Municipal finances in India

DISCUSSION PAPER Report No.: UDD 18 Municipal Finances in India by bhijit Datta December, 1981 Urban Development Department Qperational Policy Staff World Bank The views presented here are those of the author, and they should not be interpreted as reflecting those of the World Bank. The author was a consultant to the Development Economics Depart- ment and the South Asia Programs and Projects Departments. He is a Professor of Urban Administration, Development and Municipal Finance at the Indian Institute of Public Administration. He is also Director of the Center for Urban Studies at the Institute. CC - The author gratefully acknowledges the assistance of Douglas Keare, Johannes Blinn, Sven Sandstrom and Rakesh Mohan. Research Project No.: 672-64 Research Project Name: National and State Analysis of Indian Urban Development NJI - ABSTRACT This paper presents the current information and studies in the field of municipal finance in India, highlights major problem areas as well as the various attempts at resolving them, and, finally, suggests appropriate policy and research action for the Bank. The chapters are organized in the following fashion; the first reviews the organization of urban government, and indicates the trends in both the amount and composition of municipal revenues and expenditures, from a national perspective. Chapter II discusses municipal functional responsibilities and revenue authority for financing urban services.. Chapter III identifies the major sources of municipal revenue and the main obstacles to their fuller utilization. Chapter IV reviews the cur- rent system and practices of inter-governmental relations concerning municipal authorities. Chapter V describes the practices with regard to internal municipal budgetary expenditure control and accounting systems, and cites examples of successful financial management practices. Chapter VI indicates the role of municipal bodies in providing civic service and facilties, as well as their role in and the methods used for medium and long-term fiscal planning and programing. The last chapter focuses on the major problem areas and identifies gaps in knowledge requiring Bank inter- vention through policy action and research studies. MUNICIPAL FINANCES IN INDIA C 0 NTENTS Chapters Chapter Details Pages 1. NATIDNAL F SPCTIVE OF MUNICIPAL FINANCE 1 - 29 Organizational Framework 1 Patterns and Trends in Municipal Finance 12 -2. MUNICIPAL FUNCTIONS AND REVENUES 30 - 59 Functional Responsibilities 30 Revenue Authority 39 Role of Municipal Governments 45 Municipal Fiscal Gap 53 3. MUNICIPAL RE1vNUE MOBILIZATION 60 - 92 Sources of Municipal Domestic Revenue 60 Obstacles to Revenue Mobilization 66 4. INTER -GOV31NMNT.AL FISCAL AND NCILRELATIONS 93 --24 Inter-governmental Relations in Urban Finance 93 Fiscal Transfer to Municipal Authorities 96 State Control of Municipal Finance 110 Machinery for Municipal Supervision 117 5. MUNICIPAL FINANCIAL MANAGEMENT 125 -141 Prevalent Practices 125 Fiscal Planning and Programming 136 Successful Financial Management Practices 138 」 LIS-T OF - TJA3L3 S T ble No. Table Contents Page 1. State- -.ise distribution of municipal authorities in India, 1980 2 2. Relative taxation - central, state and municipal governments in 1977-78 15 3. Overall budgetcary position of municipal authorities : 1970-71 apd 1976-77 16 4. Growth of revenue expenditure of sample municipal bodies: 1970-71 to 1976-77 17 04, India : Revanue structure of municipal authoritie.s7 1960-61 and 1976-77 19 6. India : JTD6 e- v anue structure of municipal a-ut-horities in larger stcates7 1.0,60-61 and 1975-76 20 7. India : Eevenua structu--re of sample municipal aut-hori";ies by siz%e.-cl1r-_-sse..s2 1975-76 2 Sj 81 India : Pattern of ordinary anxpnnditiur-- of municipal auttlhorities, 1960-61 -,nd 1976-77 23 91 India : Pattern of ordinary eaxpenditure of munilci-,-.Nal authoirities in st=-t-30s, 1960-61 24 10, India : Pattarn OC ordinary -9-xpendituraz of sample municipal authorities in larger si .ates, 1975-76 25 11. India : Pattern of ordinaary -Sxpenditura of sample municipal authorities by size-class-es, 1975-76 "zT.-7 12. India Per capita municipal expenditurs in larger st-tes7 1976-77 29 13. India Functional responsibilities of urban serv-i,ces under municipal and state governments 34 14. India ; Revenue authority for urban taxation under municipal and state governments 41 - iv - 15. Inventory of governments in Jaipur city 50 16. Inventory of gcvirnments in metropolitan cities in India 52 17. Desired and actual per capita recurring expenditure of municipal authorities, 1960-61 56 18. Per capita IS level of expenditure for municipal services, 1976-77 58 19. Level of per capita expenditurn. on municipal se1ices, 1976-77 58 20. Structure of municipal taxation in sample municipal authoriti.as: 1970-71 and 1976-77 61 21. Octroi and non-octroi states in India : 1980 63 22. Property tax rates in selected municipal