grants for education were important before the takeover of responsibility for financing education by the State Government. Revenue sharing now accounts for virtually all transfers. Municipalities retain full proceeds from the profession tax, and part of the proceeds from the entertainment tax and the duty on transfer of property collected from their areas. In addition, the Madras Corporation (but not other municipalities) receives part of the proceeds from the sales tax collected within its boundaries. - 18 - Table 2.8: CURRENT RECEIPTS OF THE AHMEDABAD, MADRAS AND TRIVANDRUM CORPORATIONS, 1988/89 Ahmedabad Madras Trivandrum (percent of total current receipts) Tax receipts 70.5 76.0 77.1 Octroi 48.1 - - Property tax 21.8 37.2 28.2 Entertainment tax - 15.4 24.8 Duty on transfer of property - !13.4 14.6 Profession tar - 0.2 4.3 Motor vehicle tax - - 4.6 Surcharge on sale s tax - 7.7 - Other 0.6 2.1 0.6 Non-tax receipts 11.8 11.8 15.5 State Government grants 17.7 12.2 7.4 General purpose - - 2.5 Specific 17.7 12.2 4.9 (per capita receipts in rupees) Tax receipts 282.4 115.0 77.4 Octroi 192.7 - - Property tax 87.4 56.2 28.3 Entertainment tax - 23.3 24.9 Duty on transfer of property - 20.3 14.8 Profession tax - 3.1 4.3 Motor vehicle tax - - 4.6 Surcharge on sales tax - 11.6 - Other 2.3 0.5 0.4 Non-tax receipts 47.2 17.8 15.6 State Government grants 70.7 18.5 7.4 General purpose - - 2.5 Specific 70.7 18.5 4.9 Total 400.3 151.3 100.4 Sources: Statistical Appendix, Tables 12, 21 and 27. - 19 - 2.27 In Kerala, the emphasis is on tax assignment (i.e., transfer of certain taxes to municipalities for levy by them), but both block and specific grants are also utilized. The grants are meant to favor smaller municipalities. The municipalities levy and retain revenues from the profession tax, the entertainment tax and a surcharge on transfers of property; they also receive a proportion of receipts from motor vehicle taxes. The block grant is essentially a per capita grant payable at one rate to major municipalities and at another (higher) rate to other municipalities. Specific grants are provided for outlays on maternity and child welfare centers, anti-filaria schemes and other purposes; the matching ratio (i.e., the share of expenditure financed by the State Government) for major municipalities is lower than for others. 2.28 In none of the corporations have capital expenditures in real terms shown a steady upward trend. For example, in Ahmedabad capital expenditures have fluctuated within a narrow range and in 1969/90 were at about the same level as in 1980/81 (Table 2.6), despite an increase irt population of nearly one-third over the period. In Madras they have tended to fluctuate widely from year to year and in 1988/89 were lower than in the preceding five years. The financing of capital expenditures presents some interesting features. 2.29 In Ahmedabad, the main sources of capital finance, in the order of importance, are public loans, State Government loans and grants (Statistical Appendix, Table 13). Grants are either made directly by the Government (small savings grants based on savings collected within municipal areas) or channeled through the Gujarat Municipal Finance Board (GMFB). By contrast, grants play a larger role than loans in Madras and Trivandrum (Statistical Appendix, Tables 22 and 28). One major source of borrowing in Kerala is the Kerala Urban Development Finance Corporation (KUDFC). 2.30 These two financial institutions serve different purposes and are of interest. The main function of GMFB, established in 1979, is to make grants to municipalities from resources provided by the State Government. The Board is also expected to make recommendations to the State Government every five years concerning the principles that should govern grants-in-aid payable to urban local bodies. The GMFB's resources come from the transfer by the State Government of 50 percent of receipts from the entertainment tax. The Board allocates 90 percent of the receipts for grants, setting aside the remaining 10 percent for loans. The allocation of grants is based on an elaborate formula that takes account of factors such as population, area and per capita revenue (excluding grants). 2.31 Created in 1970, the KUDFC is the earliest financial institution established for supporting capital development by urban local bodies. The Corporation's resources are derived mainly from market borrcwing, supplemented by borrowing from HUDCO. It finances non-remunerative (e.g., roads, playgrounds) as well as remunerative (e.g., shopping centers) projects. Main Issues of Municipal Finances 2.32 The trends in urban finances, though a cause for concern, cannot fully reflect the deteriorating urban services and crumbling urban infrastructure - 20 - widely encountered in India. This should not come as a surprise. Municipalities are generally required to present balanced budgets, so that their financial difficulties will not be primarily reflected in budget deficits but in a declining range and quality of services. These latter variables are notoriously difficult to measure. 2.33 The difficulties of grasping the severity of financial pressures encountered by municipalities from financial trends have led to assessments of their need for current and capital expenditures. The pioneering work in this connection was done by the Zacharia Committee, 13 which estimated current expenditures needed to achieve minimum standards for the main services baped on engineering norms. The committee placed the current expenditure requirements for 1960/61 at Rs 2,113 million whereas current income amounted to Rs 1,202 million; a gap between needs and resources of about 40 percent was therefore indicated. The NIUA made a similar estimate for 1979/80, taking account of depreciation as well. It found a gap of Rs 8,330 million, which implied a shortfall between expenditure needs and revenues of 50 percent. An attempt to estimate minimum investment requirements for basic municipal services was made by the Planning Commission's Task Force on Housing and Urban Development.15 Its low estimate for investment requirements for 1981-1986 (1980 prices) was Rs 43,600 millic or Rs 8,720 million annually; these figures compare with the actual investment of Rs 2,500 million in 1979/80. While exercises such as these must be interpreted cautiously, they give a rough indication of the urban areas' formidable financial requirements. 2.34 The large investment requirements are not surprising, given the present coverage of even the most basic services. Over 25 percent of the population in urban areas was not served by piped water supply in 1985. Since most urban centers do not have sewerage systems, the situation with respect to sanitary sewerage and drainage was much worse: the coverage was limited to under 30 percent of the urban population. Urban areas have also not come to grips with the problem of refuse disposal. A recent sample survey suggested that 27.5 percent of the garbage remains uncollected in urban areas. Environmental sanitation alone can clearly absorb considerable resources. Major efforts by the State and municipal governments will be needed to alleviate these deficiencies. 13 Report of the Committee on Augmentation of Financial Resources of Urban Local Bodies (Government of India, 1963). 14 A Study of Financial Resources of Urban Local Bodies in India and the Level of Services Provided (NIUA, New Delhi, 1983). 15 Financing of Urban Development (Task Force on Housing and Urban Development, Planning Commission, 1983). 18 Upgrading Municipal Services, Norms and Financial Implications (NIUA, New Delhi, 1989). - 21 - 2.35 Substantial progress in improving municipal resource mobilization and rationalizing transfers by states to municipalities will be essential for a revitalization of municipalities. The issues covered in the study will therefore include: (i) Desirable directions of reform of property taxes; (ii) The main possibilities for cost recovery and the best ways of utilizing them; (iii) Desirable directions of reform of State Government transfers to - urban local bodies; (iv) The feasibility of integrating municipal plans in state plans; (v) Alternative ways of financing capital outlays, including the establishment of state loan boards or a national financial institution for lending to urban local bodies; and (vi) The adVisability of periodically constituting municipal finance commissions. 2.36 The main financing issues will be discussed keeping in mind a simple framework. In this framework, local authorities are concerned only with the allocative function (i.e., the division of resources between private and social goods and the choice of the mix of social goods), with distribution and stabilization functions being reserved for the highest level of government. In such a framework, it seems plausible to require that: private goods (e.g., water) should be financed by user charges; public goods (e.g., street lighting) should be financed by taxation; services whose benefits extend beyond local boundaries (e.g., education) should be at least partially financed by intergovernmental transfers; and capital outlays whose benefits accrue over a long period should be financed by borrowing. The appropriate local taxes are those whose characteristics include tax bases that are relatively immobile (e.g., property tax). Intergovernmental transfers can be justified in this system for a variety of reasons, including: differentials in tax bases among local authorities, and the concentration of tax sources at higher levels of government for economic reasons. 2.37 Actual revenue patterns in developing countries tend to differ from those that would be implied by these requirements. This is to be expected. A government may wish to subsidize a service, thereby bringing about an underutilization of user charges. Or again, capital grants may need to supplement borrowing by local authorities with weak finances. It is clear that while the above framework provides useful guidelines for policy, rigid adherence to it would not be appropriate. 2.38 Detailed discussion of taxation will be confined largely to property taxation because of the high revenue potential of the tax and absence of feasible alternatives to it. However, the scope for increasing receipts from taxes such 17 For further details, see Roy W. Bahl and Johannes F. Linn, "The Assignment of Local Government Revenues in Developing Countries" in Charles E. McLure, Jr. (ed.), Tax Assignment in Federal Countries (Australian National University, Canberra, 1983). - 22 - as the professions tax and the entertainment tax through better administration and record-keeping should not be underestimated. For example, now that the Constitution has raised the maximum rate of professions tax from Rs 250 to Rs 2,500, the professions tax is capable of yielding much higher revenues. The steady increase in the personal exemption under income tax in recent years has reduced tax liability at all income levels, as well as excluding many taxpayers from the scope of the income tax. This provides an opportunity to capture part of the gains accruing to taxpayers through higher rates of profession taxes. To realize the full revenue potential of the tax, deduction of tax at source by employers needs to be utilized and greater efforts need to be made to expand the coverage of the self-employed, who are much more difficult to tax than employees. 2.39 Property tax receipts in most states have stagnated or declined relatively to other receipts. This has been largely due to judicial decisions on the appropriate tax base for municipal assessment in the context- of rent controls. Rent control acts of most states limit "standerd rents" to a proportion of the cost of buildings or to rents realized when buildings are first let, often permitting revisions in standard rents only when improvements and additions are made to buildings. The courts have ruled that municipal assessments cannot exceed standard rents. Neither property taxes nor rent controls distinguish between residential and non-residential buildings. By constraining the property tax base for most properties to rental values in the year of construction or first letting, the judicial decisions have had a devastating effect on the equity and elasticity of property taxes. 2.40 There seems to be a consensus that the best way of dealing with the legal difficulties surrounding the property tax is to delink the concept of rental value for the purposes of property tax from that for rent control acts. Better administration must also receive high priority, given high delinquency in the payment of taxes. Other suggestions frequently made for improving the yield of property taxation include: development of cadres of valuers; establishment of central (state-wide) tax assessment machinery; extension of the tax to vacant land; abolition of preferential treatment of owner-occupied housing; and adequate taxation of Government land. 2.41 The operation of octroi, entailing as it does long waits at checkposts and the consequent waste of time and fuel, inflicts heavy costs on the economy. The tax was replaced in Madhya Pradesh, Karnataka and Himachal Pradesh in the late 1970s and early 1980s, and recently in Uttar Pradesh. Some states, notably Gujarat, Maharashtra and Rajasthan, have explored possible alternatives. Substitutes for octroi have also been extensively studied at the National Institute of Public Finance and Policy. The two possibilities that have been studied are an entry tax, which would be very similar to octroi but which would dispense with checkposts and rely on returns made by dealers, and surcharges on state sales taxes. Entry taxes can compensate for the loss of revenue from octroi and have been adopted in some states. Surcharges on sales taxes would need to exclude commodities such as "declared goods" (see paragraph 6.6) and would not raise enough revenue at moderate rates. 2.42 User charges must increasingly supplement revenues from property tax if municipalities are to continue to finance a reasonable proportion of expenditures - 23 - from own resources. At present, the reliance on user charges varies a great deal from municipality to municipality and for different services within municipalities. The assignment of most major taxes to the Central Government and of most economic and social functions to the State Governments makes user charges a highly suitable form of revenue at the state and local levels. However, lacking a tradition of relying on cost recovery, at least since independence, the country has not utilized user charges adequately. 2.43 Expansion of the scope of user charges faces many hurdles. For some major services it has not proven possible to levy charges based on consumption; metering of water, for example, exists in only a few cities. The major means of cost recovery has in fact been the levy of surcharges on property taxes. This has meant that all the deficiencies of the tax bases for property taxes have been carried over to the area of cost recovery. Moreover, where charges for services are consolidated with the property tax, even the extent of cost recovery cannot be determined. Last but not least, extensive use of cash accounting, which does not provide for depreciation, makes even the proper determination of costs of services difficult. 2.44 Ev,n with better resource mobilization, state transfers to municipalities can be expected to grow, given deficiencies in the standards of services, the continued expected rapid growth of urban population, and the retention of most major taxes at the central and state levels. This makes it important that the magnitude and allocation of state transfers are based on suitable principles. 2.45 The most serious shortcoming of the present system of transfers is uncertainty concerning the annual level of transfers, making it difficult for municipalities to plan. Another problem has been that the emphasis on specific- purpose grants, together with the absence of precise grant formulae, has meant that "equalization" (defined loosely as reduction of disparities in standards of services in different municipalities) has not received sufficient attention. Moreover, most states have shared relatively inelastic taxes with municipalities, so that unconditional transfers have tended to grow slowly. Still another problem has been that the systems of transfers have lacked incentives for resource mobilization at the local level. 2.46 It has often been suggested that one way of improving the system of state transfers would be to appoint municipal finance commissions periodically. There have been several such commissions since the appointment of the first one in Andhra Pradesh in 1971. Municipal finance commissions could play a useful role if they are successful in induciig needed reforms at the municipal and state levels; they would not serve a useful purpose if they are overly concerned with financing municipal deficits solely through higher state transfers. The idea of municipal finance commissions is certainly worth looking at. 2.47 The lack of involvement of municipalities in the planning process at the state level has meant that municipal capital development has not progressed beyond the undertaking of sporadic projects. It has also entailed the implementation of urban projects included in state plans by various state agencies and their subsequent transfer to the municipal authorities for - 24 - maintenance; this separation of developmental and maintenance roles for urban rublic services has contributed to the problem of inadequate maintenance. The latter tendency has been accentuated by a proliferation of autonomous bodies. The existing arrangements for the financing of capital expenditures need to be improved in the light of a review of their operation. 2.48 Among the solutions that have been proposed to deal with these problems are the integration of municipal spending plans into state plans, and the establishment of a national urban finance institution. It is thought that the former could facilitate the development of a system of financing municipal projects by the states. The latter is meant to increase emphasis on proper project appraisal and cost recovery as well as to improve the supply of resources for urban services. Only the largest municipalities may be capable of planning, while the creation of a new institution need not necessarily improve the availability of urban finance. Nonetheless, these ideas are worth reviewing. 2.49 The experience of existing institutions engaged in urban finance may help in forming a judgement on the potential contribution of such institutions. The Kerala Urban Development Finance Corporation has been in operation for many years, and a Municipal Urban Development Fund has been established in Tamil Nadu under a Bank project. At the national level, the Housing and Urban Development Corporation (HUDCO) has recently opened an urban infrastructure window. Under this facility, HUDCO lends for water supply, sanitation, sewerage, drainage, roads and solid waste management; a major objective of the facility is to provide technical assistance for project preparation and for the introduction of adequate pricing of urban services. 2.50 The remainder of this study will be primarily concerned with a detailed discussion of these issues. - 25 - CHAPTER 3: PROPERTY TAXATION 3.1 Revenues from property taxes have recorded a lackluster performance in recent years. Reflecting their low responsiveness to higher rents, land prices and construction costs, property tax receipts in most states have stagnated or declined in importance relatively to other receipts (Table 3.1). This chapter examines the structure and operation of the property tax with a view to delineating policies needed to enable the tax to resume its former pivotal role in municipal finances. A detailed description of the various features of property taxes is necessary for identifying appropriate reforms later. Careful attention is also paid to the rent control legislation and judicial decisions on the appropriate tax base for municipal assessment, the interaction between which has continued to erode the tax base severely. The experience of Gujarat, Kerala and Tamil Nadu is supplemented by that of other states as appropriate. Structure of ProDerty Tax 3.2 The property tax in India is based on annual rental value rather than capital value. The tax is payable by the owner, in contrast to the practice in Britain, where occupiers were legally responsible for the payment of the tax. Problems of levying user charges for services have led to the practice of levying service taxes for different services along with the general property tax; the tax rate for each service is normally identified, but some municipalities, most notably the Municipal Corporation of Calcutta, levy a single consolidated tax (see the next chapter). 3.3 Tax Base. Almost all state enactments constituting municipal authorities define the tax base as the annual rent at which a property might reasonably be expected to let from year to year after allowing for permissible deductions for repairs and maintenance. Giving operational form to this definition in the c-ntext of rent controls has presented intractable problems. 3.4 In Ahmedabad, rental values for rented residential properties are based on actual rents realized by landlords; market rents for similar properties are used where collusion between landlords and tenants is suspected. Rental values for self-occupied residential properties are derived from an assessment table, which classifies properties into three broad categories and prescribes assessment rates per square meter (sq. mt.) for properties of different size within each category (Statistical Appendix, Table 16). Commercial properties are also assessed on the basis of an assessment table, which specifies different assessment rates for different types of properties (Statistical Appendix, Table 17). Annual rent for properties such as factories and educational establishments is taken as 6 percent of the land value and depreciated cost of construction. - 26 - Table 3.1: CONTRIBUTION OF PROPERTY TAX IN SELECTED MUNICIPAL CORPORATIONS (percentages) Percent of Percent of Tax Receipts Current Receipts 1. Ahmedabad 1980/81 30.6 24.5 1984/85 30.1 19.1 1989/90 29.2 22.3 2. Madras 1980/81 80.0 41.6 1984/85 80.9 40.9 1989/90 90.5 35.7 3. Trivandrum 1980/81 n.a. n.a. 1984/85 46.6 38.9 1989/90 43.5 25.4 4. Bombay 1980/81 n.a. 43.8 1984/85 n.a. 36.6 1989/90 n.a. 33.1 5. Calcutta 1980/81 n.a. n.a. 1984/85 93.9 72.6 1989/90 76.7 33.7 6. Delhi 1980/81 67.0 27.1 1984/85 74.1 27.5 1989/90 78.0 38.7 Sources: Respective municipal corporations. 3.5 Madras utilizes "prevailing rentals" for determining rental values. This approach is resorted to for both tenanted and owner-occupied properties, irrespective of the purpose fur which they are used. However, with no revision of assessments undertaken since 1978/79, "prevailing rentals" of most properties are bound to be. considerably below market rents. - 27 - 3.6 An assessment table also features in the assessment practices in Trivandrum. The city has been divided into three zones (namely, inner city, outer city and the periphery), and properties in each zone are classified in terms of location and type of construction (Statistical Appendix, Table 23). The assessment rates for Lesidential properties vary from Rs 0.50 to Rs 3 per sq. mt., with the rate for non-residential properties being five to ten times higher. 3.7 Exemptions. Land and buildings used exclusively for worship and charitable purposes are exempt from the levy of property tax. In some states, the exemption is extended to even educational institutions and charitable medical facilities. However, exempted properties are generally liable to service taxes and cesses. 3.8 Exemptions are also granted on the basis of rental value. In Ahmedabad, properties with rental values of up to Rs 600 per annum are exempt; this compares with exemption levels of Rs 36 per annum in Madras and Rs 60 per annum in Trivandrum. 3.9 Tax Rates. Many types of rate schedules are in use, with proportional rates, and graduated rates which rise with rental value being the most common. Trivandrum has adopted the former system, while Ahmedabad and Madras provide examples of the latter approach (Table 3.2). 3.10 Some rate structures feature a preferential treatment of residential properties and newly constructed properties. Delhi levies lower rates of general tax on houses. Calcutta imposes a surcharge of 50 percent of the consolidated rate on non-residential properties; it also gives a tax concession to the extent of 25 percent of the consolidated rate to all new buildings for three years. 3.11 Faced with an inelastic tax base, cities like Ahmedabad have adopted relatively high tax rates. The tax rates in Trivandrum and Madras, which have not been revised since 1967 and 1972, respectively, are much lower. - 28 - Table 3.2: PROPERTY TAX RATES IN AHMEDABAD,MADRAS AND TRIVANDRUM (percent of annual rental value) Annual Rental General Water Drainage Conservancy Lighting Education Total Value (Ra) Tax Tax Tax Tax Tax Tax (cess) 1. Ahmedabad fa, /b Up to 300 Nil 11.0 - 13.0 - Nil 24.0 300 - 600 Nil 11.0 - 13.0 - 3.0 27.0 601 - 1,000 15.0 11.0 - 13.0 . - 3.0 42.0 1,001 - 2,000 20.0 11.0 - 13.0 - 5.0 49.0 2,001 - 2,500 23.0 11.0 - 13.0 - 5.0 52.0 2,501 - 3,000 23.0 11.0 - 13.0 - 6.0 53.0 3,001 - 4,600 30.0 11.0 - 13.0 - 6.0 60.0 4,501 - 6,000 30.0 11.0 - 13.0 - 7.0 61.0 Above 6,000 30.0 11.0 - 13.0 - 10.0 64.0 2. Madras Up to 600 5.0 5.5 1.5 - 3.5 4.0 12.5 501 - 1,000 10.5 5.5 1.5 - 3.5 4.5 18.5 1,001 - 5,000 12.0 5.E 1.5 - 3.5 5.0 20.5 Above 5,000 14.5 5.5 1.5 - 3.5 5.0 23.5 3. Trivandrum Flat rate 7.0 3.0 5.0 - 3.0 - 18.0 /a Conservancy tax of 26 percent of rental value is levied on hotels, clubs, etc. /9 Education cess for non-residential buildings varies from 7 to 20 percent of rental value. Sources: Respective municipal corporations. 3.12 Taxation of Vacant Land. The tax treatment of vacant land is not uniform throughout the country. Ahmedabad and Trivandrum do not tax vacant land (and this is also true of the respective states), wbile Madras taxes it at the nominal rate of Rs 104 per "ground" (240 sq. ft.). More effective taxation of vacant land exists in Bombay, Calcutta and Delhi, which levy tax rates of 12 percent, 7 percent and 5 percent of capital value, respectively. 3.13 Taxation of Government Property. Properties belonging to the Central and State Governments are taxed differently. Broadly, the present position, details of which follow, is that Central Government properties acquired before 1937 pay property taxes, but those acquired since then pay only service charges; State Government properties are taxable, though their treatment varies from state to state. 3.14 The present tax treatment of Union properties can be traced to Section 154 of the Government of India Act, 1935, which exempted Central Government properties from all taxes imposed by a state or any authority within a state. A similar provision was embodied in Article 285 of the Constitution of India, 1950. However, following the Act of 1935, which provided for continuation of taxes imposed before its commencement in April 1937, the Constitution permitted - 29 - the continuation of such taxes after 1950. But no provision was made for raising the tax rates prevailing prior to April 1937. 3.15 The Government of India reviewed these arrangements in 1953 and decided to pay higher taxes on its properties subject to tax retroactively from April 1948. The payment of taxes at higher rates was discontinued in 1966 following a judgement of the Supreme Court in 1964 relating to the interpretation of Article 277 of the Constitution.18 Thus, Union properties subject to taxation before 1937 are still taxed at the old rates. Periodical revaluation of such properties is, however, permitted. 3.16 Union properties acquired after 1937 were altogether exempt from taxation until 1953. Responding to pleas from municipal authorities to rectify the situation, the Government agreed to pay service charges in lieu of property taxes from 1954 onwards. Since 1968, based on a review of the. arrangement in the preceding year, annual values for the purposes of levying service charges have been taken as 9 percent of the capital value of the property. The definition of capital value includes the cost of acquiring or constructing a building and the cost of the site. Service taxes payable are restricted to between 33.5 percent and 75 percent of property taxes payable by private individuals, depending on the range of services provided by local bodies. 3.17 State Government properties are frequently taxed at concessional rates. Madras and Trivandrum municipal corporations, for example, apply normal tax rates to such properties, but rental values are taken at only 6 percent of the cost of construction and the price of land at the time of construction. Calcutta does not accord a preferential treatment to state properties. Properties owned by public sector undertakings are taxed like any other private property in all states. 3.18 Periodic Revision of Rental Values. Most municipal enactments provide for periodic updating of the tax base through fresh valuations. For example, revisions are required every four years in Gujarat and every five years in Kerala and Tamil Nadu. Revisions are undertaken in a phased manner by dividing cities into zones so that by the time revaluations are completed in the last zone, the first zone becomes due for a fresh valuation. Municipalities have generally followed the prescribed cycle of revaluations; a major exception has been Madras, where the latest revaluations were undertaken more than a decade ago. Judicial Decisions on Property Tax 3.19 Municipal statutes do not define the word "reasonably" occurring in the expression "the annual rent at which land or building might reasonably be expected to let from year to year". However, following the practice in Britain, 18 The Supreme Court observed that the "intention of Article 2/7 of the Constitution may be said to permit the existing range of the taxes to be continued and not that the Article conferred on them [state and local authorities] authority to expand the range of their taxation by subjecting new laws to taxation or by increasing rates of taxes." Town Municipal Committee, Amravati vs. Ram Chandra Vasudeo Chinote and others (AIR 1964; SC 1166). - 30 - reasonable rent was taken to represent hypothetical rent which a hypothetical occupier would be prepared to pay under the circumstances prevailing at the time of assessment. The British courts took the view that there was no clear-cut relationship between annual rental value of a property and its controlled rent; the former could, therefore, exceed the latter. Successive court judgements in India since the late 1950s, by contrast, have come to the conclusion that "fair rents" and 'standard rents" defined in rent control laws must be taken as the upper limits of municipal assessments. Given the rigidity of most rent control laws in India (see the next section), these rulings have greatly circumscribed the base of property tax. 3.20 New interpretation to the concept of "reasonable rent" was first given in the case of the Corporation of Calcutta vs. Padma Devi. In this case, the Calcutta Municipal Corporation had assessed a property on the basis of the actual rent paid. Subsequently, the standard rent was- fixed by the Rent Controller . under the provisions of the rent control legislation. The Corporation argued that since it had to determine only the hypothetical rent realizable from a hypothetical tenant at the time of assessment, the standard rent was not relevant for municipal assessment. Rejecting this contention, the High Court observed that a property can never be expected to be legally let out at a rent higher than the standard rent. The consideration that weighed heavily on the court was that, unlike in Britain, it was illegal under some rent control laws in India to accept a rent higher than the standard rent. 3.21 The decision was upheld by the Supreme Court, which observed: '.... a combined reading of the said provisions [ of rent control laws ] leaves no room for doubt that a contract of a rent at a rate higher than the standard rate is not only not enforceable but also that the laadlord would be committing an offence if he collected a rent above the rate of the standard rent. One may legitimately say under those circumstances that a landlord cannot reasonably be expected to let a building for a rent higher than the standard rent.'20 3.22 The principle enunciated in Padma Devi's case was extended to situations in which standard rent had not been fixed by the Rent Controller. The first extension took place through the Supreme Court's ruling in the case of the Corporation of Calcutta vs. Life Insurance Corporation of India.21 The case involved a tenant who had sub-let premises at a much higher rent than the rent payable by him to the landlord. The Calcutta Municipal Corporation assessed the property at the higher rent received by the tenant. In this case not only had standard rent not been fixed, but also it would not have been illegal for the landlord to have charged a higher rent than had been agreed. The court held that even though the standard rent of the premises had not been fixed by the Rent Controller, it was statutorily fixed (at the agreed rent) and that, taking account of the rent that a landlord may reasonably expect to receive, the annual value of the building could not exceed the standard rent. The standard rent was 19 All India Reporter (AIR) 1957; Calcutta High Court 466. 20 AIR 1962; Supreme Court (SC) 151. 21 AIR 1970; SC 1417. - 31 - considered statutorily fixed because the definition of standard rent under the relevant rent control legislation included the rent which would have been fixed if application had been made for its determindtion. 3.23 The Supreme Court's judgement in the case of Guntur Municipal Council vs. Guntur Town Rate Payers' Association further extended the principle set out in Padma Devi's case." A general revision of rental values by the municipality, which took the rentals beyond the levels implied under rent control legislation, was the cause of litigation. The Andhra Pradesh Buildings Control Act, 1960 permits landlords to charge agreed rent where "fair rent" (standard rent) has not been fixed by the Rent Controller. Using this fact, the municipality argued that where fair rent had not been fixed, municipal assessments should not be constrained by provisions of the rent control act. Rejecting this contention, the court held that assessments must take account of fair rent as "determinable" under the act and, where fair rent had not been fixed, municipal authorities must arrive at their own estimates 3.24 Whatever doubts that may hAve remained.about the relationship between rateable values and standard rents for rented properties dissipated with the Supreme Court's landmark judgement in the case of Dewan Daulat Rai Kapoor vs. New Delhi Municipal Committee.23 In this case, rateable values of certain premises were based on actual rents, standard rents not having been fixed for them. The court came to the conclusion that annual values of all properties must be limited to standard rents determinable under rent control acts. The underlying reasoning is best brought out by quoting from a review of the case in the Supreme Court's judgement in the subsequent case of Dr. Balbir Singh.24 "The Court held that even if the landlord was entitled under the law to recover the contractual rent from the tenant because the standard rent of the building had not yet been fixed and the time for making an application by the tenant for fixation of the standard rent had already expired, such contractual rent could not furnish a measure of determination of the rateable value, because the question had to be judged not with reference to the actual tenant but with reference to a hypothetical tenant and the yardstick provided by the statute for determination of the rateable value was as to what rent the owner of the building might reasonably expect to get from a hypothetical tenant, if the building were let from year to year and the hypothetical tenant could not be assumed to be willing to pay anything more than the standard rent, because after taking the hypothetical tenancy, he could irmediately make an application for fixation of standard rent. The Court, therefore, reached the conclusion that even if the landlord was lawfully entitled to receive the contractual rent from the tenant, such contractual rent could not be taken to be the rateable value of the building, because the reasonable expectation of the landlord to receive 22 AIR 1971; SC 353. 23 AIR 1980; SC 541. 24 AIR 1985; SC. - 32 - rent from a hypothetical tenant could not possibly exceed the standard rent determinable in accordance with the provisions laid down in the Rent Act." 3.25 The latest case, Dr. Balbir Singh and others vs. Municipal Corporation of Delhi, involved the determination of rateable values (municipal assessments) of different types of properties (e.g., owner-occupied, partly self-occupied and partly tenanted). The Supreme Court reaffirmed that for all types of properties, rental as well as non-rental, rateable values of buildings could not exceed the respective standard rents. Rent Control Laws in India: A Review 3.26 Enactment of rent control laws in India, initiated in the aftermath of the First World War, gathered momentum after the Second War , with many laws enacted as late as the 1960s and 1970s. Land, including "the relation of landlord and tenant, and the collection of rents" is a state subject, so that rent control laws are enaated by State Governments. The laws have the same broad thrust, that of protecting the tenant from exorbitant rents and arbitrary evictions. Provisions concerning the setting of standard rents, permissible increases in standard rents, and exemptions from the purview of rent control acts differ from state to state. 3.27 Most provisions for the determination of standard rent provide for the adoption of rents prevailing during prescribed base years as standard rents, the derivation of standard rents from the price of land and the cost of construction, or a combination of these methods. 3.28 The first method is to be found in states such as Andhra Pradesh, Gujarat, Maharashtra and Punjab. By and large, the late 1930s and the 1940s constitute the relevant base years. For properties for which no standard rents had been determined in the base years, the practices vary. In Gujarat and Maharashtra, for example, the standard rent of a property rented out after the. prescribed base year is the rent at which the property is first let. 3.29 Tamil Nadu and Uttar Pradesh are among the states that calculate standard rents on the basis of the cost of property. In the former, standard rents for residential and non-residential properties are taken as nine percent and 12 percent of the cost of property at the time of application for the setting of standard rent. In the latter, standard rent is calculated by taking 10 percent of the market value of the land and building immediately before the commencement of the rent control act (1972) or at the date of letting, whichever is later. 3.30 Varying combinations of these practices prevail in West Bengal, Karnataka, Madhya Pradesh and other states. Generally, rents prevailing in the base years are taken as standard rents for properties existing before the coming into force of the rent control laws, and the cost method is used for deriving standard rents of properties constructed after the base years. Most states also use the cost method for arriving at standard rents of properties for which rentals are difficult to estimate (e.g., Government property). - 33 - 3.31 Kerala and Orissa provide examples of states that use none of these methods. In Kerala, standard rents are determined with reference to rental values assessed by municipal authorities at the time of letting, the only restriction being that they cannot exceed assessed rental values by more than 15 percent. Where the property has not been assessed for property tax, the standard rent is based on prevailing rent in the locality for similar properties during 12 months preceding the letting. The Orissa legislation provides for the determination of standard rent on the basis of the rent considered reasonable having regard to situation, locality, level of services and amenities provided, and rental value fixed by the local authority. 3.32 Only marginal increases are permitted in controlled rents. The increases are limited to situations where alterations, additions or improvements have been made to buildings. Only in a few states is it possible to revise rents to take account'of price rises. One such state is Haryana, where basic rents.:can be increased by up to 25 percent of the change in the general (wholesale) price index. 3.33 Rent controls have an extensive coverage, frequently embodying no significant exemptions. Legislation in Tamil Nadu and Uttar Pradesh is among the more liberal. Tamil Nadu, in particular, given its exclusion of all residential properties with monthly rents above Rs 400 from the purview of rent control, probably has the least restrictive rent control legislation in the country. In Tamil Nadu as well as Uttar Pradesh, buildings leased out with machinery and furniture and used as factories are exempt from the provisions of rent control laws; the exemption extends to even shops and theatres in the latter state. Moreover, newly constructed properties in Tamil Nadu and Uttar Pradesh are provided a "rent control holiday" of five and 10 years, respectively. 3.34 The only detailed official assessment of rent control in India at the national level was undertaken by the Economic Administration Reforms Commission.25 The commission made proposals for curtailing the scope of rent controls as well as for lessening the rigidity of remaining controls. The former was to be achieved by excluding from the scope of rent controls all residential buildings with monthly rentals above Rs 1,000, and all non-residential buildings; and by introducing a five year rent control holiday for all new construction. To improve flexibility, the commission proposed that standard rents of all properties should be increased every five years to compensate partially for inflation (one-half of the increase in the consumer price index). To deal with anomalies in standard rents of old and new tenancies, it recommended that standard rents of old tenancies should be raised to compensate partially for inflation since the initial determination of rent; the increase was to be staggered over a five-year period. The commission was not in favor of the use of original cost of construction for the determination of standard rents, preferring prevailing rents as proxies for standard rents. 25 Rent Control: Report of a Study by Economic Administration Reformt Commission (Ministry of Urban Development, Delhi, 1982). - 34 - 3.35 The recommendations of the National Commission on Urbanisation, made in its interim report,26 were similar to these. However, the commission favored a permanent exemption of new construction. More importantly, recognizing that adjusting rents of properties from their initial levels was not practicable, it proposed neutralization of the effect of inflation (100 percent for non- residential properties and 50 percent for residential properties) only for tenancies that had come into force since 1974.27 3.36 There have not been major initiatives to reform rent controls in recent years. A case in point is the Delhi Rent Control (Amendment) Act, 1988, which became effective in December 1988. The legislation provides for the exemption of properties with monthly rentals of Rs 3,500 and above; the exemption of all new properties for ten years; an increase in the standard rent from 7.5-8.25 percent to 10 percent of the capital cost of property (at the time of construction); and a periodic increase (every three years) in the standard rent of 10 percent. While these reforms are in the right direction, they do not go far enough; only two percent of assessed properties have monthly rentals above Rs 3,500. 3.37 Rent controls in India clearly remain quite rigid. Rent controls in other parts of the world are often accompanied by exemption of new construction from controls, provisions allowing periodic increases in rent, and "vacancy decontrol" (that is, change in the rent previously fixed at the time of new tenancy). In India, no state exempts new construction permanently, and few states permit either automatic increases in rents or vacancy decontrol. 3.38 Available evidence does not permit categorical statements on the effect of rent controls on rents. It is widely believed that actual rents for a large proportion of property--with the possible exception of some tenancies that existed at the time rent controls came into force, and properties for which rent controllers have set standard rents--are above standard rents. The limited number of applications made to rent controllers,28 who can only fix rents in response to applications by tenants and landlords, lend support to this view. The widespread use of lumpsum payments (salami or pugree) at the start of tenancies in some parts of the country, and the growing practice of subletting property at higher rentals by original tenants provide further support. 3.39 Regardless of their precise impact on the housing market, rent controls, in conjunction with judicial decisions on what constitutes the property tax base in a controlled rental environment, have had a devastating effect on the equity and elasticity of property taxation. The tax base for most properties has been 26 National Commission on Urbanisation: Interim Report (Ministry of Urban Development, Delhi, January 1987). 27 The distinction made by the commission between properties with the plinth area of below and above 80 sq. mt. has been ignored here. 28 In Delhi, the applications made to the Rent Controller were less than 3,000 for the period 1971 to 1987. See Kiran Wadhwa, "Delhi Rent Control Act: Facts and Fallacies," Economic and Political Weekly, May 25, 1991, p. 1352. - 35 - constrained to standard rents in the year of construction or first letting, thereby freezing rateable values of a sizable proportion of properties for decades. This, in turn, has resulted in a sluggish growth of the tax base, and brought about a situation where effective tax rates on similar properties of different ages are vastly different. Property Tax Reform 3.40 Reform of the property tax should be comprehensive in nature, covering the tax base, valuation and assessment procedures, rate structures and tax administration. Emancipation of municipal assessments from the effects of rent control laws will be essential in this connection. Given the rigidity of rent control laws of most states, the effectiveness of property tax reforms will be greatly enhanced if undertaken in the context of less pervasive and more flexible rent controls. 3.41 Alternative Tax Bases. Dissatisfaction with the annual rental value as a t-ax base has periodically brought forth suggestions for its replacement. The proposals most frequently made are the adoption of the capital value base, and the assessment of properties based on their physical characteristics. 3.42 Capital value may be superior to annual value as a tax base: the former will reflect the value of property in alternative uses, while the latter is linked to its value in the existing use. Capital value taxation, by taking account of the opportunity cost of land in existing uses, may thus encourage a more efficient use of land. In practice, the problems that have plagued the annual rental value--rent controls, limited market transactions in renting and sale of property, and the use of property transactions to launder "black" money-- will tend to be carried over to capital value assessments. 3.43 Standardized methods of assessment have long been of interest as a means of diminishing the scope for arbitrary and corrupt practices. Standardization of assessment procedures based on simple criteria have, however, been struck down by the courts for being inappropriate or inequitable. Thus, on Kerala's proposal to base assessments on the floor area of buildings, the Supreme Court commented that the legislation had not taken into account "the class to which a building belongs, the nature of construction, the purpose for which it is used, its situation, its capacity for profitable use and other relevant circumstances which have a bearing on matters of taxation." 3.44 More elaborate methods involve dividing a city into homogenous zones, and taxing land and buildings on the basis of a few factors thought to be the main determinants of property values. The factors taken into account include location, type of construction, age of building and land use; each of these variables is subdivided into four or five classes. The basic tax, which is related to the plinth area of buildings and the extent of appurtenant land, is supplemented by surcharges based on the other attributes of properties. 29 State of Kerala vs. Haji K. Kutty Naha (AIR 1969; SC 378). - 36 - Legislation to implement such a system was introduced in Tamil Nadu,30 but it failed to become law due to political developments in the state. While standardization is intuitively appealing, assessments based on it often bear little relationship to market rentals due to the difficulty of quantifying some critical determinants of property values.31 3.45 Delinking of Annual Rental Value from "Fair Rent" or "Standard Rent". There is a growing consensus that to insulate municipal assessments from rents determinable under rent control acts, the laws should be amended to give a more clear-cut definition of annual rental value and to make it clear that municipal assessments have nothing to do with controlled rants. One possibility, and the possibility that seems most appropriate in the present circumstances, is to replace the concept of "reasonable rent" by "actual rent or market rent, whichever is higher". To safeguard against possible legal challenges, this change should be accompanied by an amendment in the municipal act to incorporate a non-obstante clause; this should provide that "not withstanding anything contained in any other law for the time being in force", the property tax assessment will be based on annual rental value as defined in the appropriate municipal legislation. 3.46 States have been more willing to amend municipal legislation than to undertake the politically more sensitive task of amending rent control laws. The Mr 1fa Pradesh Municipal Corporation Act, 1956 and the Calcutta Corporation Act, 198U, for example, contain non-obstante clauses. In a case arising in Madhya Pradesh involving the Indore Municipal Corporation, the Supreme Court held that where standard rent had not been determined, fixing of reasonable rent without regard to the rent control law was permissible.32 The Calcutta Corporation has also been permitted by the Calcutta High Court to overlook the provisions of the West Bengal Premises Tenancy Act, 1956; an appeal against the decision is, however, presently pending with the Supreme Court. Recently, in another case, the Calcutta High Court has questioned the relevance and efficacy of the non- obstante clause in the municipal legislation. In the light of these c.ponsiderations, it would seem prlident to make complementary changes in rent 30 Tamil Nadu Municipal Corporation Laws (Second Amendment) Bill, 1988. 31 Standardization in assessments w&s rejected in Britain. "Superficially attractive are suggestions for assessing houses on a points system which would involve setting up a tariff of values relating to standard features of housing such as size, age, equipment, amenity, location and environmental features. In our view there would be insurmountable difficulties in deciding the weight to attach to the less tangible factors." Report of the Committee of Enquiry on Local Government Finance, Chairman: Frank Layfield (HMSO, London, Cmnd 6453, May 1976), p. 169. 