authorit:-ies, 1976-77 71 23. Fiscal transfer to the states cnd the municipal authoritied : 1970-71 and 1976-77 109 24. extent of state control over municipal expenditure 115 25. India: State machinery for municipal supervision 121 26. Time cycle for budget preparation in selected corporations 127 f 1. NATIONAL PERSP3CTIV: OF MUNICIPAL FINANCE Organizational Framework Municipal government in India covers five distinct types of urban local authorities, viz., the municipal corporations, the municipal councils, the notified area committees, the town area committees and the cantonment boards. The municipal corporations and councils are fully representative bodies, while the notified area and town area committees are either fully or partially nominated bodies.- The cantonment boards are created under a central legislation and consist of partially elected authorities supervised by the Union Ministry of Defence. The municipal authorities are creatures of the state governments where the district officer exercises indirect control over their function- ing, except in the case of the municipal corporations which deal directly with the state government. Unlike the rural local authorities (pacchayati raj), the urban local authorities are not organized hierarchically, * The paper would exclude any further discussion of the cantonment boards, as these represent a special category of municipal institution functioning outside the aegis of the state governments. References to municipal bodies in the union territories have also been avoided for the same reason. nor are their activities integrated with either the rural local authorities or the states' field administration in the districts. Tres of authorities The state-wise distribution of municipal authorities in India is shown in Table-1 below: Table - 1 State-wise DIstribution of Municipal Author4tie in Indias 1980 Noifiied T Area and o A. Larger states Corporations Municipalities Town Area t Committees a 1 Andhra Pradesh 1 8 1 10 Assam 1 22 23 Bihar 1 71 64 136 Gujarat 5 50 2 57 Haryana - 28 - 8 Himachal Pradesh 1 18 19 Jammu & Kasbmir 5 15 20 Karnataka 3 12 208 223 Kerala 3 29 1 33 Madhya Pradesh 6 180 24 210 Maharashtra 5 221 - 226 Orissa 26 64 90 Punjab 3 97 7 107- Rajasthan W 144 2 146 Tamil Nadu 2 94 7 103 Uttar Pradesh 5 174 388 567 West Bengal 2 91 7 100 T -3- Notif1ed a Municipal- Area and t B. Smaller States Corporations ities Town Area a commitAes 1 Manipur - 1 21 22 Meghalaya - 1 1 2 Nagaland - - 3 3 Sikkim 1 - - 1 Tripura - 1 - 1 C. Union Territory Delhi 1 1 - 2 Total 40 1274 815 2129 Source: All-India Institute of Local Self -Goverr snt, Bombay. Municipal corporations are constituted for cities and bigger towns and they enjoy more tax powers, functional .competence and autonomy in decision-making, compared to other types of municipal authorities. The municipalities enjoy more or loses the same tax powers as the corporations, except that the degree of state control here is relatively more. The notil.ed area authorities are constituted for rapidly growing towns which do not qualify for full- municipalization, while the town area committees are created for small townships having pronounced rural characteristics. Tax Dowers and functions Municipal authorities enjoy tax powers and functiona; competence as conferred on them by the state governments through a process of delegation -4- incorporated in the governing legislations constituting such authorities. However, the state goveroAents can impose parallel taxes or undertake similar functions. A few municipal legislations empower the local authorities to levy any tax which the state legislature has the power to impose with the consent of the state government (e.g., under the UJP. Municipal Corporations Act, 1959), although this type of general tax power has not been used so far. The taxation powers of the corporations are confined to a few items and are generally of a compulsory nature; on the other hand, the tax powers of the other types of urban local authorities cover a wider range, optional in nature and subject to a procedure for their imposition requiring the final sanction of the state governments. The tax powers of the notified areaand the town area committees are about the same as in the case of the municipalities, except for a greater degree of state control over the town area committees in this regard. Municipal authorities are endowed with specific local functions covering regulatory, maintenance and development activities within their jurisdictions. Most municipal legislations lay down detailed list of functions- these are sometimes laid down in the financial rules. Generally municipal functions are classified into obligatory and discretionary; in West Bengal and Orissa such a distinction is absent. Classifying the municipal - 5 - functions into obligatory and discretionary does not mean that a local authority cannot undertake a discretionary function unless all the obligatory