32 AIR 1977; SC 308. AIR 1982; Calcutta High Court 1479. Dr. Roma Sur vs. State of West Bengal, Calcutta Weekly Notes, vol. XCV, 1990/91, p.1. control laws since the courts tend to give precedence to social legislation (such as rent control laws) over municipal laws. In particular, rent control laws should be amended to state that the determination of standard rents has nothing to do with the municipal assessment of properties. 3.47 Divorced from standard rent, the annual rental value should be indexed to some measure of annual price increases, preferably the widely-used consumer price indices for industrial or non-manual workers. If this seems too harsh, there should be partial indexation. The cost of providing municipal services is rising so rapidly that revaluation of one-fifth or one-quarter of properties each year undertaken by most municipalities simply does not raise enough additional revenues. Moreover, the trend in prices and construction costs in India has been such that the kind of increases in taxation that four- or five-year revaluations give rise to are politically difficult to implement. Properties should continue to be revalued periodically if the usual manner and the new valuations should replace the prevailing provisional valuations (based on indexation). 3.48 The delinking of municipal assessments 'from standard rents will make revaluations more meaningful. At present, given the restriction that municipal assessments cannot exceed standard rents, few properties qualify for reassessment even in a general revaluation. In Gujarat, for example, reassessment of existing properties is only possible consequent upon changes in their ownership or use. And in cities where standard rents are fixed in relation to the original cost of premises, revaluation does not make any sense at all; this is why the Municipal Corporation of Delhi discontinued periodic revaluations. 3.49 Since the legal liability for payment of property taxes rests on the owner (rather than the occupier), the effect of delinking on the owner will need careful thought. The Calcutta Corporation Act, 1980, for example, enables the owner to recover taxes from occupiers in respect of the tax paid on annual value in excess of the rent received. 3.50 Tax Base. Owner-occupied houses, vacant land and Government property must be taxed like any other property. Owner-occupied houses are often accorded a concessional treatment either by law or through assessment procedures; both these practices need to be discontinued. The preferential tax treatment of self- occupied properties results in a considerable loss of revenue.34 The exemption of vacant land, where it exists, needs to be discontinued. As for Government property, the differential tax treatment of Central Government property acquired before and after 1937 should be eliminated and all Government property, Central and State, treated uniformly. 3.51 Valuation and Assessment. The need for improving valuation and assessment practices cannot be exaggerated. Disparities in the assessment of comparable properties can by no means be attributed solely to the quirks of legislation. In Calcutta, which has incorporated a non-obstante clause in the municipal legislation, municipal assessments have been found to vary from Rs 0.36 3 Owner-occupied properties in Calcutta and Delhi are estimated to account for 35 percent and 65 percent of total holdings, respectively; they tend to be even more significant in small and medium-sized towns. - 38 - per sq. ft. to Rs 36.83 per sq. ft. for units used for a similar purpose in the same premises. And while the assessment tables used by Ahmedabad, Trivandrum and other cities may introduce some order into the chaotic state of assessments, they are not a solution. The courts have tended to frown upon assessment practices different from those specified in the legislation, so that the tables may not have been challenged only because they work in the taxpayers' favor. The assessment tables in Ahmedabad, for example, give rentals that are only one-tenth of the market rentals.37 3.52 Surprising though it may seem, professional valuers have played a very limited role in property taxation. Even metropolitan cities are not adequately staffed by professional cadres of valuers. Valuation is, in fact, carried out largely by a municipality's clerical staff. Partly because of the high involvement of laymen, the valuation process has been vulnerable to political pressures by councillors. To promote the much-needed professionalism in valuation and to insulate assessments from local pressures, the idea of central (state-level) valuation organizations.has been frequently mooted. 3.53 The creation of the Central Valuation Board in West Bengal, with both valuation and appellate powers, in 1979 represented the first serious effort to set up a state-wide machinery for valuation. The Board has experienced a variety of problems, stemming partly from political developments at the state and local levels. The Board was not authorized to undertake valuations until 1985, or six years after its establishment; and its methodology for the assessments has been considered too complicated to be understood and accepted by assessees. More importantly, efforts to promote professionalism in valuation have met with limited success. The Board's appellate powers, which were resented by the municipalities, were returned to the municipalities in 1989; with this change, there may be a greater willingness to seek the Board's assistance in valuations. 3.54 In Orissa, a valuation organization was set up in 1970 under the administrative control of the Director of Municipal Administration. The organization developed an assessment procedure based on the proximity of properties to infrastructure and amenities, and the quality of construction. This attempt at central valuation failed, possibly because the municipal employees undertaking valuations lacked the necessary skills. In Andhra Pradesh too, valuation was made part of the Directorate of Municipal Administration. However, the organization has been dormant since the 1970s, when an assessment scheme based on capital values developed by it provoked public outcry. A valuation organization set up in Assam has not started functioning. Finally, in Maharashtra, efforts of the Town Planning and Valuation Department to enter the 38 R.M. Kapoor and P.K. Ghosh, "Issues, Options and Agenda for Action", p. 8. 37 Meera and Dinesh Mehta, "Property Taxation in Developing Countries: Situation, Analysis and Potential Reforms in Ahmedabad, India", p. 24. 38 The methodology is described in B.K. Guha Thakurta, "A New Methodology for Rational and Objective Valuation of Lands and Buildings for Municipal Taxation". - 39 - area of municipal valuation were unsuccessful, with the result that its role is limited to the valuation of land for town planning purposes. 3.55 The experience with central valuation, albeit limited, has clearly not been encouraging. At this juncture it will be unrealistic to expect municipalities to relinquish all their powers over municipal valuations, especially since the competence of central valuation organizations has left much to be desired. At the same time, there is a great need to improve the valuation procedures, and the technical skills of valuers. Consideration should, therefore, be given to the establishment of valuation organizations that, while not undertaking valuation, develop proper valuation procedures and organize training facilities. 3.56 Rate Structure. A moderately progressive rate structure would be the most suitable in the Indian conditions. A proportional rate structure, especially where the general rate and service taxes give a relatively high combined tax rate, would impose a heavy burden on owners of properties with low rateable values. On the other hand, a highly progressive rate structure would accentuate disparities in the tax liabilities of similar properties of different ages; this would arise because under rent controls newer properties pay much higher taxes than similar older properties. The blocks of rateable values to which the different tax rates apply should be few in number and wide in range to reduce temptations for tax evasion and possibilities of litigation. 3.57 Tax Administration. Improvements in the structure of the tax and valuation practices will mean little if only a small proportion of taxes due are collected. Delinquency in the payment of property taxes constitutes a very serious problem. Ahmedabad manages to collect only 20 percent of the taxes due (including arrears) to it; an unprecedented surge in appeals, and the accompanying growth in tax arrears, explains the sharp decline in the collection ratio in recent years. The collection ratio of Trivandrum of about 30 percent also cannot be considered satisfactory. The tax collection ratio of Madras, at *70 percent, is probably among the highest in the country, but even in this case arrears amount to one-quarter of the total taxes due. - 40 - Table 3.3: PROPERTY TAX DEMAND AND COLLECTIONS IN SELECTED MUNICIPAL CORPORATIONS (amounts ii million rupees) Demand Collections Collections as Year Arrears Current Total Percent of demand 1. Ahmedabad 1986/87 407.3 288.4 695.7 190.0 27.3 1987/88 505.7 432.0 937.7 230.5 24.6 1988/89 702.2 481.4 1,188.6 270.4 22.7 1989/90 918.2 531.7 1,499.9 302.0 20.8 1990/91 1,147.9 601.7 1,749.6 311.2 17.8 2. Madras 1986/87 76.0 220.0 296.0 214.6 72.5 1987/88 78.0 235.5 313.5 225.0 71.8 1988/89 75.0 260.0 335.0 224.8 67.1 1989/90 80.0 279.0 359.0 264.1 73.6 1990/91 90.0 311.5 401.5 280.1 69.8 3. Trivandrum 1986/87 n.a. n.a. 24.9 14.6 58.7 1987/88 n.a. n.a. 33.1 16.2 49.0 1988/89 n.a. n.a. 36.6 20.9 57.1 1989/90 n.a. n.a. 40.4 15.3 38.0 1990/91 n.a. n.a. 62.5 20.0 31.9 4. Bombay 1986/87 44.1 641.2 685.3 551.9 80.5 1987/88 32.6 734.0 766.6 581.8 75.9 1988/89 41.5 825.4 866.9 644.0 74.3 1989/90 70.0 892.7 962.7 704.4 73.2 1990/91 78.2 976.2 1,054.4 759.3 72.0 5. Calcutta 1986/87 n.a. n.a. 335.2 294.5 87.5 1987/88 n.a. n.a. 495.2 326.9 66.0 1988/89 n.a. n.a. 644.0 456.2 70.8 1989/90 n.a. n.a. 650.2 419.3 64.5 1990/91 n.a. n.a. 775.8 423.2 54.6 Sources: Respective municipal corporations. - 41- 3.58 Securing high compliance will require legal as well as administrative measures. Aside from substantial litigation, the reasons for low compliance range from poor record-keeping to inadequate incentives and penalties for taxpayers. Some of the measures that are worth considering are: - Maintenance of proper records, through computerization where relevant; - Introduction of incentives, in the form of discounts, for prompt payment of taxes; - Charging of market rate of interest on arrears of taxes; - Requiring payment of at least three-quarters of the tax assessed before the filing of an appeal; and ' - Provision of a wide network of centers, possibly *including commercial banks, where taxes due may be paid. Conclusions 3.59 The most critical policies that are needed to revitalize the property tax are the adoption of "actual or market rent, whichever is higher" as the tax base, and its annual revision in the light of inflation. To broaden the tax base further, the preferential treatment of owner-occupied houses should be discontinued, vacant land should be made taxable, and the taxation of Government property should be rationalized. Greater technical skills need to be brought to bear on valuations, and tax administration needs to be strengthened. It goes without saying that the relaxation of rent controls along the lines suggested by the Economic Administration Reforms Commission and the National Commission on Urbanisation would greatly improve the effectiveness of these measures. - 42 - CHAPTER 4: COST RECOVERY 4.1 Few aspects of urban public finances are in as unsatisfactory a state as the operation of user charges for services provided by local authorities. Yet in no other area is the task of gathering basic data as difficult, nor the available research as scanty. This chapter tries to bring out the magnitude and the nature of the problem, supplementing the overview with discussions of cost recovery in water supply, land development and bus transport. Private and communal responses to deficiencies and gaps in local public services are also briefly discussed. 4.2 Distributional implications of higher user charges could not be considered in detail. The omission is perhaps not serious, given the limited role of user charges in local and state finances at the present time. Should user charges begin to play a prominent role, distributional considerations would deserve careful analysis. Present Role of Cost Recovery 4.3 Although water and transport undertakings do not generally cover their full operating costs, they are the main sources of user charges; these undertakings are discussed separately. User charges play a negligible role in the financing of other services. In 1989/90, in Ahmedabad, user charges from all services other than water supply and transport brought a mere Rs 69 million, or 5.5 percent of current outlays (Table 4.1). The situation in Madras, where 16 percent of outlays were recovered through charges, was somewhat better; however, nearly one-half of the receipts came from the lighting tax levied as part of the property tax. A similar situation exists in Trivandrum, where the main sources of user charges are the receipts from rest houses and tourist homes, and charges for pay toilets. A major explanation for this state of affairs is that no charges are levied on basic health services and primary education. Infrequent revisions in charges for other services (e.g., markets, recreation, parking, advertisements, etc.), license fees and fines also seem to have contributed. 4.4 It is worth saying a little more on the situation in Ahmedabad. While education is mostly financed from State Government grants, medical services (hospitals, a TB clinic and a maternity home) attract limited grants. The corporation spent Rs 83.5 million on medical services in 1989/90, but derived only Rs 19 million from medical charges (or one-quarter of the outlay). There was an additional outlay of Rs 8 milliou on the Medical College (under the head "education"), of which fees covered a meager Rs 215 thousand. The AMC has found its involvement in medical services financially burdensome and has reportedly made representations to the State Government to take over the responsibility for hospitals. - 43 - Table 4.1: REVENUE FROM SERVICE CHARGES AND FEES IN AHMEDABAD AND MADRAS, 1989/90 (million rupees) Current Type of Revenue from Activity Expenditure Charge Service Charges and Fees 1. Ahmedabad Conservancy /a 105.1 0.6 Conservancy tax ( - ) Sale of compost (0.4) Other (0.2) Public health 35.9 Medical 83.5 19.0 Dispensaries and hospitals (17.9) Ambulances (0.7) Other (0.4) Education 298.0 0.7 Fees for pro-school classes (0.3) Medical college (0.2) Other (0.2) Property, land acquislotion and management 38.5 39.5 Advertisements on property (13.9) Municipal plots (24.5) Betterment charges (1.1) Markets and slaughter houses 1.0 0.9 Street lighting 39.0 0.1 Fire services 11.8 0.1 Recreation (parks, swimming pools, etc.) 20.7 4.1 Other current expenditure 578.1 Other service charges 4.1 Total current expenditure 1,288.2 /b Total service charges 69.1 2. Madras Deputy and Assistant Commissioners' offices 179.7 0.5 Private scavenging fees (0.4) Other (0.1) Public health 84.5 0.9 Prevention of food adulteration (0.2) Community center rent (0.3) Other fees and fines (0.4) Education /c 42.9 . Electrical Uepartment 43.5 0.7 Lighting tax (40.7) Works 23.5 25.5 Building license fees (25.5) Other fees and fines (0.1) Legal cell 1.0 0.3 Revenue department 16.8 16.1 License fees (8.8) Market fees (3.7) Contract Income (0.8) Advertisements on lamp posts (1.6) Parking fees (1.5) Unauthorized con- structions (0.5) Other current expenditure 117.7 Other service charges 0.5 Total current expenditure 531.2 Total service charges 84.5 /a Including refuse collection. I Excluding water services. /c Excluding elementary education fund. Sources: Budget documents of AMC and MMC. - 44 - Water and Sewerage 4.5 The diversity of institutional arrangements for water and sewerage was alluded to before. In Gujarat, the larger municipalities like Ahmedabad and Surat undertake the construction and operation of water systems; smaller municipalities also operate their water systems, but the construction of water systems is the responsibility of the state-level Gujarat Water Supply and Sewerage Board (MMWSSB). The situation is similar in Tamil Nadu, where the installation of water systems outside the main urban centers is carried out by the Tamil Nadu Water and Drainage Board (TWAD). In sharp contrast, the Kerala Water Authority (KWA) has state-wide responsibilities for the development and operation of water systems.39 There has been a tendency for the shift of responsibility for water supply to state-level agencies. 4.6 Examples of water authorities that cover their costs are hard to come b'y. The Madras Metropolitan Water Supply and Sewerage Board (MKWSSB or Metrowater) is perhaps one of the few water authorities that has managed to achieve modest operating surpluses in recent years (Table 4.2). To place this in proper perspective, it should be noted that Metrowater's capital costs are heavily subsidized: one-half of the capital funds provided by the State Government are in the form of grants, and loans are subject to terms more lenient than the market terms. A significant feature of Metrowater's revenue is that water and sewerage charges (including the sewerage surcharge on water charges) are much more important than water and sewerage taxes: the former bring more than 70 percent of the total revenue from water and sewerage charges and taxes. 4.7 The Ahmedabad Municipal Corporation (AMC), which has placed greater reliance on water taxes than on water charges, is facing a difficult situation because rising property tax litigation has depressed receipts from water taxes. The share of water taxes and charges in the financing of current expenditure on water, which amounted to about 40 percent in 1985/86, dwindled to less than 10 percent in 1989/90 (Table 4.3). The situat-ion is actually worse, since AMC's accounts are kept on a cash basis and no provision is made for depreciation. Concerned by the present situation, the AMC is examining the possibility of delinking the water tax from the property tax (see the next section). KWA was established in 1984; prior to that some local authorities owned their own water supply systems and others operated their own distribution systems. - 45 - Table 4.2: MMWSSB--STATEMENT OF INCOME AND EXPENDITURE, 1988/89 /a (million rupees) Income Water charges and the sewerage surcharge 187.6 Water and sewerage taxes 70.2 Grants and subsidies from the Government 1.6 Other income 9.7 Prior period adjustment 57.1 Total 326.2 Expenditures Operating and maintenance expenditure 48.7 Wages, salaries, etc. 121.7 Administration expenses 9.6 Depreciation 22.4 Interest payments 26.7 Provision for doubtful debts 8.0 Excess of income over expenditure 89.2 Total 326.2 /a Grants for drought expenditure of Rs 68.9 million and equivalent amount of expenditure excluded. Source: MMWSSB. Table 4.3: AMC -- EXPENDITURE ON, AND INCOME FROM, WATER SUPPLY SERVICES, 1985/86-1991/92 /a (million rupees) Income Expenditure Water Water Other Total Tax Charges 1985/86 24.8 3.5 0.1 28.4 67.5 1986/87 11.8 3.7 0.2 15.7 73.3 1987/88 0.2 3.1 0.1 3.4 84.6 1988/89 -0.1 5.2 0.2 5.3 99.0 1989/90 -0.1 11.0 0.1 11.0 132.2 1990/91 Revised 105.7 5.1 0.4 111.2 167.6 1991/92 Budget 110.2 11.1 0.4 121.7 215.0 /a Cash accounts; no provision made for depreciation. Source: AMC. - 46 - 4.8 The recently prepared accrual accounts (for the years 1985/86 to 1987/88) and data on cash flows suggest that only about 25 percent of the cost of water is recovered in Kerala. The picture is distorted by arrears of payments due by local authorities to the KWA. 4.9 Tariff structures of the metropolitan cities of the selected states (Table 4.4) capture most features of the wide variety of water tariffs to be found in Indian cities. !.i the recovery of cost of water, water charges are normally supplemented by taxes based on annual rental values. Water charges are invariably the lowest for domestic consumers and the highest for industrial consumers. Where there is no water metering, water charges are based solely on rental values, the number of connections, or ferrule size (diameter of the pipe that enters a building). 40 The levy of a sewerage surcharge on water charges is unusual in India. Lastly, though no longer a significant feature of the cities under consideration, a "free allowance" of water (defined in daily or monthly terms) for domestic consumers is widespread. 40 Charges for water are frequently based on ferrule size where water is available only for a few hours a day. - 47- Table 4.4: WATER AND SEWERAGE CHARGES AND TAXES IN AHMEDABAD, MADRAS AND TRIVANDRUM 1. Ahmedabad Water Charges Non-metered supply Domestic - 14% of annual rental value - Non-domestic - 19% of annual rental value Metered supply Domestic - Rs 1.50 per 1,000 litres Combined use - Rs 2.50 per 1,000 litres Non-domestic - Rs 4.00 per 1,000 litres for offices, nursing homes, guest houses, etc. Rs i0.00 per 1,000 litres for construction, factories, hotels, etc. Water Taxes 11% of annual rental value for all properties 2. Madras Water Charges Domestic consumers Non-metered supply - Rs 10 per connection Metered supply - Up to 50,000 litres, Rs 1 per 1,000 litres Above 50,000 litres, Rs 2 per 1,000 litres Commercial consumers Up to 50,000 litres - Rs 3 per 1,000 litres 50-100,000 litres - Rs 4 per 1,000 litres Above 100,000 litres - Rs 5 per 1,000 litres Industrial consumers Rs 7 per 1,000 litres Sewerage Charge A surcharge of 20% on the water charge for all consumers Water and Sewerage Taxes Water tax - 1.5% of annual rental value for all properties Sewerage tax - 5.5% of annual rental value for all properties - 48 - 3. Trivandrum Water Charges /a Domestic consumers Up to 10,000 litres - Rs 10 10-30,000 litres - Rs 10 plus Rs 1.50 per 1,000 litres in excess of 10,000 litres 30-50,000 litres - Rs 40 plus Rs 2 per 1,000 litres in excess of 30,000 litres Above 50,000 litres - Rs 80 plus Rs 3 per 1,000 litres in excess of 50,000 litres Non-domestic consumers other than industrial Up to 50,000 litres - Rs 3 per 1,000 litres with minimum charge of Rs 25 Above 50,000 litres - Rs 150 plus Rs 4 per 1,000 litres in excess of 50,000 litres Industrial consumers For entire consumption - Rs 5 per 1,000 litres with minimum charge of Rs 100 Water and Drainage Taxes Water tax - 3Z of annual rental value for all properties Drainage tax - 5Z of annual rental value for all properties /a The charges, which became effective from October 1, 1991, are uniform throughout the state. Note: Charges and taxes that relate to annual rental value are annual; all others are monthly. Sources: AMC, MMWSSB and KWA. 4.10 Economic efficiency requires that prices should be in line with marginal costs. In the case of water, this would imply, inter alia, that prices vary with the distance from the source of water (to take account of costs of distribution) as well as the time of day. Examples of strict application of marginal cost pricing in water are difficult to come by. In any case, given extensive water shortages and limited use of water metering, marginal cost pricing probably has little relevance in most Indian cities at this juncture. - 49 - 4.11 Some broad observations on the desirable characteristics of water tariff can be made, however. First, the main reliance should be on water charges that vary with consumption rather than on taxes based on annual rental values. Modest water taxes can be levied as a means of recovering the cost of water supplied at public standposts. Second, any differentials in water charges for different types of consumers should be moderate. Large differentials will not be in accord with economic efficiency because they would involve heavy subsidies for domestic consumers and, possibly, heavy taxation of industrial consumers.41 Third, the unit price of additional water should rise rather than fall with consumption for both economic and environmental reasons. In particular, bulk purchases should not be discounted because increased supplies of water are not infrequently associated with higher marginal costs. Fourth, service charges tied to water usage seem to be a suitable means of recovering the cost of sewerage facilities. Finally, in order to inculcate the habit of paying for publicly-provided services, the supply of a certain amount of water at nominal charges is preferable to the system of a free allowance. The amount provided at nominal charges should be high enough to provide a measure of assistance to the poorest families, but not so large as to weaken incentives for conservation for' the consumers. 4.12 Water metering is clearly necessary for the pursuit of proper price policies and improved cost recovery. Yet, in India, the coverage of metering is limited, and many cities have experienced difficulties with metering. Malfunctioning of meters in conditions of low water pressure, and poor quality of meters have been the main problems. 41 Prices higher than marginal costs would mean that industrial consumers were being taxed. Taxation of intermediate goods is not generally desirable. - 50 - Table 4.5: MMC--WATER METERING, AND REVENJES FROM WATER AND SEWERAGE CHARGES AND TAXES 1. Water Metering No. of Water Percent of Metered Connections /a Connections Domestic 124,558 Commercial 13,597 36 Industrial 313 68 Public authorities 53 94 Other non-domestic 2,442 52 Total 140,863 8 2. Receipts from Water and Sewerage Charges and Taxes Amount /b Percent of (million rupees) Total Water charges 158.4 61.4 Metered 129.6 50.3 Domestic (6.1) (2.4) Commercial (7.0) (2.7) Industrial (89.6) (34.8) Public authorities (16.2) (6.3) Public fountains (6.3) (2.4) Non-residential (4.4) (1.7) Unmetered 28.8 11.2 Domestic (1.3) (0.5) Other than domestic (18.9) (7.3) Other (8.6) (3.3) Sewerage surcharge 29.2 11.3 Water tax 15.0 5.8 Sewerage tax 55.2 21.4 Total 278100.0 /a 1991. /b 1988/89. Source: MMWSSB. 