duties have been satisfactorily performed, since eaf orcement of such a condition would entail detailed laying down of physical standards of performance which is not easy for regulatory functions, nor practicable for service functions in view of the general paucity of resources. Criteria for municipalization Most municipal legislations do not lay down any specific criteria for constituting an urban local authority; where they do, a population criteria is generally followed, except in West Bengal where the census tests of urbanization and an income adequacy criterion are followed; in Tamil Nadu an estimated minimum annual income of b 300,000 needs to be assured. An official committee estimated during the mid-sixties that a minimum population of 20,000 would be needed to provide the 1 basic urban services. On this basis, a large number of the existing urban local authorities would have to be de-municipalized. In fact, most of the existing municipal areas, under the census eligibility tests 1. India (Ministry of Health and Family Planning), Re ort of the Rural-Urban Relationship Committee, Vol.I:Deli, 1966, p. 26. -6- for urbanization, are rural in character. Constitution of municipal corporations, at the other and of the municipal scene, should follow the population test of 500,000 and an annual income of R 10 million in terms 2 of the recommendations of an official committee. There is at least one corporation that does not fulfil the population test (Chandernagore), while there are a few municipalities with more than the required population waiting to be accorded corporation status (Srinagar, Coimbatore, 7ishakhapatnam). Apart from the population and income criteria, other factors, such as, territorial extent, commercial and industrial importance, political and funcional importance etc. are also considered to be relevant. Delimitation of a municipal area is generally done on the basis of a compact settlement area; the area is extended later to bring in peripheral urbanized tract in a piecemeal manner. There is a general reluctance on the part of the existing municipal authorities to extend their boundaries even with substantial urban grvth on the periphery (e.g., Calcutta, Madras, Patna, Baroda, Ahmedabad)? 2. Ibid. 3. G.B. Krishna Rao, "Criteria for Upgrading a Municipality as a Municipal Corporation: An Approach", Nagarlok, Vol. VI, No.3 (July-September, 1974). - 7- on the other hand, large tracts of rural areas are included at the time of according corporation status to the municipalities (e.g., Delhi, KAVAL cities of U.P., Poona). In the case of Bombay corporation, extension of its boundary took place on the basis of a separate budget, tax concession and reduced level of municipal services for the suburbs and, later, for the extended suburbs. Executive structure Municipal executive in India has always been highly centralized and built on the notion of separation of executive powers and functions (mistakenly termed as separation between the deliberative and the executive wings) . the executive powers are exercised by the council or its standing committee, while the executive functions remain the prerogative of the chief executive : the commissioner in the corporations and the chairman* in the mnicipalities. Since the corporation commissioner is a state-appointed official and the municipal president is an elected councillor, one notices the anomaly that the most autonomous form of municipal government (i.e. the municipal corporation) abhors political executive and in substance no different from the smaller urban local authorities (viz., the notified and the town area * The terms chairman and president of a municipality have been used interchangeably. - 8- committees and the cantonmelat) in executive decision- making. Only the municipalities stand out as unique local government institutions with an elected chairman as the chief executive. The reason for this anomaly is historical - there has not been any change in the executive system of the corporations - except during a brief interval in Calcutta between 1923-51 - ever since the system was adopted in Bombay in 1888; in the municipal arena the district officer or his nominee used to be the ex-officio chairman of a municipality until 1919 when the Montford reforms replaced him by an elected councillor, inheriting his decision-making prerogatives (weak-Mayor system in the American parlance). The only exception to this system occurred in the erstwhile Madras Presidency in 1933 in the wake of centralization of municipal personnel and the municipal executive structure was remodelled on the corporation system. After Independence and the reorganization of states, all the southern states, viz., Tamil Nadu, Kerala, Andhra 4 Pradesh and Karnataka, have followed the Madras pattern. 