4.13 Trivandrum provides a good example of a city where problems with metering have stemmed from the poor quality of its meters. About one-half of - 51 - the meters, out of an estimated 85 thousand metered connections, are not in operation.42 4.14 By contrast, in Gujarat, it is the low terminal pressure that has been the main source of the problem. For example, water metering for domestic consumers was introduced in Bhavnagar in the 1940s. Initially, the system worked satisfactorily, except for some problems relating to the repair and maintenance of meters. However, in the 1960s, reflecting deterioration in the city's water supply, the water pressure began to decline. In this situation, the local authority had to give way to increasing demands of consumers to let them open the T-connection, which precedes the point where water meters are located. Metering for domestic consumption was discontinued in 1981. 4.15 Improper functioning of meters due to low water pressure was also the reason for the abolition of billing based on water metering for domestic consumers in Madras. Metering on a significant scale exists for industrial and other non-domestic donsumers and for public agencies, which account for a large proportion of receipts from water charges (Table 4.5). 4.16 Water metering is not only necessary for improving cost recovery, but its introduction also presupposes the presence of realistic prices for water. Water metering can seem intolerably costly if evaluated on the basis of subsidized prices. A study for Gujarat placed the annual capital and maintenance costs of a meter at Rs 60 (or Rs 5 per month) in 1984 (Table 4.6). Meters for domestic purposes presently sell for Rs 410, implying an increase in the relevant monthly cost from Rs 5 to about Rs 7.50. Now, a family of five cunsuming 30,000 litres per month (200 litres per capita per day) and paying water charges of Rs 1 per 1,000 litres would be billed for water charges of Rs 30 per month. If this family were to pay for the cost of a meter, its monthly charges would increase by 25 percent (from Rs 30 to Rs 37.50). Water for domestic consumers is underpriced because of the partial recovery of costs of water production and cross-subsidization by industrial and commercial consumers. 42 KWA is sponsoring privately-managed meter servicing stations. Each station is responsible for the maintenance of about 3,000 meters and is paid Rs 1 per meter per month. 43 The use of a sinking fund factor by ORG underestimates the annual capital charge. Capital costs can be annualized more directly by thinking in terms of simple annuities. - 52 - Table 4.6: ANNUAL COST OF WATER METERING PER CONNECTION (rupees) Capital cost of a meter (domestic) 175 Cost of installation 115 Estimated life of the meter 7 years Annual capital costs (domestic connections) Replacement cost of the meter 18.15 /a Cost of installation 11.93 /a Total 30.08 Annual cost of operation and maintenance (domestic and non-domestic connections) Cost of spares 6.85 Cost of removal, repair and reinstallation (staff and labor) 10.28 Cost of meter reading 7.90 Overheads (including rent of a godown, electricity charges, etc.) 5.00 Total 30.03 Total annual cost (1984 prices) 60.11 /a Calculated at 10 percent interest for seven years using a sinking fund factor. Source: Study on Feasibility of Water Metering in Gujarat (Operations Research Group, Baroda, 1984). 4.17 The related problems of water metering and pricing need to be viewed in a dynamic context. Water is a costly service to provide. Underpricing it will not only encourage waste, but also increase future investment requirements. Therefore, the question that increasingly needs to be asked is not whether universal water metering should be adopted, but how the problems encountered with metering can be overcome. A comprehensive picture of the successes and failures of water metering in the country and their causes is badly needed; such a review should include cities such as Bangalore and Hyderabad, where metering is said to have worked satisfactorily. - 53 - Service Charges 4.18 Service taxes based on annual rental values mirror all the defects of property taxes: they tend to differ greatly for similar properties with different standard rents and, reflecting infrequent revisions of standard rents, they tend to be inelastic. Therefore, service charges delinked from annual rentdl values, and based on actual consumption, are to be preferred to service taxes levied as part of the property tax. 4.19 A proposal to delink water and conservancy taxes from the property tax, c-rrently under consideration by the Ahmedabad Municipal Corporation, is worth meL,tioning. The proposal has been prompted by two events: growing litigation in connection with property tax assessments, which has raised pending appeals against the corporation to over 45 thousand; and an increase by the State Government in the exemption level for the property tax from the annual rental value of Rs 300 to Rs.600, which has reduc6d properties subject to tax by about one-third. Partly due to these factors, residential properties presently account for only one-quarter of receipts from the general property tax and the water and conservancy taxes. To improve the magnitude and flexibility of revenue from residential properties, the Ahmedabad Municipal Corporation is exploring the possibility of abolishing the general property tax for residential properties and replacing the water and conservancy taxes by a service charge based largely or wholly on the "carpet area" of properties. Some believe that such an approach cannot withstand legal challenges. However, previous judicial decisions are no guide to the outcome since they related to the levy of general property taxes (and not service taxes) on the basis of physical characteristics of buildings. 4.20 Where service taxes cannot be completely delinked from property taxes, should they be levied at a single consolidated rate (or absorbed into property taxes) or at separate rates for different services? The National Commission on Urbanisation and the more recent Expert Committee on Property Tax in Delhi both favored a consolidated rate. Despite this, the identification of a tax rate for each service would seem to have advantages over a consolidated rate. (i) Separate service taxes help to identify the extent of cost recovery for each service through taxes. (ii) Full range of services are not provided in all urban centers; this is particularly true of sewerage systems. With separate taxes for different services, new taxes can be levied whenever more services are made available. (iii) In cities where water boards are responsible for water supply and sewerage services, receipts from water and sewerage taxes are transferred to them by local bodies. Such an arrangement might have been more difficult to adopt under a consolidated rate. - 54- Urban Land Development 4.21 Urban growth will continue to be associated with demand for substantial serviced land for residential and business facilities, and for public amenities. This will require large investment in infrastructure. In the past, the undertaking of large-scale land development projects by public agencies was seen as a means of mobilizing the needed resources. However, this policy has not helped to increase the supply of serviced land significantly. To increase the supply of financing for land development projects, the potential of serviced land itself to generate larger resources needs to be explored. In this connection, development and related charges, and town planning schemes are briefly discussed. The former are levied by development autho:ities: the latter provide a mechanism for recovering the cost of land development projects without large-scale land acquisition. 4.22 Except where strong development authorities exist, such as the Madras Metropolitan Development Authority (MMDA), municipalities are largely responsible for town planning and urban development. Besides being responsible for the planning and regulation of development, the MMDA undertakes special projects (e.g., the iron and steel market at Sathangadu). rhe main resources of MMDA come from a grant for staff costs from the Government, sale of land and buildings under its projects, and loans from HUDCO; these are supplemented by development and related charges (Statistical Appendix, Table 33). The development authorities in Gujarat, which have yet to levy even development charges, and those in Kerala possess limited resources and responsibilities. 4.23 Development and Related Charges. The following sources of MMDA's receipts are worth describing: development charges, open space reservation charges, regularization charges, and contributions from local bodies. 4.24 Development charges, which vary with the nature of the change of use of property as well as its area (Table 4.7), are payable when planning permission is sought. An open space reservation charge is payable on developments of between 3,000 to 10,000 sq.mt.; on larger developments, the developer is obliged to provide 10 percent of the area as open space. Regularization charges, which range from Rs 5 per sq. mt. for village panchayats to Rs 15 per sq. mt. for the George Town area, are levied when layouts violating guidelines are regularized. Finally, local bodies are required to contribute one percent of their tax revenues to the MMDA. 4.25 Charges such as these help to recoup part of the administrative costs of granting planning permissions and are worth considering by other development authorities. MMDA raises about Rs 30 million annually from the above charges. Building permission fees in Trivandrum bring negligible revenues. 44 The Urban and Land (Ceiling and Regulation) Act, 1976, is partly to blame for the insufficient increase in serviced land. State Governments have been unable to acquire much vacant land for a variety of reasons, including financial. And owners of land in excess of specified ceilings are not permitted to build on it. - 55 - Table 4.7: DEVELOPMENT CHARGES IN MADRAS AND BUILDING PERMISSION FEES IN TRIVANDRUM (rupees) Land Building per sq. mt. per sq. mt. 1. MMDA - Development Charges /a (i) First change of use to: (a) residential 0.60-1.00 1.50-2.50 (b) industrial 0.90-1.50 2.25-3.75 (c) commercial 1.20-2.00 3.00-5.00 (d) miscellaneous 0.40-0.67 1.00-1.67 (ii2 Second and subsequent changes from: (a) residential to industrial /b 0.30-0.50 0.75-1.25 (b) residential to commercial /c 0.60-1.00 1.50-2.50 (c) miscellaneous to residential 0.20-0.33 0.50-0.83 (d) miscellaneous to commercial 0.80-1.33 2.00-3.33 (e) all changes of use 0.06-0.10 0.15-0.25 2. TRIDA - Building Permission Fees /d (i) Residential (a) ground floor 4 per 10 sq. mt. (b) first floor 8 per 10 sq. mt. (c) second floor 15 per 10 sq. mt. (d) third floor 20 per sq. mt. (ii) Industrial (a) ground floor 5 per 10 sq. mt. (b) first floor 10 per 10 sq. mt. (c) second floor 20 per 10 sq. mt. (d) third floor 30 per sq. mt. (iii) Compound wall 30 per running meter (iv) Transfer of land 20 per transfer (v) No objection certificate 20 per applicant /a Lower charges apply to areas wherL "economically weaker" population resides. /L) Also applies to change from industrial to commercial and vice versa. /c Also applies to change from miscellaneous to industrial. /d The fees are unilorm throughout Kerala. Sources: MMDA and TRIDA. - 56 - 4.26 Town Planning Schemes. Town planning schemes have been used in Gujarat and Maharashtra mainly to develop land for private sector development. Declaration of areas as "town planning schemes" enables local bodies or development authorities to acquire land for community purposes (e.g., schools, markets, open spaces) and to readjust private plots to fit the new layouts. Basic infrastructure such as roads, water supply, drainage and street lighting is provided, and landowners are charged a betterment fee (which is reduced for landowners from whom land is acquired). 4.27 The costs of town planning schemes include: expenses incurred in the preparation of the schemes; costs of construction of infrastructure and public facilities; compensation for land reserved or designated for public purposes; and legal expenses incurred in the preparation and implementation of the schemes. Up to one-half of the estimated in,rement in land value can be recovered as betterment charges, provided this amount-does not exceed the cost of the scheme. Betterment charges must be paid in a lumpsum or in ten annual installments at a specified interest rate. There is no provision for repayment in kind, i.e., in land contributions. 4.28 Despite the potential for full cost recovery, most town planning schemes generate deficits, necessitating the diversion of municipal resources for their completion. As will be seen from Table 4.8, selected schemes in Gujarat and Maharashtra generated deficits amounting to 23 to 46 percent of total costs. The main reason for this is that although town planning schemes take at least five to eight years to implement, their estimated costs do not provide for the escalation in costs due to inflation and other factors. In fact, when cost overruns are taken into account, deficits for most schemes may be close to or above one-half of total costs.46 46 A more recent evaluation of three schemes in Gujarat placed the share of betterment tax in the actual costs of infrastructure development at 10-20 percent. See Meera and Dinesh Mehta, "Housing Finance Systems in Metropolitan Areas of India" (School of Planning, CEPT, Ahmedabad, 1989). - 57 - Table 4.8: FINANCIAL ASPECTS OF SELECTED TOWN PLANNING SCHEMES -- MAHARASHTRA AND GUJARAT Maharashtra Gujarat Case 1 Case 2 Average ia Case 1 Case 2 1. Area of scheme 146 48 162 133 167 (hectares) 2. Total cost of scheme (lakh /b rupees) 40.5 10.6 18.9 137.1 104.2 3. Cost of evelopment (lakh rupees) 36.4 6.7 11.3 57.5 80.6 4. Investment contribution from owners (lakh rupees) 31.3 6.2 10.3 99.5 73.3 S. Deficit surplus (4-2) (lakh rupees) -9.2 -4.4 -8.6 -37.8 -30.9 8. Deficit as percent of total cost -22.7 -41.5 -45.5 -27.5 -29.6 7. Actual deficit as percent of total cost /S -4L.9 -58.6 -80.6 -42.0 -50.9 /a An overage based on estimates of 34 schemes in Maharashtra. /b Lakh = 100,000 rupees. /Z Estimated by the author taking account of inflation and other factors. Source: Chetan Vaidya, 'Town Planning Scheme as a Technique for Urban Land Management in Indiaw, Nagarlok, October - December 1984. 4.29 Schemes of betterment taxation must embody a number of features for full cost recovery. First, the cost of the scheme must be estimated with reference to the date of completion of the scheme, and not the date of its commencement. The law in Gujarat has been amended to provide for this. Second, the estimate of appreciation in land value should also be with reference to the date of completion. The increment is at present taken as the difference between market values of the plot with and without improvements at the date of the declaration of the scheme. One way of overcoming these problems would be to provide for more realistic timing for the implementation of the schemes and to take account of expected annual inflation. Third, total costs of a scheme should make provision for costs of off-site infrastructure. Most schemes will utilize the services of off-site infrastructure (e.g., a water treatment plant), even if they do not necessitate further investment in such infrastructure. Fourth, where payments of betterment charges are made in installments, market rates of interest should apply. Finally, requiring partial or complete payment of betterment charges in the form of land, for its subsequent sale for industrial or commercial purposes, would improve the financial viability of town planning schemes. An amendment in Gujarat's laws (Section 40(2)(ii)) permits the acquisition of land for industrial and commercial purposes. 4.30 Given the generally high cost of land development projects, limited financial resources of local bodies, and the inability of user charges to cover current costs of services, let alone contribute to their capital costs, 46 See the Gujarat Town Planning and Urban Development Act, 1976, Section 77(b). The amendment was introduced in 1986. - 58 - betterment charges need to be more widely used. Betterment charges must, however, be so structured that they help recoup the full costs of land development. The financial burden could also be eased by relying more on private developers than has been the case in the past. Urban Bus Transport 4.31 The operation of bus services in the different states presents an even more varied picture than the arrangements concerning water supply. In Gujarat, bus services in Ahmedabad, Bhavnagar and Jamnagar are run by the municipal corporations, while those in cities such as Baroda, Rajkot and Surat are managed by a state-level institution, the Gujarat State Road Transport Corporation (GSRTC). The municipal-managed services, including the Ahmedabad Municipal Transport Service (AMTS), are operated as departmental enterprises and not as companies or corporations. In Tamil Vadu, several state-owned bus companies have been established since.the early 1970s, following the State Government's decision to nationalize bus transport. The largest, the Pallavan Transport Corporation Ltd. (PTC), operates bus services in the Madras metropolitan area; originally part of the PTC, the Tiruvalluvar Transport Corporation provides long-distance express services throughout the state. The private sector is largely responsible for passenger transport in Kerala, where the Kerala State Road Transport Corporation (KSRTC) is the only public bus company. 4.32 Most, if not all, municipal and state-owned urban bus services incur losses. The PTC suffered a loss of Rs 156 million in 1989/90, the highest in recent years. The recent losses of AMTS and KSRTC have amounted to Rs 68.7 million (1989/89) and Rs 195.7 million (1989/90), respectively. 4.33 The PTC incurs a loss in most years (Table 4.9). A major reason for PTC's poor financial performance is that bus fares have tended to lag behind increases in personnel and fuel costs, which account for two-thirds of its operating costs. Bus fares are determined by the State Government and not the PTC. Social polfcies pursued by successive Governments at the state level have also affected the company's finances; the PTC has not always been compensated fully for the concessional fares for students and other groups introduced at the Governments' requests. - 59 - Table 4.9: PTC--OPERATIONAL AND OTHER STATISTICS Income Expenditure Profit/Loss Minimum - Maximum Fares (paise) (million rupees) 1980/81 470.8 572.8 -102.0 25 - 140 /a 1981/82 613.2 729.7 -116.4 30 - 155 /b 1982/83 637.5 719.1 -81.6 30 - 155 1983/84 614.0 648.0 -34.0 30 - 155 1984/85 590.0 661.0 -70.9 30 - 155 1985/86 727.3 721.8 5.5 40 - 175 /' 1986/87 750.4 *799.2 -48.7 50 - 195 Id 1987/88 . 876.9 904.2 1-27.3 50 - 200 1988/89 976.4 1006.1 -29.7 50 - .200 1989/90 989.8 1145.9 -156.2 50 - 250 /e /a From November 17, 1980. /b From June 6, 1981. /c From April 1, 1985. /d From March 18, 1987. /e From October 1, 1989. Source: PTC. 4.34 The reasons for the losses of public bus services in Gujarat and Kerala are similar. For Gujarat, it is interesting to note that GSRTC-managed buses charge slightly higher fares (Rs 1 to Rs 3) than municipal-managed buses (75 paise to Rs 2.25 in Ahmedabad, for example). However, all bus services incur losses, irrespective of the mode of management (Table 4.10). - 60 - Table 4.10: FINANCIAL PERFORMANCE OF CITY TRANSPORT UNDERTAKINGS IN GUJARAT, 1988/89 (million rupees) Municipal-managed GSRTC-managed Ahmedabad havnagar Jamnagar Baroda Rajkot Surat Gross earnings 252.9 3.9 7.4 45.6 18.0 39.1 Traffic earnings 219.1 n.a. 7.4 41.3 14.1 35.6 Miscellaneous earnings 33.8 n.a. - 4.3 1.9 3.5 Total costs 321.5 13.6 9.3 67.7 26.8 53.4 Operating costs 274.2 n.a. 7.8 61.5 26.4 48.7 Salaries (173.2) (4.3) (4.5) (28.0) (12.7) (26.9) Fuel, lubrica'nts, etc. (67.1) n.a. (2.1) (13.3) (5.1) (11.9) Taxes (5.5) n.a. (0.1) (1.2) (0.5) (1.3) Depreciation . (10.7) n.a. (0.9) (1.6) (0.5) (1.6) Other costs /1 (17.8) n.a. (0.2) (17.4) (6.7) (7.9) * Non-operatine- costs /b 47.3 n.a. 1.5 6.2 1.2 4.7 Surplus/deficit -68.7 -7.8 -1.9 -21.1 -10.6 -14.3 /a Rent, electricity, water charges, etc. /9 Interest, Insurance, etc. Sources: The respective municipalities. 4.35 Considerations of econcmic efficiency and traffic congestion have played a lesser role in the pricing policies for public urban transport in India than soc:Lal considerations. The policy of subsidizing bus riders is unlikely to be su'tainable in most cities due to rapidly rising operating costs of bus transport, and growing financial stringency at the municipal and state levels. The object of future pricing policies should be to cover operating costs and to provide for part of the resources needed for capital development. Potential financial burdens could also be reduced through partial or complete privatization. Few municipal services are as suitable for privatization as bus transport. Involvement of the Private Sector and the Community 4.36 Many of the services provided by local bodies, especially water and transport are in essence private goods: user charges can be levied for them, and the benefits can be withheld from consumers who do not pay for them. It is, therefore, to be expected that lacunae in local services would be filled by the private sector and the community where feasible. This, indeed, has been the case. This section provides a few examples of private and community initiatives in the delivery of urban services. 4.37 Overall, private involvement in water supply and sewerage is low, but that in urban bus transport and solid waste management is substantial. Major - 61 - water and sewerage systems are invariably managed by the public sector; however, the private sector is involved in providing on-site water and sewerage works in some states, and in the distribution of water, through tankers and other means.47 Urban bus transport in some states (e.g., Gujarat and Madras) is nationalized, while in others it is provided largely or wholly by private bus companies. So far as solid waste is concerned, its disposal is mostly the responsibility of the public sector, but many examples of the private sector's involvement in its collection and transportation can be found. 4.38 The Calcutta Metropolitan Area (CMA) provides a good example of an area where private buses are not only important in bus transport but in urban transit generally. Urban transit in CMA includes all conceivable modes of transport, including buses, mini buses, trains, metro railway, suburban railway and ferry services. Of an estimated 12 million transit trips taken daily, about 8.3 million are by buses; private buses account for 90 percent of all bus trips. Private buses were not always so important. In fact, in 1955, the State Government decided to nationalize private bus transport over a five-year period. In 1960, the Cal6utta State Transport Corporation was established and private buses were prohibited from operating in the city. Deterioration in bus services prompted lifting of the ban on private buses in 1966; private mini buses have been permitted to operate since 1972.48 4.39 The possibilities for privatization in solid waste management have also been utilized in some cities. In Bombay, for example, most solid waste is transported by private contractors; tenders are invited from private transport contractors each year for this purpose. For its more distant residential areas, Surat uses private contractors for the collection, transportation and disposal of garbage; some 25 percent of the solid vaste generated in the city is managed in this manner. 4.40 The important role that voluntary associations can play in supplementing municipal services is brought out by the activities of Civic Exnoras in Madras. These associations bring together groups of residents willing to spend modest sums to have their streets cleaned and refuse collected. About 15 thousand households are covered by the 170 Civic Exnora schemes that operate in the city. The operation of the schemes is relatively simple. Each group decides the monthly contribution per household, which ranges from Rs 25 to Rs 50. A ragpicker is then selected, and a loan is arranged for him to purchase a tricycle cart. The ragpicker's responsibilities are to sweep the streets, and to collect the garbage and deliver it to the corporation's garbage dump. The schemes have contributed greatly to the cleanliness of participating neighborhoods.49 See P.S.N. Rao, "Private Sector Involvement in Urban Water Supply Provision". 48 For further details, see S.K. Roy, "Urban Services: The Calcutta Experience", Urban India, July - December 1988. 49 See Mukund Padmanabhan, "Clean Sweep--A Novel Scheme to Keep Madras Clean Proves Remarkably Successful", Sunday, 31 March - April 6, 1991, pp. 44-45. - 62 - 4.41 The private sector is not only playing a significant role in the provision of some types of urban services, but its role has also been growing. The same applies to voluntary agencies and citizen groups. Even so, the financial difficulties being experienced by local authorities in providing the most basic urban services mean that the invol%!ment of non-governmental bodies in the provision of urban services must inevitably be much larger in the future. Despite this, little thought has been given in India to either the possible areas of such involvement or to the measures needed to bring about the increased involvement. It is probably not coincidental that the National Commission on Urbanisation had little to say on the private sector. Policies on the possible future role of the private sector and non-governmental organizations in the supply of urban services needs early attention from the Central, State and municipal governments. Conclusions 4.42 The issues of cost recovery point to four broad conclusions. First, special attention needs to be given to cost recovery for water, sewerage, bus transport and land development. Second, user charges for services should be delinked from property taxes and levied with reference to consumption to the extent possible. The distortions in property taxes created by rent controls should not be imported into user charges. At the very least, water should be metered and charged according to consumption. Third, prices should not only generally cover costs, but should also be revised annually in the light of inflation. Infrequent price revisions are giving rise to deficits that are unsustainable. Indexation of user charges may help insulate them from political pressures; the creation of state-level bodies such as water boards has certainly not done so. Efforts to improve cost recovery are more likely to be successful if accompanied by greater efficiency in the delivery of iervices. Finally, the private sector, voluntary organizations and citizens' groups should be encouraged to increase their participation in the delivery of urban services. The quality of urban services in a large number of local bodies will depend on the success attained in achieving this participation. - 63 - CHAPTER 5: STATE ASSISTANCE TO MUNICIPALITIES 5.1 Deficiencies in the existing service levels and the continued rapid growth of urban population can be expected to result in a steady increase in the financial requirements of urban local bodies. These must be met in the first instance by a better use of existing resources and through additional resource mobilization. However, even if the major reforms needed to raise substantial further resources from the property tax and user charges are undertaken in a timely fashion, available resources may fall short of the requirements for some time. Consequently, the role of state transfers and loans in financing municipal outlays is likely to increase in the near term. Designing state assistance on the basis of appropriate principles, therefore, deserves early attention. 5.2 This chapter reviews the prevailing systems of transfers in the three states that have received special attention in the study, as well as in Maharashtra and West Bengal. The arrangements in these states are sufficiently heterogeneous to give a good indication of the nature of issu s nationwide, Against this background, the advantages and disadvaniages of dif 3rent ways of transferring resources to the municipa'lities are briefly examined. A review of the planning and financing of capital expenditures follows. Based on these discussions, some broad conclusions for improving the systems of assistance to municipalities are drawn. State Government Transfers to Municipalities: Present Arrangements 5.3 Gujarat. Gujarat is among the few states that have attempted to put fiscal transfers from State Governments to urban local bodies on a more systematic basis by evolving a grants-in-aid code. The code, first formulated by the Grants-in-aid Code Committee (1962-64), has been modified from time to time, most recently by the High Level Committee (1988). Gujarat's present system of transfers is characterized by high reliance on specific grants, limited use of block grants and tax sharing (i.e., transfer of a proportion of revenues from certain taxes to municipalities), and a complete absence of tax assignment (i.e., transfer of certain taxes to municipalities for levy by them) .60 Grants for current purposes finance only about 20 percent of the municipalities' current expenditures. 5.4 General purpose transfers consist of grants based on land revenue (tax), per head grants, and incentive grants (Table 5.1). Fifteen percent of land revenues collected within municipal corporations and 35 percent collected within municipalities are passed on to the respective local bodies; similarly, 75 percent of the land revenue on non-agricultural land collected in municipalities (but not municipal corporations) is passed on to them. The per head grant is payable at the rates of Rs 1, Rs 1.50 and Rs 2.50 per capita to class A. B and C municipalities, 61 respectively. So Strictly, the property tax is an assigned tax. However, since it has been assigned to municipalities in all the states, it is best considered as a municipal tax. 51 Urban local bodies are classified into municipal corporations and municipalities of class A, B and C. Municipalities with population above 100,000 are classified as A class, those with population of between 50,000 to 100,000 as B class and those with population of under 50,000 as C class. - 64 - Table 5.1: AVERAGE ANNUAL SHARED TAXES AND GRANTS TO URBAN LOCAL BODIES IN GUJARAT, 1983/84 - 1986/86 (thousand rupees) Municipalities Municipal Corporations Annual Average Percent Annual Average Percent Grant of Total Grant of Total General Purpose Transfers 1. Per head grant 1,209 0.8 - 2. Grant from non-agricultural assessment 1,843 1.1 - - 3. Grants from land revenue and irrigation cess 1,807 1.2 3,161 2.0 4. Incentive grants 3,460 2.3 - - Specific Purpose Grants 1. Grants for dearness allowance 24,067 15.9 - 2. Primary education grant 60,411 40.1 117,022 73.7 3. Education cess 6,886 4.4 24,353 15.3 4. Secondary education grant 1,433 0.9 - - 5. Grants-in-aid for construction of 1,647 1.1 20 dispensaries and hospitals 8. Grants-in-aid for maternity homes and hospitals 72 7. Grants-in-aid for maternity homes and child welfare centers 95 0.1 - 8. Grants-in-aid for buildings and equip- ments of hospitals, child uelfare centers, maternity homes 1,246 0.8 - 9. Grants-in-aid for the appointments of health and sanitary inspector 72 0.1 - - 10. Grants-in-aid for mosquito control 2,623 1.7 1,428 0.9 11. Grants-in-aid for anti-epidemic measures - - - - 12. Grants-in-aid for water supply and drainage 4,030 3.3 - 13. Grants-in-aid for conversion or dry latrines into water borne ones 218 0.1 - 14. Grants-in-aid for the purchase of wheel barrows and land carts 22 15. Grants-in-aid for construction of conservancy staff quarters 44 18. Grants-in-aid under the Bombay Motor Vehicles Act, 1968 22 - - 17. Grants-in-aid for construction and maintenance of roads 363 0.2 675 0.4 18. Grants-in-aid from fines realized in cases under the Municipal Acts tried by magistrates 194 0.1 - - 19. Grants from Entertainment Tax 37,264 24.7 12,123 7.6 Total Transfers 150897 100.0 168,772 100.0 Source: Re?ort of the High Level Committee on the Financial Problems of Urban Local Bodies (Government of Gujarat, 1988). 5.5 The incentive grant seems to be given to encourage resource mobilization and economies in spending. The determination of the grant takes into account per capita own current revenues, the ratio of current and previous year's arrears (of tax payments) to collections of all taxes except octroi, and the share of personnel costs in total expenditure. The fulfillment of performance requirements, which vary by type of municipality, is judged by assigning scores to each of the factors. A municipality scoring more than 60 percent receives, - 65 - as an incentive grant, an amount equal to 60 percent of certain grants (per head grant, non-agricultural assessment grant, land revenue grant, road maintenance grant and the grant for salaries) received in the previous year. Municipal corporations are not eligible for per head and incentive grants. 5.6 The main specific grants consist of grants for primary education, grants for dearness allowances, and payments of the education cess. Admissible salaries paid to primary school teachers are reimbursed to the extent of 75-85 percent to municipal corporations and 90-100 percent to municipalities, depending on the collection performance with respect to the education cess.52 The education cess is a State -Government tax on land and buildings collected by local authorities; one-half of the proceeds are retained by the local authorities as grants. 5.7 The grant for dearness allowances, which finances part of the salaries, is available to all municipalities except municipal corporations. Previously, 50 percent of the dearness and additional dearness allowances paid to municipal employees were reimbursed by the State Government. From April 1990, one-third of total emoluments (excluding those paid to education and health staff) are paid as the dearness allowance grant, subject to the overall restriction that emoluments do not exceed 45 pdrcent of a municipality's total budget. 5.8 A unique feature of Gujarat's transfer system is that a tax--the entertainment tax--is shared with municipalities not for current purposes but for capital purposes.53 Fifty percent of the proceeds from the entertainment tax (about Rs 123 million in 1989/90) are transferred to the Gujarat Municipal Finance Board (GMFB) for distribution to the municipalities. Established in 1976, the GMFB has the responsibility for making grants and loans to municipalities from the resources provided by the State Government; the Board is also expected to make recommendations to the State Government every five years concerning principles that should govern grants-in-aid payable to urban local bodies. 5.9 The GMFB utilizes an elaborate formula. Of the amount available for distribution, 75 percent is allocated for grants for priority projects (water 52 The rate of reimbursement of salaries depends on the ratio of recovery of the education cess due, as follows: Rate of Reimbursement (Z) Rate of Recovery (Z) Corporations Municipalities under 60 75 90 60-70 80 95 over 70 85 100 s3Another capital grant, the small savings scheme grant, though of much lesser importance, also has interesting features. The Central Government transfers 75 percent of net collections from small savings schemes to State Governments. Ten percent of the state's share is passed on to the districts that have achieved targets set for small saving collections. These districts, in turn, pass on 25 percent of the amount to urban local bodies (on the basis of origin) and 75 percent to rural local bodies. - 66 - supply, sewerage, roads and street lighting), 15 percent for grants for special projects of lesser priority, and the remaining 10 percent for a revolving fund for loans. 5.10 The allocation of grants for priority projects is best seen as a two- stage process. In the first stage, the relative weights and allocations for each of the four categories of municipalities are determined, as illustrated in Table 5.2. As will be seen, the population figures of the four categories of municipalities are multiplied by factors that vary with the category, and the resulting relative weights are taken as the weights for the allocation of grants. This procedure ensures that per capita grants vary inversely with the population of municipalities (i.e., lowest per capita grants for the corporations and the highest for the C grade municipalities). Although municipal corporations account for 60 percent of urban population, they are allocated about 20 percent of capital grants. Table 5.2: DETERMINATION OF WEIGHTS FOR THE ALLOCATION OF GMFB GRANTS FOR HIGH PRIORITY PROJECTS No. of Population Weights Based Population Final Weights Towns (million) on Size of x Size Municipality Factor i P; C P;ip ';cC Municipal Corporations 6 5.083 1 5.083 0.1962 A Class Municipalities 6 0.699 4 2.798 0.1074 B Class Municipalities 22 1.449 8 8.694 0.3338 C Class Municipalities 34 1.184 8 9.472 0.3838 68 8.415 26.045 1.0000 5.11 At the second stage, the amount determined for .each category is allocated among the municipalities within that category. Within each category, 40 percent of the grant is allocated on the basis of relative population, 15 percent on the basis of relative area, and 20 percent on the basis of per capita revenue excluding grants (i.e., per capita revenue of a municipality in relation to the sum of per capita revenues of all municipalities within that category). The allocations thus derived represent potential grants available; grants are made only for projects that are approved. 5.12 Grants for special projects cover part of the project costs and require matching contributions from the municipalities--two-thirds of project costs from corporations and A class municipalities, one-half from B class municipalities and one-third from C class municipalities. Grants for priority and special projects not utilized in a given year are carried over until the end of the relevant plan period, after which they lapse. 5.13 The revolving fund for loans is meant for providing short-term bridge finance. The fund has not been adequately used; it has been proposed that it - 67 - should be discontinued for a few years, and the relative share of special project grants should be increased from 15 percent to 25 percent. 5.14 What can be said of this system of transfers? Equalization as an objective has not received as much attention in current transfers as in capital transfers. Per capita current expenditures in municieal corporations are about twice as high as in other local bodies (Table 5.3).5 The negligible reliance on block grants, the sharing of tax revenues on the basis of origin, and the limited differentiation in the matching ratios68 for specific grants for the different classes of municipalities cannot be ex ected to narrow disparities in the levels of services to a significant degree. Transfers to municipalities based on collections of revenues from their respective areas (that is, allocations based on the "origin" or "derivation" principles) will be normally biased in favor of the relatively wealthy municipalities. 5.;5 The formula for capital grants, by its imaginative use of the composite weight for size (i.e., p,c,), has ensured that per capita capital grants vary inversely with size. However, with their better access to Government and institutional loans, municipal corporations still manage to achieve per capita capital outlays three times those of other local bodies. Transfers are considered equalizing or equitable for the purposes of this study if the relatively poor municipalities receive higher per capita transfers than the relatively rich municipalities. Rigorous definitions of equalization that take account of the needs and tax bases of local authorities will be found in Richard A. Musgrave, "Approaches to a Fiscal Theory of Political Federalism", in Public Finances: Needs, Sources and Utilization (National Bureau of Economic Research, Princeton University Press, 1961). ss Care is needed in interpreting statistics for education because while corporations provide primary education, not all municipalities do so. 6 The matching ratio for a service is defined as the share of total expenditure on that service financed by the State Government. 6 Suppose two municipalities spend Rs 200 and Rs 100, respectively, on a service. A specific grant of 50 percent of expenditures to the former and 75 percent of expenditures to the latter would mean per capita grants of Rs 100 and Rs 75, respectively. Thus, even with a lower matching ratio, the relatively better-off municipality gets higher per capita grants. - 68 - Table 5.3: PER CAPITA REVENUES AND EXPENDITURES OF URBAN LOCAL BODIES IN GUJARAT, 1988/89 (rupees) Municipal A Class B Class C Class Corporations Municipalities Municipalities Municipalities. Current revenue 421.7 208.7 216.4 161.8 of which: octroi 212.5 84.9 72.3 63.1 property tax 89.0 40.0 34.7 24.0 education grant 63.6 37.0 35.0 23.8 other grants 4.2 19.2 23.9 20.9 Cuirent expenditure 393.3 189.1 200.3 171.8 of which: primary education 83.4 39.4 34.4 28.9 Capital expenditure 86.2 28.3 32.5 24.5 financed by: capital grants 8.7 18.2 22.9 26.6 Government loans 26.6 4.6 11.2 12.2 other loans 61.0 0.3 1.7 0.4 Source: Gujarat Municipal Finance Board, Ahmedabad. 5.16 Kerala. A distinctive feature of transfers in Kerala is the emphasis on tax assignment. Comprehensive data indicate that revenues from assigned taxes and grants, mostly specific in nature, were equivalent to 40 percent and 12.5 percent, respectively, of current revenues of urban local bodies in 1985/86 (Statistical Appendix, Table 18). More recent data, which unfortunately exclude municipal corporations, are consistent with this pattern of transfers (Table 5.4). - 69 - Table 5.4: CURRENT REVENUES OF MUNICIPALI7IES /a IN KERALA, 1989/90 Thousand Percent of Rupees Total Tax revenue 273,261 55.3 Property tax 156,443 31.7 Profession tax 15,020 3.0 Entertainment tax 82,651 16.7 Surcharge on stamp duty 17,251 3.5 Other taxes 1,896 0.4 Own non-tax revenue 127,262 25.8 State transfers to municipalities ' 93,377 18.9 General purpose transfer 14,408 2.9 Vehicle tax compensation 47,500 9.6 Other 30,469 6.4 Total current revenue 493,900 100.0 /a Excluding the Mui.icipal Corporations of Trivandrum, Calicut and Cochin. Source: Directorate of Municipal Administration, Trivandrum. 5.17 Assigned taxes consist of the entertainment tax, the professions tax and the duty on transfers of property (surcharge on stamp duties). The first two taxes are administered by urban local bodies, which retain the full proceeds from them. Under the Entertaiinment Tax Act, 1961, local bodies may levy an entertainment tax of up to 30 percent of the admission fee to cinemas. All urban local bodies presently levy the tax at the maximum rate; in addition, they also levy a surcharge of 60 or 65 percent on the entertainment tax. The maximum rate for the levy of profession tax has been raised to Rs 2,500 per year from August 1990 in consonance with the constitutional amendment. The Kerala Stamp Act, 1959, permits the urban local bodies to levy surcharges on stamp iuties on specified instruments relating to immovable property situated in their areas; the tax rates cannot exceed 4 percent of the value of property. 5.18 The only general purpose grant is the fixed per capita grant payable at different rates to different types of municipalities. The rate for municipal corporations and grade I municipalities is Rs 2 per capita, for grade II municipalities Rs 2.50 per capita and for grade III municipalities Rs 3 per capita. The conditions of eligibility for the grant are not very strict. According to the Kerala Municipal (General Purposes Grant-in-Aid) Rules, 1966, 80 percent of the grant is payable without any conditions, but the remaining 20 percent is subject to satisfactory revenue performance by the local authority concerned. The resource effort is considered satisfactory if corporations and major municipalities (first and second grade) have a per capita annual income of - 70 - Rs 15 and other municipalities Rs 10. For municipalities whose annual incomes fall short of these requirements, the revenue effort is considered satisfactory if their income increases by at least 7 1/2 percent over the previous year's income. 5.19 The largest specific grant is the vehicle tax compensation grant paid for road maintenance. A portion of receipts from the motor vehicle tax is distributed to urban local bodies on the basis of the length and type of roads maintained by them. Payments are not made on a regular basis, with the result that payments in most years include arrears of past payments; this explains wide annual fluctuations in the vehicle tax compensation. 5.20 Other specific grants are provided for outlays on maternity and child welfare centers, anti-malaria and anti-filaria schemes, town planning and survey operations and other specified purposes. The grants are provided at the rate of 50.percent of expenditure for municipal corporations and major municipalities and 66 2/3 percent for other municipalities. 5.21 The system of transfers in Kerala embodies some attractive features: municipalities are provided with substantial independent sources of tax revenues, and both block and specific grants accord a preferential treatment to smaller municipalities. However, the emphasis on tax assignment is so great in relation to grants that the system can be expected to place relatively wealthy municipalities at an advantage. This feature will no doubt receive attention from the committee chaired by the Secretary, Local Administration currently looking into municipal finances. 5.22 Tamil Nadu. Urban local bodies in Tamil Nadu other than municipal corporations are classified into five categories on the basis of their revenues (including shared taxes but not grants). Virtually all resources are passed on to municipalitier through tax sharing, following the assumption of responsibility for financing primary education by the State Government from April 1, 1990. The State Government does not provide general purpose grants, and the relatively minor specific grants have uniform matching ratios for all local bodies. 5.23 The state of Tamil Nadu shares revenues from two taxes--the entertainment tax and the duty on transfer of property--with all municipalities; in addition, it shares revenue from the sales tax with '.he Madras Municipal Corporation. In the case of entertainment tax, corporations and special grade municipalities receive 70 percent of the revenue collected within their 58 The details are as follows: Revenues Type of Municipality above 20 million special grade 10-20 million selection grade 4-10 million first grade 2-4 million second grade 1 million or above third grade (and population of at least 20,000) - 71 - respective jurisdictions, selection grade and first grade municipalities receive 65 percent and second and third grade municipalities receive 60 percent of the collections.59 The State Government levies stamp duties of 13 percent on the value of immovable property transferred; 38.5 percent of the proceeds collected from their areas are remitted to the appropriate municipalities. 5.24 The sharing of sales tax, introduced in 1981/82, now constitutes the single largest source of assistance for the Madras Corporation. Fifty percent of the surcharge on sales tax (currently at the rate of 15 percent) collected within the city limits is transferred to the corporation. The sharing of sales tax receipts with other urban local bodies has been under consideration. 5.25 Before the shift of responsibility for primary education, grants for education were sizable. Education was financed by an education tax (a component of property tax) and grants. Government grants had two components: a grant of 50 percent of the education tax collected to encourage collections, and an additional grant to cover remaining deficits. 5.26 The prevailing specific grants are as follows: a family welfare grant to reimburse all admissible outlays; a public health grant to defray 25 percent of unit costs of specified activities; and a road maintenance grant (Rs 1.2 million in 1990/91) based on the length of earthen roads. The revision of the tax in 1989 reduced the municipalities' share because the average rate of tax was lowered following the rationalization of the tax. - 72 - Table 5.5: PER CAPITA RECEIPTS OF MUNICIPALITIES /I IN TAMIL NADU, 1988/89 (rupees) Special Selection Grade I Grade II Grade III All Municipalities Grade Grade Own revenue 99.24 93.21 80.47 66.67 50.42 85.26 62.8 Tax revenue 8_87H 66.84 48.51 40 Ff. 52.74 38.8 Fees 14.14 10.97 13.24 10.44 10..02 12.46 (9.2) Other non-tax revenue 26.16 15.40 20.72 15.29 11.26 20.07 (14.8) State transfers 80.27 44.42 60.51 44.89 29.59 50.55 37.2 Share of taxes 48.12 SI 28.76 7 I-1 16.31 33.92 25.0 Grants-in-aid 12.15 15.69 21.75 19.79 13.29 16.63 (12.2) Total receipts 159.50 137.64 130.99 111.56 80.02 136.81 (100.0) /a Excluding the municipal corporations of Madras, Madural and Coimbatore. Note: Figures in parentheses denote relative shares in total receipts. Source: Directorate of Municipalities, Madras. 5.27 Table 5.5 brings out the effects of these arrangements. As is to be expected, derivation-based tax sharing benefits the relatively better-off municipalities the most. Per capita receipts from shared taxes amount to Rs 48 in special grade municipalities, compared to Rs 16 in grade III municipalities. Grants-in-aid, which were mostly for elementary education, moderate but do not eliminate the wide disparity in transfers. 5.28 Maharashtra. Urban local bodies in Maharashtra consist of municipal corporations and three categories of municipal councils 2lassified on the basis of population.6o Octroi and the property tax are the main sources of revenue. State Governmen. transfers to urban local bodies are predominantly for specific purposes; specific purpose grants are given for a wide variety of schemes and constitute about 94 percent of total transfers. General purpose transfers, accounting for the remaining 6 percent of the total, have taken the form mainly of the sharing of some State Government taxes with municipalities. 5.29 Entertainment tax receipts, which constitute the bulk of general purpose transfers (Table 5.6), are allocated among the different types of municipalities on the basis of varying proportions of revenues collected from their areas, as follows: 10 percent of the collections to municipal corporations, 30 percent to A class municipalities, 35 percent to B class municipalities and 40 percent to C class municipalities. Next in the order of importance is the assignment of So Municipalities with population above 75,000 persons are classified as A class, those with population between 30,000 and 75,000 as B class, and those with population under 30,000 as C class. - 73 - receipts relating to land revenue; a proportion of the collections are distributed on the basis of origin. Table 5.6: STATE TRANSFERS TO LOCAL BODIES IN MAHARASHTRA, 1990/91 Million Percent of Rupees Total General Purpose Transfers 1,421 100.0 1. Stamp duty 2. Assignment of land revenue and non-agricultural 28 2.0 assessment of land revenue 311 21.9 3. Entertainment duty 1,028 72.3 4. Grants in lieu of profession tax 29 2.0 5. Grants in lieu of pilgrim tax 16 1.1 6. Other assigned taxes 9 0.7 Specific Purpose Grants 21,665 100.0 1. Dearness allowance grants 4,500 20.8 2. Grants for primary education 6,284 29.0 3. Grants for secondary education 275 1.3 4. Special provision for development of Nagpur 1,500 6.9 5. Grants to municipal councils for Kumbh Mela 750 3.5 6. Grants to clear backlog of Dandekar Committee recommendations for development of backward regions 3,165 14.5 7. Beautification of Bombay and Chandar Tank (Mahadmun Canal) 92 0.4 8. Grants for fire-fighting service 10 0.1 9. Grants for water supply and drainage 1,541 7.1 10. Grants for implementation of development plans 747 3.5 11. Grants for upkeep of roads 1,541 7.1 12. Grants for Integrated Development of Small and Medium Towns 83 0.4 13. Grants for low-cost sanitation 10 0.1 14. Grants for Nehru Rozgar Yojana 554 2.6 15. Grants for social forestry scheme 85 0.4 16. Grants to municipal councils (with less than 15,000 persons) to adjust non-payment of loans 26 0.1 17. Grants to Maharashtra Water Supply and Sewerage Board for loan repayment and interest payments 151 0.7 18. Grants to Municipal councils for repayment of loans and interest to LIC and GIC 287 1.3 Total grants 23,086 Source: Department of Local Bodies, Government of Maharashtra, Bombay. - 74 - Grants in lieu of the taxes abolished (e.g., pilgrim tax) or taken over (e.g., the profession tax)1 by the State Government are of minor importance. 