4. The corporation system of local executive is also prevalent in the rural local governent set-up. One might recall that under the French system of local administration the Mayor was initially state-appointed; after this position became elective, the Mayor combined the dual role of acting both as a state agent as well as a representative of the council. Similar developments did not take place in India; hence the anomay. The author is grateful to Prof. G.W.Jones of London School of Economics for clarifying the French system. - 9.- State-municilal relations From the point of view of state-municipal relations significant differences in formal position exists in respect of the municipalities belonging to the Bengal pattern on the one hand, and the Madras pattern on the other. Within the Bengal pattern, Gujarat and Maharashtra municipalities having developed internal organizational strength through improved staff- ing practices under separate personnel system, the nature of state control is somewhat positive and enlightened. Municipalities in the north and central India, by and large, have adopted centralized staffing pattern under the unified personnel system, while those of eastern India lack a well-developed staffing pattern and continue to function under the rubric of the separate personnel system. In these areas the extent of state control taries - in northern and central India, control of municipal staff is exercised by the newly- appointed state functionary, called, the director of municipalities; and in eastern India state control is exercised through ad hoc posting of state officers to the municipalities. Municipalities in the southern states, following the Madras pattern, have not only centralized municipal cadres controlled by the state director, but their decision-making mechanism has been effectively integrated with the state administration so * 10 - much so that these display the characteristics of the French system of local administration. At the corporation level, wherever centralization of staff has taken place (Kerala, Andhra Pradesh, Rajasthan, U.P.), there has been serious inroads into municipal autonomy. This is in addition to the internalization of state control through the appointment of the commissioner. Only in the corporations of Maharashtra and Gjarat, the institutional autonomy is still retained and the commissioner has learnt to live with the wishes of the majority party of the council and the powerful standing .5 committee. Commenting on the nature of state-municipal relations, an expert sums up the position hus : The municipal Acts in India abound in regulatory and punitive provisions which have helped the state executive administration to evolve a system of overlordship much like the French 'tutelege'. State control over municipal financial administration is the strictest. There are the Draconian provisions about default powers, rescission of municipal resolutions, removal of members and supersession and dissolution. Less drastic state powers include those relating to inspection, calling for information and reports, and giving directions and conditional grants-in-aid. Wherever integrated and/or unified municipal services have been introduced, the state governments have 5. The role of the commissioner in Gujarat has been sketched out in a perceptive manner by Anil Bhatt. See his paper, "Municipal Commissioner in Gujarat: Structure, Process and Style", Nagarlok, Vol.X, No.2 (April-June, 1978). encroached upon municipal6powers over personnel administration. Major changes In a number of states, such as, Maharashtra, Andhra Pradash, Gujarat, Kerala, Assam, Orissa, Madhya Fradesh, Rajasthan, Haryana and Karnataka, new laws on municipal administration have been passed. These are either consolidations of earlier Acts or at best slightly changed versions of the older ones. Even the legislations contemplating major amendments to the municipal legislations in a'few states (e.g., Punjab) tare intended not to confer more powers on the municipal bodies, but to extend the radius of state 7 control". In the case of municipal corporations, Himachal Pradesh has created one for Simla, its capital, with a completely nominated council - thus ending the possibility of any future conflict between the elected councillors and the appointed commissioner. On the other hand,West Bengal has recently passed a new legislation for Calcutta corporation with a cabinet (mayor-in-council) form of executive - thereby abolishing the preeminent 8 position of the commissioner in executive decision-malking. 6. Mohit Bhattacharya, "Urban Local Government", in Perspectives, Supplement to The Indian Journal of Public Administration, Vol. XVII, No.4(October-December, 1971. 