5.30 The largest specific grants are for primary education (29 percent of total specific grants) and for the dearness allowance payments (21 percent). The State Government reimburses varying proportions of admissible expenditures on primary education for different municipalities: 20 percent for the Bombay Municipal Corporation, 50 percent for other municipal corporations and 80 percent for municipal councils. The grants for dearness allowances are made to municipal councils of A, B and C classes to compensate them for additional dearness allowance payments at the rate of 80 percent, 90 percent and 100 percent, respectively, subject to the condition that at least 80 percent of the property tax due is collected. 5.31 Grants for the maintenance and repair of roads represent a share of motor vehicle tax given to the municipal bodies except Bombay in lieu 'of the abolition of wheel tax. Ten percent of net receipts from the motor vehicle tax collected in the previous year are distributed to the municipal bodies in proportion to their population. 5.32 Assistance provided for the implementation of development plans for activities such as parks, medical facilities and school buildings have matching requirements. Assistance is given to meet 33 percent of project costs in the case of A class municipalities and 50 percent in the case of B class and the larger C class municipalities; the smaller C class municipalities (with a population of less than 15,000) receive full project costs. 5.33 Aside from these, a number of grants are given at the discretion of the State Government. One such grant is that given to meet partial requirements for the development of backward areas as recommended by the Dandekar Committee. Grants to assist in debt servicing provide another example. 5.34 The general purpose transfers, given their limited role and distribution on -he basis of origin, cannot offset fiscal disadvantages of weaker municipal bodies. This is true also of the entertainment tax, though larger fractions of collections are assigned to smaller municipalities, because the magnitude of resources so transferred is relatively small. Even the distribution of specific grants does not seem to pay adequate attention to the needs of financially weaker municipalities. Although there are some specific grants with higher matching ratios for smaller municipal bodies, only one-half of the specific grants contain such built-in equalization elements. Finally, the practice of giving grants on an ad hoc basis may be noted; even if such transfers are well deserved, their completely discretionary nature casts doubts on their equalizing tendencies. 5.35 West Bengal. Urban local bodies in West Bengal are divided into those within the Calcutta Metropolitan Area (CMA) and those outside it (non-CMA). The 61 Proceeds from the professions tax have been earmarked for the Employment Guarantee Scheme, a major state-initiated poverty alleviation program. - 75 - CMA municipal bodies consist of the corporations of Calcutta and Howrah and 34 other municipalities; there are 79 municipalities outside the CMA. The Calcutta Metropolitan Development Authority (CMDA) exercises major responsibilities in the implementation of development projects. In the non-CMA area, development projects are undertaken directly by the Ministry of Urban Development or its agencies.62 The property tax is the only major tax levied by municipal bodies, contributing more than 70 percent of own revenues. State Government transfers, divided equally between general and specific purpose transfers, constitute 60 percent of the municipalities' current receipts. 5.36 The transfer system since 1983, the Revised Grant Structure (RGS), has been based on the recommendations of the last municipal finance commission. The new grant policy was meant to provide municipalities with adequate resources to meet their current expenditure needs while ensuring better financial discipline among them. Current grants are decided on the basis of the projected gap between revenues (including revenue sharing) and expenditures of individual municipalities, with the projections keeping in view certain performance targets on both the revenue and expenditure sides. Grants equivalent to the uncovered projected gaps are then given to each municipality. Failure to achieve the performance target by a municipality results in the actual gap being higher than the projected gap, and this reduces the capacity of the municipality to undertake capital works. On the other hand, when the actual gap is lower than the projected one, additional capital outlays can be undertaken. Performance targets for CMA municipalities are fixed by the Department of Local Government each year. The RGS has so far covered only CMA municipalities. 5.37 Aside from grants to fill the projected financial gaps, general purpose transfers consist of the sharing of entry tax, the entertainment tax and the motor vehicle tax with municipal bodies. The entry tax, which is similar to octroi, is a tax on the entry of goods into the Calcutta Metropolitan Area, but it is levied and collected by the State Government. Of the total proceeds, 50 percent are assigned to CMDA, 28 percent to the Calcutta Municipal Corporation, 15 percent to CMA municipalities, and the remaining 7 percent to non-CMA municipalities; the shares of individual municipalities are based on population. Fifty percent of receipts from the entertainment tax are also assigned to urban local bodies on the basis of population. There is no fixed pattern for the sharing of proceeds from the motor vehicle tax. For these transfers, per capita allocations are generally higher the smaller the size (population) of the municipality (Table 5.7); the main reason for this is that none of the shared taxes is distributed on the bdsis of origin. 62 The urban development department has four major wings, namely, the Directorate of Local Bodies, the Directorate of Municipal Engineering, the Central Valuation Board, and the Institute of Local Government and Urban Studies. 63 The only exception arose in the case of B class municipalities within CMA, vhich received lower per capita receipts from shared taxes than the A class municipalities. - 76 - 5.38 The main specific grants are in respect of dearness allowances and education. The former, which compensates urban local bodies for 80 percent of liabilities arising from the dearness allowance payments, accounts for one-third of the total current transfers. Table 5.7: PER CAPITA CURRENT RECEIPTS OF URBAN LOCAL BODIES IN WEST BENGAL, 1989/90 (rupees) CMA Non-CMA Al I Urba Class A Class 8 Class C Total Class A Class B Class C Total Local Bo Total own revenue 28.94 33.20 45.14 31.74 28.46 32.43 41.77 33.82 32.79 Tax receipts 23.78 7.96 0.561 T977 22.02 21.71 29.90 24.30 24.93 Property tax 22.41 26.59 28.95 24.18 19.35 19.74 27.43 21.83 22.99 Other 1.37 1.37 1.68 1.39 2.68 .1.97 2.77 2.47 1.93 Non-tax receipts 5.16 5.24 14.64 6.17 6.42 10.72 11.87 9.52 7.87 Total current transfers 58.21 50.88 75.43 58.11 36.33 57.16 80.68 50.89 54.34 Share of taxes 30.36 28.78 74372 3 .9 144 25.11 28.50 24.81 28.00 Entry tax 19.47 19.32 25.81 20.09 11.64 13.66 14.83 13.19 16159 Entertainment tax 10.24 8.72 15.16 10.36 7.85 10.75 12.38 10.13 10.24 Motor vehicle tax 0.64 0.75 2.30 0.86 2.24 0.71 1.48 1.49 1.17 Grants 27.88 22.10 32.15 26.81 14.89 32.06 32.08 26.88 26.34 D.A. and A.D.A. /a subventions /b 20.27 20.92 14.11 19.80 14.06 21.26 14.22 16.54 18.14 Education grants 7.26 0.10 14.70 6.17 0.04 10.50 16.07 8.42 7.31 Other 0.34 1.07 3.36 0.84 0.79 0.29 1.78 0.92 0.88 Total current receipts 87.15 84.08 120.57 89.85 84.78 89.59 102.36 84.51 87.14 /a Dearness allowance and additional dearness allowance. /E Including the revenue account part of RGS grants, for which separate figures are not available. Note: Municipalities have been classified into A class (population of above 100 thousand), B class (between 5C to 100 thousand) and C class (under 50 thousand) on the basis of the 1981 population. Source: Institute of Local Government and Urban Studies, Government of West Bengal, Calcutta. 5.39 Efforts to achieve an equitable system of transfers, by basing revenue sharing on population 1ather than derivation, are noteworthy. However the RGS cannot be considered to have achieved its objective of providing incentives for resource mobilization and economies in spending. In the first place, tax devolution, which forms over 95 percent of general purpose transfers, is based on population and not on projected current account gaps and, therefore, the pdrformance targets do not really matter in the case of municipalities which have surpluses after the devolution of tax revenues. Second, the incentive for better performance is weak, involving as it does only freedom over the utilization of that portion of current surplus attributed to better than projected performance. Last but not least, the method of setting performance targets--the application of uniform growth rates to revenues and expenditvres (except the property tax) for all municipal bodies--does not take into account inter-municipal differences in economic conditions. By the same token, it cannot take into account the extent of undertaxation or overtaxation, and the degree of economy or profligacy in spending. In sum, the Revised Grants Structure replicates the gap-filling - 77 - approach of Federal Finance Commissions and is, therefore, subject to the same limitations. 64 State Government Transfers to Municipalities: General Considerations 5.40 The brief comments on the systems of transfers in the different states should have given some indication of the kind of policies that are needed. It will be useful, nonetheless, to consider the relative merits of assigned taxes, revenue sharing, block grants and specific purpose grants more systematically before drawing policy conclusions. 5.41 Local autonomy and tax assignment frequently go hand in hand. The importance of tax assignment arises from the fact that it provides local bodies with an independent source of 7:venue, that is, a tax whose structure and tax rates could be varied within certain limits by local authorities in line with their requirements. Control over a tax also improves the predictability of receipts. Heavy reliance on tax assignment will, however, be inequitable since the proceeds of a tax levied by local authorities are, in effect, allocated on the basis of origin. 5.42 It will be desirable to assign one or two taxes to municipalities in states where local bodies do not control significant revenues. The entertainment and professions taxes, though not without drawbacks, are the most suitable taxes for this purposr-. The more frequent screening of movies on television (Doordarshan) ana emergence of video parlors have rendered the future growth of revenue from the entertainment tax uncertain. The operation of professions taxes levied by local authorities creates a problem where taxpayers live in one local authority area and work in another area; such problems are, however, not insuperable. 5.43 Concern about the administrative capacity of local bodies to ad tinister taxes properly has made some states reluctant to assign taxes to local bodies. The problem should not be taken lightly, but it is best tackled by accompanying tax assignment by technical assistance on tax administration. 5.44 Disparities in per capita expenditures of municipalities are so great that equalizing general purpose grants deserve a place in the grant system. General purpose transfers can take the form of tax devolution or block grants. Tax sharing based on a relatively elastic tax will have the advantage of ensuring that the municipalities' receipts grow in tandem with their requirements. However, the allocation of proceeds from shared taxes according to the origin of revenues, as has been the case in most states, will not be equalizing. Allocation based on population and other suitable indices will be preferable to that based on derivation on equity grounds. 5.45 Block grants have an advantage over shared taxes in that they can be targeted at the financially weaker municipal bodies. However, this advantage cannot be realized in the Indian conditions because of the difficulties of 64 See the Second R,?port of the Ninth Finance Commission for 1990-95 (Government of India, December 1990). - 78 - measuring needs and revenue-raising capacities of municipalities. Nonetheless, because of the disequalizing tendencies of other components of transfers, the most widely used block grant--the per capita grant--has played a useful role. More flexible annually-adjusted per capita grants would be even more useful. One way of increasing the flexibility of block grants would be to relate them to receipts from a tax, but then they would be no different from revenue sharing. 5.46 Specific grants have been used worldwide to shift public expenditures toward desired activities or to help achieve certain standards for basic public services, and India is no exception in this respect. That specific grants should be few in number and subject to clear-cut conditions of eligibility is well-known and need not be labored here. However, in the Indian context, three points are worth making. First, if specific grants are used for equalization purposes, there should be substantial differentiation in the matching ratios for municipal corporations and other local bodies. P'r capita expenditures in the corporations are so much higher than in other municipalities that modest differentiation would mean that per capita transfers to the former would exceed those to the latter. Second, specific grants should be supplemented by assistance for capital development. Specific grants for current expenditures alone are unlikely to help eliminate deficiencies in the coverage or standards of services. Third, specific grants for salaries and dearness allowances should not normally be provided by making general purpose transfers sufficiently elastic. Separate grants for salaries and dearness allowances may induce laxicy over the control of personnel costs. 5.47 Systems of transfers should ideally embody incentives for resource mobilization. This has been difficult to do in India because of the absence of a variable that can be labeled "tax base". Given the highly unsatisfactory state of property tax, the assessed rateable values certainly cannot be used. In this situation, states like Gujarat and Maharashtra have taken per capita tax or revenue collections as a measure of tax effort. The problem with this approach is that it rewards municipalities with high tax base as well as those with high tax effort. This difficulty can be minimized by computing separate measures of tax effort for different classes of municipalities. The tax effort of a municipality would then be compared with the average tax effort of the municipalities in its class. The use of such measures to reward local bodies is justified despite their deficiencies, given the importance of encouraging local bodies to utilize their tax bases more fully. The other measure sometimes used-- the ratio of property tax collections to assessments--is more deficient, not only because of substantial variation in the extent of undervaluation of rateable values across municipalities, but also because it could encourage deliberate underassessments. Planning and Financing of Capital Expenditures 5.48 The previous discusNion has brought out the difficulties faced by municipal bodies in generating internal resources, and the shortcomings of State Government transfers. Capital epending has borne the main brunt of these problems. The problem of inadequate availability of capital assistance has been compounded by considerable uncertainty over its annual levels. The resulting environment has discouraged municipal initiative in the planning of investment. - 79 - The possibilities of strengthening the institutional framework for planning and financing capital spending are briefly reviewed. 5.49 Capital assistance is not codified to the same extent as current transfers. Broadly, the eligibility and the terms for state plan schemes and centrally sponsored schemes are specified; other assistance depends on the discretion of the relevant State Government department or agency. In Gujarat, the systematization of capital assistance is largely confined to capital grants by the GMFB. In Tamil Nadu, assistance is provided mainly for road works and various state plan (e.g., accelerated slum improvement schemes) and centrally sponsored (e.g., the integrated development of small and medium towns program) schemes. The situation is similar in Kerala. 5.50 Both national and state-level financial institutions play a peripheral role in the financing of urban infrastructure. The Life Insurance Corporation has been .financing water supply schemes, but its overall investment in infrastructure financing is not significant. Although the role of HUDCO's infrastructure window can be expected 'to grow, its disbursements in 1990/91 amounted to only Rs 968 million. At the state level, KUDFC's disbursements of just over Rs 33 million in 1989/90 took its total disbursements since its inception (in 1970) to Rs 380 million. 5.51 The reliance of municipalities on market borrowing is also low. The main explanations for this are that the states have been provided limited borrowing possibilities, and that market borrowing by municipalities must be met from the borrowing a.ocations for the states. Market borrowing cannot be expected to play a significant role in municipal capital development in these circumstances. 5.52 Municipal Finance Commissions. The complexity of devising appropriate systems of assistance, and uncertainties connected with the annual levels of assistance, especially for investment, suggest that municipal finance commissions should be used more widely than has been the case in recent years. Finance commissions could be used to review both current and capital requirements over three to five years. 5.53 Few State Governments have depended on finance commissions on a regular basis, possibly due to apprehensions of being forced into assuming open-ended commitments. Such fears are understandable. Finance commissions that emulate the methodology of the Federal Finance Commissions--that is, projection of revenues and expenditures, and provision of assistance to fill the projected gaps--will have a limited contribution to make. On the other hand, municipal finance commissions that focus on issues and policies, examining expenditure needs, the scope for additional resource mobilization, progress in cost recovery and improvements in the systems of assistance, will have a major contribution to make to the strengthening of urban public Zinances. 5.54 Planning. Greater involvement of urban local bodies in the planning of capital development will facilitate better assessment of their financial needs. While the planning of trans-municipal services must necessarily be undertaken by State Governments, the planning of most other local services is best undertaken by municipal bodies. A major problem to securing this division of - 80 - responsibilities is that few municipalities have the requisite expertise and experience in formulating and implementing plans. As a step towards increasing the municipal involvement in planning, planning units should be set up in the larger municipal corporations and, where they already exist, strengthened. For other municipalities, the establishment of a small cell in the Planning Department of the State Government to help them determine their investment requirements would probably be sufficient. 5.55 The limited number of planning units at the municipal level, coupled with lack of sufficient knowledge about the expenditure needs for some municipal services at the state level, has often meant that state development plans have not been sufficiently detailed concerning urban development. Greater participation of municipalities in planning should make it possible to take a fuller account of their needs in the formulation of state plans. The necessity of integrating municipal plans into five-year state plans is greater than in the .past, given the anticipated growth of urban population. 5.56 Financial Institutions for Urban Development. Loans to municipal bodies for urban development are advanced directly by State Governments, since only one or two states have specialized financial institutions such as the KUDFC. Specialized urban finance institutions can help mobilize resources from the state-level and national institutions engaged in urban development and can contribute to much-needed improvements in project appraisal and cost recover- The usefulness of such institutions can be greatly increased by using them o widen the access of smaller local authorities to capital funds by providing them assistance in the identification and preparation of projects. The establishment of financial institutions for urban development might be worth considering in some of the larger states. 5.57 It is often suggested that a national urban finance institution should be set up to improve the supply of resources for urban services. The establishment of such an institution could also be justified on the grounds that many states have neither the expertise- nor the resources to set up an urban finance iastitution. A national urban finance institution is likely to be needed in a few years' time, given not only the need for expanding the infrastructure facilities, but also the rapidly growing need for replacing aging and decaying infrastructure. At the present time, however, priority needs to be given to strengthening operations of the institutions presently engaged in financing infrastructure as well as improving the capacity of local bodies to utilize more loan finance. The growing difficulties of maintaining existing services have made local authorities reluctant to borrow; at present, the utilization of loan funds seems to be constrained more by demand than by supply. In this situation, it is particularly important that institutions such as LIC and HUDCO strengthen their infrastructure wings, emphasizing proper project appraisal and adequate cost recovery. Conclusions 5.58 The institutional arrangements for the planning and financing of capital expenditures need to be strengthened. Assigned taxes, revenue sharing and specific grants all have a role to play in a well-designed system of current transfers, though their relative roles and appropriate cnaracteristics will - 81 - depend on the precise circumstances prevailing in the different states. More specifically, the analysis points to the following conclusions: (i) Planning capabilities of the larger municipal corporations should be strengthened, and other municipalities should be given greater assistance in planning; (ii) Municipal finance commissions concerned primarily with advising the state and municipal governments on the main issues of municipal finances should be more widely utilized; (iii) Transfers should be based on systematic considerations (formula-based, where practicable) and should be predictable; (iv) One or two taxes should be assigne, to municipalities, especially in states where the propert, tax is the only significant local tax;s6 (v) Proliferation of specific purpose grants should be avoided, confining them to a few services of naticnal importance such as education; (vi) Given large gaps in service levels in municipal corporations and other municipalities, matching ratios for specific grants should embody substantial differentiation; (vii) Specific grants for current expenditures should be coordinated with assistance for the capital development of major services; (viii) Revenue from shared taxes should be largely distributed on criteria other than derivation (e.g., population); (ix) There should be no separate grants for dearness allowances; and (x) Grants that automatically cover budget deficits should be avoided. This will be true particularly of non-octroi states. - 82 - CHAPTER 6: OTHER SELECTED ISSUES 6.1 This chapter briefly discusses topics that, while not forming the main focus of the study, are nonetheless important. The topics to be discussed are octroi, the professions tax, municipal accounting practices, and urban finance statistics. Octroi 6.2 Octroi is levied by local authorities on good. coming into their areas for consumption or sale. The tax takes the form mostly of ad valorem levies and is collected at the points of entry into local authority areas. 6.3 Octroi is presently being levied in Goa, Gujarat, Maryana, Maharashtra, Nagaland, Orissa, Punjab and Rajasthan. Madhya Pradesh abolished the tax in 1976, Karnataka in 1979, Himachal Pradesh in 1982 and .ttar Pradesh in 1990. Possible alternatives to Lhe tax have been studied in Gujarat, Maharashtra and Rajasthan. 6.4 The undesirable effects of octroi have long been recognized. The most serious economic costs arise from the loss of time and the waste of fuel due to long delays at octroi checkposts. Another important distortion stems from the high reliance on taxation of intermediate <nd capital goods; in Bombay and Ahmedabad, for example, such goods account for one-half to two-thirds of the revenue (Tables 6.1 and 6.2). The tax is also more vulnerable to corruption and evasion tnan most taxes because its operation depends on the exercise of wide discretion by large numbers of relatively junior officials. 6.5 Despite its obvious limitations, revenue considerations have discouraged universal abolition of octroi. The tax is not only very important in the municipal revenue structure, but the bulk of the revenue accrues to municipal corporations. For example, in Maharashtra, octroi accounts for just over one- third of municipal revenues; however, one-half of octroi receipts accrue to the Bombay Municipal Corporation and four-fifths to municipal corporations (including Bombay). - 83 - Table 6.1: BOMBAY MU1ICIPAL CORPORATION -- OCTROI REVENUE FROM THE TEN MAIN COMMODITIES, 1986/87 Million Percent Rupees of Total Mineral oils 270.7 15.7 Machinery and-spare parts 269.3 15.6 Iron and steel 229.3 13.3 Instruments 194.8 11.3 Hair oil, laces 185.8 10.8 Piece goods 176.7 10.3 Non-ferrous metal 157.9 9.2 Liquor 85.8 5.0 Cotton 75.7 - 4.4 Paper 75.2 4.4 Total 1,721.2 /a 100.0 /a Equals 75 percent of total octroi revenue. Source: Report of the Committee on Siibstitution of Octroi (Government of Maharashtra, October 1987). Table 6.2: AHMEDABAD MUNICIPAL CORPORATION -- OCTROI REVENUE, 1984/85 Million Percent Rupees of Total Food 15.0 4.1 Cloth and yarn 132.1 36.2 Building materials 44.8 12.3 Provisions and articles of consumption 24.9 6.8 Machinery, motors and industrial inputs 126.4 34.6 Other materials 22.0 6.0 Total 365.2 100.0 Source: Statistical Outline of Ahmedabad City, 1988/89 (Ahmedabad Municipal Corporation, March 1990). 6.6 Surcharges on state sales taxes, and entry taxes have received the most attention as substitutes for octroi. It has been found that the former would not - 84- raise sufficient revenues at realistic rates and have rarely been adopted. The reason for the expected narrow tax base is that the three commodities subject to additional excise duties (mill-made textiles, sugar and tobacco), and declared goods would not be taxable. Under an agreement between the Central and State Governments, the latter do not levy sales taxes on certain commodities in return for revenues from additional excise duties levied on those commodities by the Center. Certain goods considered to be of special importance in inter-state trade have been designated as declared goods; the maximum rate of sales tax for such goods is restricted to four percent. Since some major commodities are not subject to state sales taxes and declared goods are generally taxed at the maximum rates, surcharges on sales taxes would not be sufficient.1y productive. Abolition of octroi in Maharashtra would have necessitated a surcharge of 45 percent on the sales tax rates.je 6.7 Entry taxes at moderate rates could, by contrast, help to recoup loss oL revenue from the abolition of octroi. Entry taxes would be very similar to octroi in that they would be levied on goods e'ntering a local area for consumpti6n, use or sales. The critical difference from octroi would be that they would be collected on the basis of returns made by dealers and not at checkposts. Proposals for entry taxes generally provide for a broad tax base (including goods subject to additional excise duties, and declared goods), maximum tax rates of four to five percent with limited rate differentiation, and collection of the tax mostly from sales tax dealers. To avoid multiple taxation, it is generally provided that goods that have borne entry tax in one local area should not be liable to further (entry) tax in another local area, as is the case with octroi. Madhya Pradesh and Karnataka substituted entry taxes for octroi. Strong opposition to an entry tax forced Uttar Pradesh to levy a surcharge on the state sales tax. Business and industry has not favored entry taxes, possibly because the tax authorities would gain wider access to its books. 6.8 The main advantage of an entry tax would be that its collection would not interfere with the flow of traffic. However, the tax would also have disadvantages. The most serious shortcoming would be that the tax would not be a genuinely local tax, since an individual local authority would not be able to vary either its structure or rates in line with its needs. Another major deficiency would be that by not applying to all consumption within an area, an entry tax, like octroi, would tend to distort the structure of production. Moreover, if an entry tax is to raise as much revenue as octroi, it would normally have to apply to intermediate and capital goods, thereby causing further distortions. 6.9 Alternatives to octroi other than the entry tax that would not directly impinge on the revenue possibilities open to State Governments are difficult to identify. Taxes such as entry taxes may, therefore, have to be Lolerated in the short run. The long-term objective should be to replace octroi revenues by strengthening property taxes and user charges. 66 Report of the Committee on Substitution of Octroi (Government of Maharashtra, October 1987). - 85 - The Professions Tax 6.10 The maximum rate at which the professions tax could be levied was until recently limited to Rs 250 annually, thereby severely restricting the revenue potential of the tar. The restriction was meant to limit utilization by the states of taxes on income (other than agricultuLal income), which the Constitution has assigned to the Union Government. With the recent increase in the ceiling to Rs 2,500 annually, the tax provides much greater revenue possibilities. Exploiting these will, however, require some changes in the structure and operation of the professions tax. 6.11 In many states the professions tax liability'depends wholly on income; this is the case in Kerala and Tamil Nadu (Table 6.3). However, in some states, of which Gujarat is a good example, the tax liability for some types of taxpayers depends partially or solely on the characteristics of taxpayers other than income. Table 6.3: RATES OF PROFESSION TAX IN MADRAS AND TRIVANDRUM (rupees) Half-Yearly Income Half-Yearly Tax 1. Madras Above 1,800 but below 3,000 9 Above 3,000 but below 4,800 18 Above 4,800 but below 6,000 37.50 Above 6,000 but below 9,000 50 Above 9,000 but below 12,000 75 Above 12,000 but below 15,000 100 Above 15,000 125 2. Trivandrum Above 3,600 but below 5,400 9 Above 5,400 but below 7,800 15 Above 7,800 but below 10,800 24 Above 10,800 but below 14,400 37 Above 14,400 but below 18,000 50 Above 18,000 but below 24,000 75 Above 24,000 but below 30,000 100 Above 30,000 but below 36,000 125 Above 36,000 but below 42,000 175 Above 42,000 but below 48,000 250 Above 48,000 but below 72,000 300 Above 72,000 but below 102,000 750 Above 102,000 but below 126,000 . 1,000 Above 126,000 1,250 - 86 - 6.12 In Gujarat, tax rates vary with the type of taxpayer. Taxpayers are classified into the following main categories: (i) salary and wage earners whose monthly emoluments are above Rs 1,000; (ii) doctors, lawyers, accountants and other professionals with annual incomes above Rs 10,000; (iii) employers employing on average more than five employees per day during a year; (iv) partners of registered firms with annual incomes above Rs 10,000; (v') dealers (as defined for the purposes of the Gujarat sales tax) with annual gros$ turnover of above Rs 50,000; and (vi) companies, hotels, theaters, gas stations, banks, moneylenders, estate agents and building contractors. 6.13 The tax rates range from Rs 50 to Rs 250 per year. The rates for employees vary with their salaries, those for professionals with their "standing in profession" (professionals with under five years of working experience are exempt), and those for dealers with their turnover. The rates for employees under (iii), moneylenders and professionals vary with the size of the urban area; those in localities with populations of under 20,000 are exempt. 6.14 Businesses need to be taxed more effectively either through the professions tax or through separate business licenses. While the use of income as a tax base for employees should not create too many difficulties, the determination of income of the self-employed and businesses, especially those not subject to income tax, is likely to be problematic. There is thus a presumption that characteristics other than income may be useful for some categories of taxpayers. Unfortunately, given their limited role in the past, little or no work has been done on the operation of different types of professions taxes. Research on the administration of professions taxes in a few states would seem to be worthwhile. 6.15 Since the professions tax and personal income tax are both levied on income, it is desirable that they neatly dovetail into each other. This is not difficult to do provided it is kept in mind that the professions tax paid is deductible for the purposes of the income tax. The implication of deductibility is that the proportion of professions tax payable (after taking advantage of the deduction) declines with increases in marginal income tax rates. Thus, if a professions tax of Rs 2,500 were levied on taxpayers subject to marginal tax rates of 40 percent and 50 percent respectively, the corresponding net liabilities would be Rs 1,500 and Rs 1,250. The structure of the professions tax should, therefore, take account of the fact that it is the net liabilities that matter. - 87 - Table 6.4: INCOME TAX AND HYPOTHETICAL PROFESSION TAX PAYABLE BY SALARIED TAXPAYERS (rupees) Taxable Income Tax /a Pro4ession Tax Income Tax and Income Tax Tax Payable Gross Net of Net Tax Paya- Profession Tax Payable as Z of Taxable Tax Tax ble as Z of Payable as I of Income (%) Taxable Income Taxable Income 5,000 - - 50 50 1.00 1.00 10,000 - - 100 100 1.00 1.00 30,000 - - 300 300 1.00 1.00 40,000 1,200 3.00 500 400 1.00 4.00 50,000 4,000 8.00 715 500 1.00 9.00 100,000 22,800 22.80 1,665 1,000 1.00 23.80 120,000 31,600 26.33. 2,500 1,250 1.00 27.33 /a The surcharge of 12 percent payable by taxpayers with taxable incomes above Rs 75,0 has not been taken into account to keep the calculations simple. 6.16 Three further considerations should be borne in mind in deciding on the rate structure. First, to keep the operation of the tax simple, there should be only a few tax rates; the adoption of a tax schedule with fourteen tax rates in Kerala will impart unnecessary complexity to the tax, especially since local bodies have no powers to call for business accounts. Second, exemption levels for the professions tax should be much lower than for the income tax, given that the level of over Rs 30,000 at which income tax becomes payable for employees is relatively high. Third, the maximum amount of tax should begin to become payable at annual incomes close to Rs 100,000, since zelatively few taxpayers have incomes above this level. Table 6.4 illustrates the case of a proportional professions tax. Accounting Practices 6.17 Most municipalities maintain accounts on a cash rather than an accrual basis. Many autonomous bodies, un the other hand, are required to adopt some kind of accrual accounting. Of the three municipal corporations of special interest, Ahmedabad and Trivandrum utilize cash accounting and Madras accrual accounting. Even when accounts are maintained on a cash basis, the detailed procedures vary from state to state. 6.18 The accounting practices of Trivandrum are common among municipalities in India. The Corporation maintains a general account, a deposits and advances account and four subsidiary accounts: for water supply, drainage, lighting and conservancy (Table 6.5). An account may be further divided into ordinary and capital accounts. All accounts other than the general account (ordinary) and the deposits and advances account must show a surplus or must balance, with the result that a number of transfers take place from the general account (ordinary) to subsidiary accounts, and from ordinary accounts to corresponding capital - 88 - accounts. The transfers give rise to double-counting, which must be eliminated to get a true financial picture. 6.19 The accounting practices in Gujarat are very similar. The main accounts are the revenue account, the capital account, and the debit, deposit and suspense account. Gujarat has, however, not found it necessary to resort to the practice of making inter-account transfers and its accounts are more transparent than Kerala's accounts. However, the accounting practices create a problem in respect of the water system, which is run as part of the overall municipal operations; cash tccounting precludes provision for depreciation. No such problem arises for the AMTS, since it is operated as an autonomous municipal enterprise and utilizes commercial accounting practices. 87 Special commercial accounts have, however, been prepared for the water operations for the purposes of World Bank loans. - 89 - Table 6.5: CORPORATION OF TRIVANDRUM--ANNUAL ACCOUNTS FOR 1986/87 (thousand rupees) Abstract of Accounts Ordinary Capital Receipts Expenditure Receipts Expenditure General account 23,938.9 36,945.3 2,668.4 2,668.4 Water supply account 2,718.5 - - - Drainage,account 4,530.8 4,530.8 - - Lighting account 9,374.3 9,374.3 - - Conservancy account 8,154.1 8,154.1 508.6 508.6 Endowment account - - - - Deposits and advances account - - 9,010.2 3,896.1 48,716.5 59,004.4 12,187.1 7,073.1 General Account Ordinary Gross receipts 36,496.7 Expenditure 36,945.3 Transferred to Capital Account -2,548.9 Transferred to Lighting Account -6,655.8 Transferred to Conservancy Account -3,353.1 23,938.9 36,945.3 Capital Loan from Government . 119.5 Expenditure 884.4 Transferred from Ordinary Account 2,548.9 Interest and repayments of loans 1,784.0 2,668.4 2,668.4 Water Supply Account Ordinary Water tax 2,718.5 2,718.5 - 90 - Drainage Account Ordinary Drainage tax 4,530.8 Contingencies 59.6 Transferred to Conservancy Account 4,471.2 4,530.8 4,530.8 Lighting Account Ordinary Lighting tax 2,718.5 Purchase of energy 9,374.3 Transferred from General Account 6,655.8 9,374.3 9,374.3 Conservancy Account Ordinary Public comfort stations 597.7 Personnel costs 5,513.5 Transferred from General Account 3,353.1 Transportat.*,.n 2,175.9 Transferred from Drainage Account 4,471.2 Other 464.7 Transferred to Capital Account -508.6 Other 240.7 8,154.1 8,154.1 Capital Transferred from Ordinary Account 508.6 Construction of latriies and comfort stations 26.8 Lorries, trailers, etc. 402.3 ._ Other 79.5 508.6 5^8.6 Deposits and Advances Account Capital Revenue collected on behalf Deposits and advances 3,896.1 of Government: Additional entertainment tax 4,990.8 Surcharge on show tax 14.4 Other deposits and advances 4,005.0 9,010.2 3,896.1 Source: Draft Annual Report and Annual Accounts for the Year 1986/87 (Philip & Mathew, Chartered Accountants, Trivandrum and Cochin). - 91 - 6.20 The treatment of public debt is inadequate in both Trivandrum and Ahmedabad. In the former, the accounts do not distinguish between interest payments and loan repayments. In the latter, debt transactions appear in all the three accounts. The revenue account, under the head "loan charges", gives total interest payments and part of loan repayments (presumably repayments of sums explicitly borrowed for revenue purposes). The repayments of public loans are reflected in the debt, deposit and suspense account and those of the other loans in the capital account. All loan receipts are shown in the capital account. The accounts of both corporations give little or no information on debt outstanding, though such information is available. 6.21 The idea of accrual accounting has been mooted from time to time to help municipalities improve the costing of their services. Besides taking account of depreciation, accrual accounting facilitates proper allocation of various costs to different activities. Accrual accounting is, therefore, particularly relevant for public enterprises, and for services subject to user charges. 6.22 The Madras Municipal Corporation switched to accrual accounting in 1982/83. The Corporation issues an income and expenditure account and a balance sheet each year. Depreciation is provided for all assets and other costs of providing various services are given in detail. However, MMC's published accounts need to include a statement of cash flow or sources and uses of funds. 6.23 The following changes in accounting practices would seem to be desirable: (i) Reduction in the present protracted delays in the auditing of accounts; (ii) Adoption of accrual accounting at least for public utilities, and for services where user charges are appropriate; (iii) Issue of a statement of cash flow or sources and uses of funds for all revenue-earning activities; (iv) Drawing of a clear distinction between interest payments and loan repayments, with the former treated as revenue expenditure and the latter as capital expenditure; (v) Inclusion of a statement on debt outstanding in the accounts; and (vi) Minimization of inter-account transfers, or preparation of summary accounts free of double counting. Urban Finance Statistics 6.24 The paucity of statistics is hampering an adequate understanding of the declining capacity of local bodies to provide minimal standards of basic services. Moreover, without much improved statistics, proper systems of transfers cannot be devised; nor can the impact of existing systems assessed. - 92 - Early steps need to be taken to ensure that municipal finance statistics attain the same high standards that exist for the Central and State Government finance statistics. 6.25 Avallable ,tatistics suffer from a lack of comprehensiveness and timeliness. There ete three main sources of municipal finance statistics. The most significant source is the National Institute of Urban Affairs, which compiled comprehensive statistics for 1974/75 and 1979/80 and part tal statistics (based on relatively small samples) for 1983/84 and 1986/87. It should be noted that no comprehensive data have been collected for over a decade. The state directorates of statistics are another important source. However, the statistics published by them are not or-inized in the most suitable form for studying municipal finances because their primary object is to indicate gross capital formation by municipalities; the usefulness of these statistics is further diminished by their tardy availability. Finally, data on the finances of selected municipal corporations are published in the Annual Abstract of India, U - these are mostly out of date. Of the three main states covered by the study, tr- ituation in Gujarat is the best, mainly because of the presence of a special tution such as the Gujarat Municipal Finance Board, which gathers a great e financial data on municipalities for the performance of its duties. 6.26 At a minimum, the following measures need to be taken to improve the availability of ui -a finance data: (") At the scate level - coll..tion of data from all municipalities on their finances; - collection of financial data from major autonomous bodies such as water authorities, development authorities and bus companies; and - collection of data on tax rates, and on user charges for major services. (ii) At the national level - publication each year of more up-to-date data on selected municipalities than is presently the case in the Statistical Abstract of India; and - publication of countrywide statistics on municipal finances at least every two to three years. 6.27 Great care will be needed in deciding which institutions should have the responsibility for gathering statistics. In most states, a specialized institution such as the Gujarat Municipal Finance Board would not seem to be needed. The choice will mostly be between the Directorate of Statistics and the Directorate of Municipal Administration, with the former better placed for the task in most states. Nationwide statistics could be collected either by the NIUA or the NIPFP. Ideally, data requirements for all states should be standardized, so that national statistics on municipal finances could be compiled from the data - 93 - already generated by the states. Better and more timely information is a prarequisite for coming to grips with the country's deteriorating urban problems. - 94 - STATISTICA. APPENDIX List of Tables Table No. 1. India -- Summary of Public Finances of Municipalities, 1979/80 2. India -- Current Expenditures of Municipalities, 1979/80 3. India -- Current Revenues of Municipalities, 1979/80 4. India -- Ordinary Grants to Municipalities, 1979/80 5. India -- Capital Expenditures of Municipalities, 1979/80 6. India -- Capital Income of Municipalities, 1979/80 7. India -- Current Receipts of Selected Municipal Corporations 8. India -- Current Expenditures of Selected Municipal Corporations 9. Public Finances of Municipal Bodies in Gujarat, 1988/89,. 10. Ahmedabad Municipal Corporation .''--.Summary of Current and Capital Accounts 11. Ahmedabad Municipal Corporation -- Current Expenditure 12. Ahmedabad Municipal Corporation -- Current Revenue 13. Ahmedabad Municipal Corporation -- Capital Receipts and Expenditures 14. Ahmedabad Municipal Corporation -- Revenue from Service Charges and Fees for Selected Services, 1989/90 15. Ahmedabad Municipal Transport Service -- Operational Statistics 16. Assessment Table for Decermination of Rental Value of Residential Properties in Ahmedabad 17. Assessment Table for Determination of Rental value of Commercial Properties in Ahmedabad 18. Public Finances of Municipal Bodies in Kerala, 1985/86 19. Corporation of Trivandrum -- Summary of Current and Capital Accounts 20. Corporation of Trivandrum -- Current Expenditure 21. Corporation of Trivandrum -- Current Revenue 22. Corporation of Trivandrum -- Capital Receipts and Expenditures 23. Letting Rates Adopted for Determination of Rental Value in Trivandrum 24. Public Finances of Municipal Bodies in Tamil Nadu, 1984/85 25. Cciporation of Madras -- Summary of Current, Capital and Elementary Liucation Accounts 26. Corporation of Madras -- Current Expenditure 27. Corporation of Madras -- Currant Revenue 28. Corporation of Madras -- Capital Receipts and Expenditures 29. Corporation of Madras -- Elementary Education Fund 30. Corporation of Madras -- Revenue from Service Charges and Fees, 1988/89 31. Madras Metropolitan Water Supply and Sewerage Board -- Income and Expenditure 32. Madras Metropolitan Water Supply and Sewerage Board -- Balance Sheet 33. Madras Metropolitan Development Authority -- Receipts and Expenditures, 1988/89 and 1989/90 34. Pallavan Transport Corporation Ltd. -- Operational and Other Statistics 35. Pallavan Transport Corporation Ltd. -- Balance Sheet - 95 - Table 1 INDIA -- SUMMARY OF PUBLIC F-INANCES OF MUNICIPALITIES, 1979/80 (million rupees) Current revenue 8,507.5 Tax revenuc 5,568.0 Non-tax revenue 839.4 Grants 2,100.. Current expenditure 7,566.4 Current surplus 941.1 Capital expenditure 2,,,.56.8 Financing of overall deficit 1,515.7 Government loans and grants 565.9 Loans (342.8) Grants (223.1) Other loans 351.3 Adva:ices and deposits 639.4 Other -40.9 Source: A Study of the Financial Resources of Urban Local Bodies in India, and the Level of Services Provided (NIUA. 1983). Table 2 INDIA -- CURRENT EXPENDITURES OF MUNICIPALITIES, 1979/80 (million rupees) General administration 883.5 Public health 1,614.4 Public works 1,136.4 Street lighting aad fire brigade 552.2 Water supply an, .!rainage 1,050.7 Education 733.4 Recreation 93.1 Miscellaneous 1,502.7 Total 7,566.4 Source: A Study of the Financial Resources of Urban Local Bodies in India, and the Level of Services Provided (NIUA, 1983). - 96 - Table 3 INDIA -- CURRENT REVENUES OF MUNTCIPALITIES, 1979/80 (million rupees) Tax revenue 5,567.9 House and property tax 1,410.1 Education cess 116.8 Libraries 13.6 Fire fighting 26.9 General sanitary 41.2 Lighting 77.2 Water tax 214.3 Water rae -- taps 41.4. Water rate -- metered 386.0 Drainage 120.0 Octroi 2,237.6 Animal and vehicles tax 45.9 Trade, callings and professions 75.4 Advertisement tax 31.2 Show tax 44.8 Entertainment tax 210.0 State and Central Government buildings 57.2 Building license fee 21.0 Miscellaneous 397.3 Non-tax revenue 839.4 Rents and prices 486.7 Fees and fines 326.1 Betterment levy 26.5 Grants 2,100.1 Total 8,507.5 Source: A Study of the Financial Resources of Urban Local Bodies in India, and the Lev,. of Services Provided (NIUA, 1983). - 97 - Table 4 INDIA -- ORDINARY GRANTS TO MUNICIPALITIES, 1979/80 (million rupees) Towards assignment of taxes 537.6 Entertainment tax 277.2 Motor vehicle tax 70.9 Stamp duty 61.1 Profess.'onal tax 10.1 Land revenue 12.3 Education and health 52.5 Mis:ellaneous 52.9 Towaris other than taxes 1,562.4 In lieu of octrc4. 408.1 Education 406.3 Medical and public health 27.0 Revised pay scales 278.9 Roads 123.0 Electricity 4.6 General purpose 123.2 Family planning 16.2 Miscellaneous 175.1 Total 2,100.0 Source: A Study of the Financial Resources of Urban Local Bodies in India, and the Level of Services Provided (NIUA, 1983). - 98 - Table 5 INDIA -- CAPITAL EXPENDITURES OF MUNICIPALITIES, 1979/80 (million rupees) Water supply 707.4 Drainage 127.9 Sewerage 127.0 Public health 164.5 Roads 440.8 Tree plantation 22.9 Provision of signals and roads 8.7 Slum clearance 56.1 Housing 67.6 Electricity 87.2 Recreation 14.0 Commercial projects 60.6 Miscellaneous 572.3 Total 2,456.8 Source: A Study of the Financial Resources of Urban Local Bodies in India, and the Level of Services Provided (NIUA, 1983). Table 6 INDIA -- CAPITAL INCOME OF MUNICIPALITIES, 1979/80 (million rupees) State Government loans 342.8 Other loans 351.3 Advances 265.4 Deposits 374.0 Transfer from revenue accounts 156.8 Non-recurring grants 223.1 Miscellaneous 349.1 Total 2,062.5 Source: A Study of the Financial Resources of Urban Local Bodies in India, and the Level of Services Provided (NIUA, 1983). - 99 - Table 7 INDIA -- CURRENT RECEIPTS OF SELECTED MUNICIPAL CORPORATIONS (percent of current receipts) Property Service Octroi Terminal Taxes on Taxes on Current Tax Taxes Taxes Trades Animals Grants and and Callings Vehicles Andhra Pradesh Hyderabad (1980/81) 39.1 3.2 - - 1.2 0.8 0.7 Bihar Patna (1986/87) - 20.1 - - 0.9 1.2 72.7 Gujarat Ahmedabad (1987/88) 10.5 10.5 49.9 - - 0.4 11.8 Baroda (1987/88) 17.1 6.3 48.6 - 0.1 0.3 10.4 Surat (1987/88) 10.9 6.4 63.3 - - 0.6 13.3 Karnataka Bangalore (1986/87) 26.5 .. - - 0.9 0.7 28.8 Kerala Calicut (1987/88) 23.5 29.0 - - 4.4 - 6.6. Cochin (1984/85) 61.1 6.8 - - - .. 8.0 Trivandrum (1981/82) 30.0 - - - 17.1 2.0 5.2 Madhya Pradesh Bhopal (1987/88) 18.3 - - 5.5 - - 54.9 Maharashtra Bombay (1986/87) 13.9 24.4 46.1 - - 0.6 3.8 Tamil Nadu Madras (1986/87) 30.5 - - - 28.2 .. 3.9 Uttar Pradesh Lucknow (1987/88) 20.5 - 49.0 - 0.1 0.9 15.1 Delhi (1985/86) 32.5 0.3 - 15.9 - .. 12.2 Source: Statistical Abstract of India, 1987 (Central Statistical Organisation, Delhi). - 100 Table 8 INDIA -- CURRENT EXPENDITURES OF SELECTED MUNICIPAL CORPORATIONS (percent of current expenditures) Administration Public Safety and Education Public and Collection Health Convenience Works of Revenue Andhra Pradesh Hyderabad (1980/81) 9.8 20.8 .. 1.0 44.5 Bihar P'atna (1986/87) 24.8 39.0 2.8 - 30.7 Gujarat Ahmedabad (1987/88) 19.1 48.4 6.6 23.4 5.8 Baroda (1987/88) 22.4 3.0 6.4 15.8 6.7 Surat (1987/88) 12.8 41.7 4.3 21.4 10.7 Karnataka Bangalore (1986/87) 4.8 19.8 - 3.6 26.8 Kerala Calicut (1987/88) 26.1 10.8 .. .. 52.6 Cochin (1984/85) 19.2 27.2 .. 1.3 13.4 Trivandrum (1981/82) 10.2 7.8 1.4 1.0 31.0 Madhya Pradesh Bhopal (1987/88) 25.3 31.7 8.5 .. 13.5 Maharashtra Bombay (1986/87) 4.2 26.8 16.6 19.0 16.1 Tamil Nadu Madras (1986/87) 13.1 32.5 - 26.8 27.6 Uttar Pradesh Lucknow (1987/88) 16.8 53.4 8.4 2.7 7.6 Delhi (1985/86) 3.3 31.9 0.1 29.9 14.8 Source: Statistical Abstract of India, 1987 (Central Statistical Organization, Delhi). - 101 - Table 9 PUBLIC FINANCES OF MUNICIPAL BODIES IN GUJARAT, 1988/89 (million rupees) Current revenue Tax revenue 2,378.7 Octroi 1,657.0 Property tax 702.2 General (505.9) Water (134.6) Sanitary (25.3) Drainage (35.7) Lighting (0.7) Vehicle tax 9.3 Theater tax 5.1 Other 5.1 Non-tax revenue 1,119.0 State grants 648.4 Education (535.5) Other (112.9) Other 470.6 Current expenditure 3,515.4 General administration 486.6 Primary education 671.6 Public health and medical 715.0 Water supply 315.1 Street lighting 81.8 Interest 372.6 Other 872.7 Current surplus/deficit -17.7 Capital disbursements 829.4 Capital expenditure 670.8 Loan repayments 158.6 Financing of overall deficit 847.1 Government grants and loans 360.0 Grants (147.8) Loans (212.2) Other loans 408.9 Other -426.3 Residual 504.5 Source: Gujarat Municipal Finance Board, Ahmedabad, Gujarat. - 102 - Table 10 AHMEDABAD MUNICIPAL CORPORATION --SUM-MARY OF CURRENT AND CAPITAL ACCOUNTS (million rupees) 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Revised Budget Current Account Revenue 715.4 978.1 974.0 1,195.8 1,364.5 2,007.7 2,059.5 Expenditure 806.1 891.3 1,036.0 1,243.3 1,420.4 1,828.6 2,059.7 Surplus/Deficit -90.7 88.8 -62.0 -47.7 -65.9 179.1 Capital Account Revenue 327.6 440.0 392.6 312.9 331.0 383.0 726. Expenditure 362.6 396.1 255.1 326.0 367.9 454.6 848. Surplus/Deficit -35.0 43.9 137.5 -13.1 -36.9 -71.6 -122. Source: Budget Book, Ahmedabad Municipal Corporation. Table 11 AHMEDABAD MUNICIPAL CORPORATION -- CURRENT EXPENDITURE (million rupees) 1986/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Revised Budget General administration and tax collection 81.3 80.2 98.6 138.2 152.7 225.6 262. Education 140.2 151.1 220.5 303.6 298.0 360.0 345. Public health and medical 113.7 116.6 144.2 171.9 195.0 234.9 268. Water supply 67.5 73.3 84.6 99.0 132.2 167.6 215. Conservancy 47.0 63.3 69.0 71.9 93.2 117.1 130. Roads, bridges, storm water drains, street cleaning, etc. 92.0 100.4 116.3 124.6 152.4 202.4 240. Public works 11.1 12.7 15.4 17.8 19.0 25.7 30. Loan charges / 171.9 181.5 188.5 158.1 210.8 247.1 313. Other 101.4 112.2 120.9 158.2 167.1 268.2 258. Total 806.1 891.3 1,036.0 1,243.3 1,420.4 1,828.8 2,059.7 fa Mostly interest payments. Source: Budget Book, Ahmedabad Municipal Corporation. - 103 - Table 12 AHMEDABAD MUNICIPAL CORPORATION -- CURRENT REVENUE (million rupees) 1985/86 1988/87 1987/88 1988/89 1989/90 1990/91 1991/92 Revised Budget Tax revenue 507.9 741.4 762.2 843.4 1,033_5 1,399. 1,436. Octroi 343.3 581.1 537.4 575.5 734.0 950.0 950. Property tax 157.8 172.7 197.7 261.1 288.9 430.6 464. general (98.1) (140.4) (193.6) (2568.0) (278.0) (200.1) (213. water (28.3) (15.5) (3.3) (5.1) (10.9) (110.8) (121. conservancy (31.4) (16.8) (0.8) ( ..) (..) (119.7) (129. Vehicle tax 5.3 5.7 8.7 5.2 8.8 7.3 10. Theatre tax 1.4 1.9 1.9 1.5 1.9 1.8 2. Fire tax - - - - - 10.0 10. Other - - 18.5 - - - - Non-tax revenue 207.5 236.7 211.8 352.2 321.0 608.2 623.0 State grants -and contributions 78.4 93.8 106.7 211.2 191.4 30.1 360. Edication (73.4) (85.0) (100.9) (203.4) (182.5) (245.3) (246. Other (5.0) (8.8) (5.8, (7.8) (8.9) (114.8) (113. Own non-tax revenue 129.1 142.9 105.1 141.0 129.8 248.1 262. Rent (17.7) (17.3) (19.2) (22.1) (25.7) (28.9) (32. Interest (9.8) (8.2) (10.3) (12.2) (18.7) (18.5) (18. Medical (11.2) (13.4) (14.2) (15.9) (18.7) (21.8) (25. Municipal plots (61.4) (69.8) (34.1) (43.9) (24.5) (110.0) (120. Other (29.0) (38.4) (27.3) (46.9) (42.0) (69.1) (686. Total current revenue 715.4 978.1 974.0 1,196.8 1,354.5 2,007.7 2,059.5 Source: Budget Book, Ahmedabad Municipal Corporation. - 104 - Table 13 AHMEDABAD MUNICIPAL CORPORATION-- CWITAL RECEIPTS AND EXPENDITURES (millIon rupee) 1985/88 1988/87 1987/88 1988/89 1989/90 1990/91 1991/92 Revised Budget Receipts Government grants and loans 18.4 127.3 158.1 96.7 68.0 95.0 381. Grats - 41.8 20.9 15.8 18.5 29.8 16. Small savings scheme grants ( - ) (40.2) (8.0) (2.9) (3.5) (18.9) (10. GMFB /a grants ( - ) ( - ) (11.7) (12.9) ( - ) (10.9) (5. Other (-) (1.6) (1.2) (-) (13.0) ( -) (- Loans 18.4 86.6 135.2 80.9 61.5 65.2 366. State Government loans (1.0) (41.8) (83.3) (51.6) (5.1) (65.2) (175. World Bank loans (17.4) (42.9) (51.9) (29.4) (46.4) ( - ) (191. Gujarat Housing Board loans ( - ) (0.8) ( - ) ( - ) ( - ) ( - ) ( - Public loans 146.4 184.9 123.8 168.4 153.5 113.0 203.4 HUDCO loans 1.6 - 28.0 44.5 36.5 23.1 LIC loans - - - - - - Other loans and grants 8.2 4.3 4.7 4.5 9.3 2.2 8.0 Deposits and advances (net) 153.0 14-3. 5 T 15.3 -6-7 137.3 112.8 Total 327.6 440.0 392.8 312.9 331.0 383.0 726.4 Expenditures Capital expenditure 248.0 238.8 171.7 212.2 233.7 403.6 746. Loan repayments 116.6 157.3 83.4 113.8 134.2 51.0 103. Public loans (1186.8) (80.3) (468.0) 7(78.0) 7956.7) Ts51. 0) (103. Other loans ( - ) (77.0) (37.4) (35.8) (38.5) ( - ) ( - Total 362.6 396.1 255.1 328.0 387.9 454.6 848.8 /a Gujarat Municipal Finance Board. Source: Budget Book, Ahmedabad Municipal Corporation. - 105 - Table 14 AHMEDABAD MUNICIPAL CORPORATION -- REVENUE FROM SERVICE CHARGES AND FEES FOR SELECTED SERVICES, 1989/90 (million rupees) Activity Current Type of Revenue from Expenditure Charge Service Charges and Fees Water 132.2 11.0 Water tax ( - Metered water (10.9) Other (0.1) Conservancy 93.2 0.6 Conservancy tax ( - Sale of compost * (0.4) Other (0.2) Refuse collection 11.9 Public health 35.9 Medical 83.5 19.0 Dispensaries and hospitals (17.9) Ambulances (0.7) Other (0.4) Markets and slaughter houses 1.0 0.9 Education 298.0 0.7 Fees for pre-school classes (0.3) Medical college (0.2) Other (0.2) Property, Land acquisi- tion and management 36.5 39.5 Advertisements on property (13.9) Municipal plots (24.5) Betterment charges (1.1) Street lighting 39.0 0.1 Fire services 11.8 0.1 Recreation (parks, swimming pools, etc.) 20.7 4.1 Source: Budget Book, Ahmedabad Municipal Corporation. - 106 - Table 15 AHMEDABAD MUNICIPAL TRANSPORT SERVICE -- OPERATIONAL STATISTICS (million rupees) Income Expenditure Profit/Loss 1980/81 99.6 1. .2 -17.6 1981/82 119.5 147.5 -28.0 1982/83 137.6 172.5 -34.8 1983/84 151.8 183.5 -31.7 1984/85 151.1 201.2 -50.1 1985/86 137.4 189.4 -52.3 1986/87 179.3 213.9 -34.7 1987/88 190.3 248.4 -58.1 1988/89 252.9 321.5 -68.6 1989/90 247.4 318.3 -70.9 Source: Statistical Outline of Ahmedabad City, 1988-89 (Planning and Finance Department, Ahmedabad Municipal Corporation, Ahmedabad). - 107 - Table 16 ASSESSMENT TABLE FOR DETERMINATION OF RENTAL VALUE OF RESIDENTIAL PROPERTIES IN AHMEDABAD Gamatal Area Tenements, Apartments, Independent (Village Sites) Row Houses, etc. Bungalow Built-up Assess- Built-up Assess- Built-up Assess- Area ment Area ment Area ment (sq.mt.) (Rs) (sg.mt.) (Rs) (sq.mt.) (Rs) 1 2 3 4 5 6 1 -10 11 1 - 10 13 1 - 50 18 11 -20 12 11 - 20 14 51 - 75 20 21 -30 13 21 - 30 15 76 -100 23 31 - 40 14' 81 - 40 16 101-125 26 41 - 50 * 15 41 - 50 17 126-150 30 51 - 60 16 51 - 60 18 61 - 70 17 61 - 70 19 71 - 80 18 71 - 80 20 81 - 90 19 81 - 90 21 91 -100 20 91 -100 22 101-110 21 101-110 23 111-120 22 111-120 24 121-125 23 121-130 25 131-140 26 141-150 27 For more than 125 sq.mt. For more than 151 sq.mt. For more than 151 sq.mt. rate will be increased rate will be increased rate will be increased at Rs 1 per sq.mt. at Rs 1 per sq.mt. Rs 1 per sq.mt. Note: Kutcha houses not of reinforced cement concrete will be assessed at Rs 12 per sq.mt. Source: Ahmedabad Municipal -irporation. - 108 - Table 17 ASSESSMENT TABLE FOR DETERMINATION OF RENTAL VALUE OF COMMERCIAL PROPERTIES IN AHMEDABAD Type of Property Rate (Rs per sq.mt.) 1. Open plot for commercial purposes 2 2. Open shed 5 3. Enclosed shed, pucca wall 10 4. Enclosed shed with GI sheets or cement sheet wall 7.5 5. With RCC /a construction and RCC shed 15 6. All commercial properties and flats on main road except Ellisbridge 20 a Reinforced cement concrete. Source: Ahmedabad Municipal Corporation. - 109 - Table 18 PUBLIC FINANCES OF MUNICIPAL BODIES IN KERALA, 1985/86 (thousand rupees) Current revenue Tax revenue 249,453 Property tax 75,348 Profession tax 7,799 Entertainment tax 104,141 Duty on transfers of property 35,023 Surcharges on taxes 8,136 Taxes on vehicles and animals 10,167 Other 8,839 Non-tax revenue 131,683 Transfers from State Government 47,645 Income from property 57,098 Other 26,940 Current expenditure Current account surplus (savings) 123,494 Capital expenditure 112,774 Gross capital formation 101,105 Other 11,669 Financing of capital expenditure Savings 131,758 Net borrowing -18,984 Source: An Economic Classification of the Budgets of Municipalities and City Corporations in Kerala, 1982-83 to 1985-86 (Department of Economics and Statistics, Trivandrum, April 1991). - 110 - Table 19 CORPORATION OF TRIVANDRUM -- S0XAr5F CURRENT AND CAPITAL ACCOUNTS (thousand rupees) 1985/88 /a 1986/87 /1 1987/88 /b 1908/89 /b 1989/90 /b 1990/91 /b Revised Budget Current Account Revenue 47,757.3 52,308.0 51,368.8 54,412.6 78,591.8 87,333.6 Expenditure 39,905.4 56,317.3 42,631.4 48,949.8 70,424.5 80,072.5 Surplus/Deficit 7,851.9 -4,009.3 8,727.4 5,462.8 8,167.3 7,261.1 Capital Account Revenue 8,184.1 4,124.4 6,522.0 9,804.9 12,764.3 30,521.5 Expenditure 13,826.7 5,289.0 9,947.9 11,196.9 19,133.0 44,234.0 Surplus/Deficit -5,642.6 -1,184.8 -4,425.9 -1,592.0 -6,368.7 -13,712.5 /a Accounts prepared by accountants. /E Budget documents. Note: Double counting due to transfers from the general account to subsidiary accounts and from ordinary to capital accounts has been eliminated. Table 20 CORPORATION OF TRIVANDRUM -- CURRENT EXPENDITURE (thousand rupees) 1985/86 /a 1986/87 /a 1988/89 /b Management 9,974.5 8,462.3 .7,052.7 Education 823.3 1,038.0 1,562.3 Communications 3,504.8 3,852.5 5,401.8 Roads (2,916.4) (3,378.3) (4,960.2) Town planning (455.7) (368.0) (441.6) Town survey (128.6) (47.5) ( - Slum clearance (4.1) (58.8) ( - Public health 6,268.1 14,187.3 4,841.1 Remunerative enterprises 1,213.8 9,405.2 2,758.4 Lighting 7,545.6 9,374.3 6,560.0 Conservancy 10,520.6 8,213.5 18,715.6 Interest, and loan repayments /c 54.5 1,784.1 2,058.2 Total 39,905.4 56,317.3 48,949.8 /a Accounts prepared by accountants. /b Budget documents. /c Separate details of interest and loan payments are not available for all years. - 111 - Table 21 CORPORATION OF TRIVANDRUM -- CURRENT REVENUE (thousand rupees) 1985/86 /a 1986/87 /a 1988/89 /b Taxation 32,132.4 38,372.4 39,427.8 Property tax 14,624.4 16,310.9 15,334.6 General (5,687.3) (6,343.1) (5,963.4) Water (2,437.4) (2,718.5) (2,555.8) Drainage (4,062.3) (4,530.8) (4,259.6) Lighting (2,437.4) (2,718.5) (2,555.8) Profession tax 411.2 391.3 2,331.0 Entertainment tax 8,430.3 8,229.3 8,378.6 Surcharge on entertainment tax 5,110.4 4,990.8 5,097.2 Duty on transfer of properties 3,465.5 8,113.1 7,966.8 Tax on advertisements 17.6 261.2 245.9 Show tax 58.4 57.9 59.0 Surcharge on show tax 14.6 14.4 14.7 Tax on animals and vehicles 3.8 3.5 n.a. State grants and contributions 7,589.8 5,809.4 6,532.6 Grant for general purposes 772.9 966.2 1,352.6 Specific grants 388.4 2,450.8 2,680.0 Town planning (388.4) n.a. (699.1) Wage board expenses ( - ) n.a. (100.0) Special component program ( - ) n.a. (100.0) Library and reading room ( - ) n.a. (361.4) Anti-filaria scheme ( - ) n.a. (643.4) Maternity and child health ( - ) n.a. (776.1) Vehicle tax compensation 6,428.5 2,392.4 2,500.0 Own non-tax revenues 8,035.1 8,126.5 8,452.2 Building license fees 819.7 895.9 1,060.9 Rent of land and buildings 2,097.1 2,934.4 3,938.4 Rent of markets, stalls, etc. 1,205.2 959.2 1,058.0 Rent of slaughter houses 118.3 251.0 231.1 Rest houses and tourist homes 407.7 423.0 400.0 Charges for public comfort stations 548.4 597.7 594.9 Other 2,834.9 2,065.0 1,168.9 Total current revenue 47,757.3 52,308.0 54,412.6 /a Accounts prepared by accountants. /b Buaget documents. - 112 - Table 22 CORPORATION OF TRIVANDRUM -- CAPITAL RECEIPTS AND EXPENDITURES (thousand rupees) 1985/86 /a 1986/87 /a 1988/89 /b Receipts Government grants and loans 4,982.0 119.5 867.1 Grants (flood relief) (4,857.0) ( - ) ( - Grants (slum improvement) ( - ) ( - ) (807.1) Loans (slum clearance and improvement) (125.0) (119.5) (60.0) Public loans 146.4 -- Borrowing from KUDFC /c - - 2,426.2 Deposits and advances 3,055.9 4,005.0 6,311.4 Total 8,184.3 4,124.4 9,604.7 Expenditures Education 0.4 114.4 31.1 Communication /d 8,878.0 554.4 4,384.8 Public health 2.3 215.6 57.9 Remunerative enterprises 378.2 - 145.6 Conservancy 696.3 508.6 256.1 Deposits and advances 3,871.5 3,896.1 6,321.4 Total 13,826.7 5,289.1 11,196.9 /a Accounts prepared by accountants. lb Budget documents. /c Kerala Urban Development Finance Corporation. /d Roads and buildings, town planning, and slum clearance and improvement. - 113 - Table 23 LETTING RATES ADOPTED FOR DETERMINATION OF RENTAL VALUE IN TRIVANDRUM Area of the Zone Locality Type of Rate Building (sq.mt.) Construction (Rs per sq.mt.) More than (>) 100 1 1 1 3.00 Less than (<) 100 1 1 1 2.75 1 1 2 2.40 1 1 3 1.00 > 100 1 2 1 2.60 < 100 1 2 1 2.40 1 2 2 2.00 1 2 3 1.00 > 100 1 * 3 1 2.50 < 100 1 . 3 1 2.30 1 3 2 1.70 1 3 3 0.90 > 100 2 1 1 2.75 < 100 2 1 1 2.50 2 1 2 2.00 2 1 3 1.00 > 100 2 2 1 2.50 < 100 2 2 1 2.30 2 2 2 1.90 2 2 3 1.00 > 100 2 3 1 2.40 < 100 2 3 1 2.20 2 3 2 1.60 2 3 3 0.60 > 100 3 1 1 1.20 < 100 3 1 1 1.75 3 1 2 1.35 3 1 3 1.00 > 100 3 2 1 1.50 < 100 3 2 1 1.30 3 2 2 1.25 f 3 2 3 1.00 > 100 3 3 1 1.20 < 100 3 3 1 1.10 f 3 3 2 1.00 3 3 3 0.50 Source: Municipal Corporation of Trivandrum. - 114 - Table 24 PUBLIC FINANCES OF MUNICIPAL BODIES IN TAMIL NADU, 1984/85 (million rupees) Current revenue l.094.0 Tax revenue 783.2 Own tax revenue 454.0 Property tax 376.8 Profession tax 62.9 Other 14.3 Shared tax revenue 329.2 Entertainment tax 231.1 Duty*on transfer of property 70.0 Sales tax 22.5 Other 5.6 Non-tax revenue 310.8 Transfers from State Government 144.1 Other 166.7 Current expenditure Current account surplus (savings) ".4 Capital expenditure 629. Gross capital formation 450.4 Acquisition of financial assets (net) 179.3 Financing of gross capital formation Savings 88.4 Capital transfer from the State 155.3 Net borrowing 531.3 Other liabilities (net) -145.3 Source: Economic Classification of Municipal Corporations, Municipalities and Municipal Township Committees Accounts, Tamil Nadu, 1984-85 (Director of Statistics, Department of Statistics, Madras, April 1990). - 115 - Table 25 CORPORATION OF MADRAS -- SUMMARY OF CURRT-,-aPITAL AND ELEMENTARY EDUCATION ACCOUNTS (million rupees) 1982/83 1983/84 1984/85 1985/86 1988/87 1987/88 1988/89 1989/90 1990/91 Revised Budget Current Account Revenue 265.8 307.0 332.2 392.0 469.6 475.2 606.6 661.8 704.4 Expenditure /a 257.1 282.3 324.7 398.5 436.7 494.4 531.2/b 669.8/b 692.5/b Surplus/Deficit 8.7 24.7 7.5 -8.5 32.8 -19.2 -24.6 -7.8 11.9 Capital Account Revenue 116.6 126.7 176.5 302.4 152.6 197.6 241.9 203.6 189.8 Expenditure 100.0 113.1 178.2 227.0 208.5 200.6 187.1/S 252.2/2 233.2/c Surplus/Deficit 16.6 13.6 -1.7 75.4 -55.9 -3.1 54.8 -48.6 -43.4 Elementary Education Fund Account Revenue 44.1 62.7 70.9 81.1 81.8 86.8 90.6 105.5 116.6. Expenditure 67.5 69.2 83.7 106.9 106.9 115.3 128.6 169.7 180.7 Surplus/Deficit -13.4 -8.5 -12.8 -25.9 -25.0 -28.5 -38.1 -84.1 -64.1 /a Excluding depreciation. /b Excluding interest due to the State Government. /c Excluding loan repayments to the State Government. Source: Financial Management Unit, Corporation of Madras. Table 26 CORPORATION OF MADRAS -- CURRENT EXPENDITURE (million rupees) 1982/83 1983/84 1984/85 1986/88 1986/87 1987/88 L988/89 1989/90 1990/91 Budget Personnel 164.0 182.2 207.5 255.4 271.7 308.5 364.7 445.4 473.6 Terminal and retirement benefits 9.9 11.8 17.7 22.3 33.4 38.3 46.1 69.4 88.7 Operating expenses 24.6 24.9 27.0 34.4 31.8 38.2 40.4 49.7 49.1 Repairs and maintenance 16.4 17.6 23.4 26.3 33.1 38.4 47.0 54.0 52.0 Program expenses 2.0 0.3 1.1 3.8 4.1 5.0 5.9 9.0 6.9 Administration expenses 6.9 8.4 8.2 16.0 17.8 15.5 15.6 16.2 13.8 Interest 34.4 37.1 39.9 41.4 44.8 50.5 21.6/a 26.0/a 28.3/a Total 257.1 282.3 324.7 398.5 436.7 494.4 531.2 669.8 692.5 /a Excluding Interest due to the State Government. Source: Financial Management Unit, Corporation of Madras. - 116 - Table 27 CORPORATION OF MADRAS -- CURRENT REVENUE (million rupees) 1982/83 1983/84 1984/85 1985/8 1986/87 1987/88 1988/89 1989/90 1990/91 Revised Budget Tax Revenue 221.8 255.4 279.0 320.4 371.1 396.2 404.3 622.1 562.2 Own Taxes 124.4 .140.6 168.0 168.8 185.4 199.2 186.3 237.1 263 Property tax 101.4 111.7 135.9 144.0 168.2 182.8 172.3 207.6 223 Other 23.0 28.9 32.1 24.6 17.2 16.3 14.0 29.5 29 Share in state taxes 97.4 114.8 111.0 151.7 186.6 197.0 218.0 285.1 309 Duty on transfer of property 23.0 26.8 25.9 37.9 58.2 64.0 80.1 94.0 94 Entertainment tax 51.4 68.0 62.6 81.3 87.5 87.1 91.9 95.0 95 Additional surcharge on sales tax 23.0 30.0 22.5 32.5 40.0 46.0 46.0 96.1 120 Non-Tax Revenue 44.0 51.6 53.2 71.7 98.5 79.0' 102.3 139.6 142.2 State grants and contributions 8.8 5.7 7.0 15.7 22.0 14.9 32.0 41.4 43 Own non-tax revenue 35.3 46.8 48.3 55.9 76.5 64.0 70.4 98.3 98 Service charges and fees 14.1 16.9 23.2 29.7 33.5 37.1 43.8 67.7 71- Sale and hire charges 0.9 2.2 2.3 2.1 2.7 1.1 1.4 1.1 1. Other 20.3 26.7 20.7 24.2 40.3 25.8 25.2 29.4 26. Total Current Revenue 265.8 307.0 332.2 392.0 489.5 475.2 506.6 661.8 704.4 Source: Financial Management Unit, Corporation of Madras. - 117 - Table 28 CORPORATION OF MADRAS -- CAPITAL RECEIPTS AND EXPENDITURES (million rupees) 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 Revised Budget Receipts Government grants and loans 73.5 77.7 119.9 222.6 92.3 97.1 160.4 129.6 137.3 Grants 47.8 44.3 94.9 182.9 46.4 48.1 109.4 106.3 115.5 Loans 25.8 33.4 25.0 39.7 45.9 49.0 51.0 23.3 21.8 Public loans 22.0 24.8 24.8 47.6 33.0 61.2 27.5 26.5 15.0 Grants from others 0.7 - 4.2 0.2 0.7 2.5 0.2 0.5 0.5 Deposits 20.4 24.2 27.6 32.1 26.6 46.8 53.8 47.0 37.0 Private street 3.9 4.5 3.5 4.8 8.8 6.1 4.4 5.0 4.0 Road cut 14.5 13.8 14.9 17.0 16.0 39.4 44.4 40.0 30.0 Street lighting - - - 2.8 1.8 1.2 5.0 2.0 3.0 Storm water drains 2.0 6.0 7.5 7.5 - - - - - Traffic improvements - - 1.7 0.3 - - - - - Total 116.6 126.7 176.5 302.4 152.6 197.5 241.9 203.6 189.8 Expenditures Capital expenditure 47.6 83.4 89.3 121.4 200.0 119.0 112.9 208.7 199.7 Loan repayments 7.6 17.3 50.8 43.8 47.0 79.2 11.0 fa 11.0 /1 - Government loans 2.1 7.3 9.8 11.8 15.0 10.7 - - Public loans 5.5 10.0 11.0 22.0 22.0 68.5 11.0 11.0 - LIC loans - - 30.0 10.0 10.0 - - - - Advances (net) 44.8 12.3 38.1 81.4 -38.5 2.4 63.3 32.5 33.6 Suppliers 30.0 3.0 19.3 47.1 -25.2 -4.8 27.6 20.0 20.0 Contractors 0.1 - 6.5 4.6 -1.5 2.0 31.7 3.0 3.0 Employees /b 2.7 2.0 7.9 4.4 -5.7 2.6 2.3 8.0 9.0 Others /6 12.1 7.4 4.4 5.4 -6.1 2.6 1.7 1.5 1.5 Total 100.0 113.1 178.2 228.5 208.5 200.6 176.1 241.2 233.2 /a Excluding loan repayments to the State Government. /b Transferred from the revenue fund. Source: Financial Management Unit, Corporation of Madras. - 118 - Table 29 CORPORATION OF MADRAS -- EM ENTARY EDUCATION FUND (million rupees) 1982/83 1983/84 1984/85 1986/86 1988/87 1987/88 1988/89 1989/90 1990/91 Revised Budget Income The education tax 27.6 35.3 37.9 47.6 47.5 49.9 49.8 66.3 Grants and contributions 16.5 27.4 33.0 33.4 34.2 36.9 41.1 40.2 Miscellaneous .. .. .. .. 0.1 .. .. Total 44.1 62.7 70.9 81.1 81.0 88.8 90.5 106.5 116.6 Expenditure Personnel costs 49.2 52.4 60.0 73.3 75.9 82.9 92.2 110.9 1 Terminal benefits 5.0 6.2 8.0 12.1 17.4 17.9 19.3 34.8 Operating expenses 0.4 0.1 0.1 0.1 0.1 .. .. 0.1 Repairs and maintenance 0.3 0.6 0.7 3.7 3.9 3.0 3.4 5.0 Program expenses 2.2 7.6 11.2 14.4 8.1 8.4 10.4 15.0 Administrative expenses 0.3 1.8 1.9 2.3 2.5 2.7 3.1 3.3 Advances 0.1 0.5 1.6 1.0 -1.2 0.3 0.2 0.5 Total 67.5 69.2 83.7 108.9 106.9 115.3 128.6 169.7 18 Source: Financial Management Unit, Corporation of Madras. - 119 - Table 30 CORPORATION OF MADRAS -- REVENUE FROM SERVICE CHARGES AND FEES, 1988/89 (thousand rupees) Department Current Type of Charge Revenue frow Expenditure Service Charge and Fees Mechanical engineering 35,069 - Health 84,490 882 Prevention of food adulteration (151). Community center rent (364) Other fees and fines (367) Works 23,460 25,476 Building license fees (25,409) Other fees and fines (67) Electrical 43,499 Deputy and assistant commissioners' offices 179,739 508 Private scavenging fees (440) Removal of encroachments (65) Other fees and fines (3) Education 42,926 30 Secondary and higher secondary fees . (25) Other fees and fines (5) Revenue 16,768 16,078 License fees (8,572) Market fees (3.711) Contract income (780) Advertisements on lamp posts (1,570) Parking fees (1,482) Unauthorized constructions (477) Legal cell 1,033 326 Charges and recoveries (326) Others 104,258 542 Total 531,242 Total 43,842 Source: Corporation of Madras, Income and Expenditure and Balance Sheets, 1988-89. - 120 - Table 31 MADRAS METROPOLITAN WATER SUPPLY AND SEWERAGE BOARD -- INCOME AND EXPENDITURE (million rupees) 1987/88 1988/89 Income Sale of water 125.0 158.4 Grants and subsidies from Government 1.7 1.6 Water tax and sewerage tax 77.3 99.4 Grants for drought expenditure 81.2 69.8 Other income 10.1 9.7 Prior period a4justments 6.4 57.1 Excess provision for bad debts, etc. 0.6 - Total 302.3 396.0 Expenditure Operating and maintenance expenditure 47.0 48.7 Wages, salaries and allowances 100.9 121.7 Office and administrative expenses 8.6 9.6 Repairs and maintenance - drought 81.2 69.8 Depreciation 18.0 22.4 Debt service charges 22.5 26.7 Provision for bad debts 3.8 7.9 Excess of income over expenditure 20.4 89.2 Total 302.3 396.0 Source: Madras Metropolitan Water Supply and Sewerage Board, Eleventh Annual Report, 1988-89. - 121 - Table 32 MADRAS METROPOLITAN WATER SUPPLY AND SEWERAGE BOARD -- BALANCE SHEET (million rupees) March 31, 1988 March 31, 1989 Liabilities Contribution . 228.3 228.3 Grants from State Government 524.2 639.3 Long-term borrowing 617.2 723.7 State Government (552.1) (658.6) Public (65.1) (65.1) Deferred credits and deposits 209.6 260.0 Current liabilities 195.5 310.3 Total 1,774.8 2,161.7 Assets Fixed assets 1,223.4 1,463.0 Current assets, loans, advances and deposits 453.9 690.3 Accumulated deficits to the extent not written off 97.6 8.3 Total 1,774.8 2,161.7 Source: Madras Metropolitan Water Supply and Sewerage Board, Eleventh Annual Report, 1988-89. - 122 - Table 33 MADRAS METROPOLITAN DEVELOPMENT AUTHORITY -- RECEIPTS AND EXPENDITURES, 1988/89 AND 1989/90 (million rupees) 1988/89 1989/90 Ordinary Receipts 43.1 48.2 Interest on investments 21.4 15.4 Government grants 19.6 30.5 Other 2.1 2.3 Capital Receipts 397.1 244.6 Sale of land and buildings 55.0 30.2 Development charges 11.7 14.4 Open space reservation charges 13.7 8.8 Sale of investments 136.5 71.'9 Loan repayments . 4.9 - Government grant 0.2 Loans and advances from the Government 49.7 - Loans from HUDCO 1.2 70.0 Receipts from schemes implemented by the Authority 120.8 24.3 Other 3.4 25.0 Deposits and Advances 51.5 51.8 TOTAL 491.734. Ordinary Payments 78.4 86.5 Wages, salaries and allowances 17.7 23.0 Cost of Project Management Group 7.0 13.8 Interest on Loans 44.3 42.1 Government 40.4 37.1 HUDCO 1.8 2.9 Debentures 2.1 2.1 Other 9.4 7.6 Capital Payments 422.5 217.8 Development works 141.2 126.9 Investments 191.7 43.0 Repayment of loans and advances 51.7 43.5 Government 47.1 39.2 HUDCO 4.2 4.3 Others 0.4 - Other 37.9 4.4 Deposits and Advances 43.3 41.9 TOTAL 544.2 346.9 Decrease in Cash and Deposits 52.6 2.3 Source: Statement of Receipts and Charges of the Madras Metropolitan Development Authority, 1988/89. - 123 - Table 34 PALLAVAN TRANSPORT CORPORATION LTD -- OPERATIONAL AND OTHER STATISTICS Income Expenditure Profit/Loss Minimum - Maximum Fixed Investment (million rupees) Fares (paise) (million rupees) 1980/81 470.8 572.8 -102.0 25 - 140 /a 43.2 1981/82 613.2 729.7 -116.4 30 - 155 lb 61.5 1982/83 637.5 719.1 -81.6 30 - 155 88.3 1983/84 614.0 648.0 -34.0 30 - 155 25.1 1984/85 590.0 661.0 -70.9 30 - 155 0.6 1985/86 727.3 721.8 5.5 40 - 175 /c 70.5 1986/87 750.4 799.2 -48.7 50 - 195 Id 75.6 1987/88 876.9 904.2 -27.3 50 - 200 98.5* 1988/89 976.4 1006.1 -29.7 50 - 200 80.9 1989/90 989.8 1145.9 -156.2 50 - 250 /e 96.3 /a From November 17, 1980. /b From June 6, 1981. /c From April 1, 1985. /d From March 18, 1987. /e From October 1, 1989. If Only buses. Source: Pallavan Transport Corporation Limited, Eighteenth Annual Report, 1989-90. - 124 - Table 35 PALLAVAN TRANSPORT CORPORATION LTD -- BALANCE SHEET (million rupees) March 31, 1989 March 31, 1990 Liabilities Shareholders' funds 128.5 128.6 Capital (120.0) (120.0) Reserves and surpluses (8.5) (8.6) Borrowing 636.9 839.4 State Government (286.6) (316.1) TDFC /a (56.9) (186.1) Banks (25.6) (31.4) ,Interest accrued and due (267.7) (305.7)* Other (0.1) Current liabilities 106.3 120.2 Total 871.7 1,088.2 Assets Fixed assets 162.7 176.7 Investments 1.7 1.7 Current assets, loans and advances 171.1 217.5 Accumul4ted losses 536.1 592.3 Total 871.7 1,088.2 /a Tamil Nadu Transport Development Finance Corporation Ltd. Source: Pallavan Transport Ccrporation Limited, Eighteenth Annual Report, 1989-90. - 125 - SELECT BIBLIOGRAPHY Angadi, D.B. Civic Property Tax. Bombay: Radha Publications, 1990. Bagchi, Amaresh. "Property Tax Reform--The Case of Delhi." 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