7. Ibid. 8. C.f.,Calcutta Municipal Corporation Bill, 1980. - 12 - As indicated earlier, whenever centralized municipal cadres have been introduced it has affected the executive role of the municipal chairman; in the southern states following the Madras pattern, the executive functions have been completely transferred to the municipal chief officer, while in the other states, adhering to the Bengal pattern, the municipal chief officer has been designated as the chief executive to function under the overall control and supervision of the chairman. Sometimes this results in a conflict situation, where the state director becomes an arbiter in 9 the internal decision-making of a municipality. PQtterns and Trends in Municipal Finance Data limitations An analysis of patterns and trends of municipal finance should be done on the basis of historical and cross-section data of the various municipal authorities in the country. Unfortunately, such data is not available in India. This itself is indicative of the marginal importance of the municipal sector within the total 9. For a case study which graphically portrays the situation see, Abhijit Datta and D.D. Malhotra, 3Authority and Conflict", in Administrative lnvironment A Bunch of Case Studies, New Delhi, IIPA, 1979. - 13 - public sector in the country, as also its insignificance from the point of view of the gross domestic product. The only comprehensive attempt in collecting financial data of the municipal authorities was made by a committee of ministers appointed by the Central Council of Local Self-Government, headed by Rafiq Zakaria in 1963, which made a complete census enumeration of municipal finances for a single year, i.e., 1960-61 (Zakaria 10 Committee). The committee was assisted by the central Town and Country Planning Organisation (TCPO) in the matter of data collection and analysis. Inspite of minor inconsistencies in the data, the report still represents the most comprehensive attempt so far in providing a factual basis of municipal financial analysis in the country and is serving till today as the bench- mark state of the art report on the subject. Two subsequent attempts in collecting municipal financial data on a sample basis are : (i) TCPO attempt in 1978 to collect sample financial data (N = 344) of all types of urban local authorities for 1975-76 to assist the seventh 11 Finance Commission, and (ii) an attempt by the National 10. India, Augmentation of Financial Resources of Urban Local Bodies, Report of the Committee appointed by the Central Council of Local Self-Government, Delhi, 1963 (Zakaria Committee). 11. India, Report of the Finance Commission 1978, Delhi, 1979. -14.. Council of Applied 3conomic Research (NCASR) to collect sample financial data (N = 39) of various municipal authorities for 1976-77 for a study on municipal 12 resource mobilization. We shall primarily rely on the Finance Commission/TCPO and the NCAER data for our analysis and would use the Zakaria Committee's data essentially for control and benchmark purposes. Importance of municipal finance In the absence of reliable financial statistics of municipal finance it is difficultito size-up the share of the municipal sector inhe total public sector of the country; however, on the basis of the Zakaria Committee's data one could roughly place it at around 8% in 1960-61. The NCAER study attempts comparison of relative taxation by the central, state and municipal governments during 1977-78 as presented in Table 2-belows Assuming an identical relationship between taxation and total expenditure in the municipal sector, one could conclude that the relative position of the municipal sector has weakened by about 57% between 1960-61 and 1977-78. One could also presume that this is 12. National Council of Applied Economic Research (NCAER), A Study of the Resources of Municipal Bodies, New Delhi, 1980. * 15 - Table 2 Relative Taxation- Centralt State and Municipal Governments in 1977-78 Taxes Levied By: Per capita Tax Revenue Tax (s) ( Million (Share in tota Central Government 317 706 51.13 State Governments 275 612 44.34 Municipal Governments 50 63 4.53 1,381107Z Source : NCAER Study, p. 33 (Table 111.14). primarily due to the dramatic increase in the expanding role of the state govera,ents since Independence, particularly as a result of the implementation of the successive five year plans from 1950-51 onwards. Overall trend The overall trend in the municipal budgetary position between 1970-71 to 1976-77 shows considerable improvement; the growth in municipal expenditure has been slower than in municipal revenues resutling in unspent surpluses, which is more pronounced in the case of corporations than in municipalities, as shown in Table-3. - 16 - Table - 3 Overall Budgetgry Position of :Mun±cipn1 Authorities: 1970-71 and 1976-77 (Rs. Per capita) Revenue Capital Overall Account Account Position 70-71 76-77 70-71 76-77 70-71 76-77 Corporations 2.60 20.13 (-)3.16 (-)6.93 (-)0.56 13.20 Municipalities 2.14 7.29 (-)0.86 0.16 1.46 7.45 Total: 2.50 17.09 (-)2.57 (-)5.25 (-)0.07 11.84 Source: NCA3R Study, p.16 (Table III.1). The data also shows that a large part of revenue surplus has been diverted to bridge the deficit under capital account, especially in corporations. In municipalities the capital budget was more or less balanced. This is the result of a faster growth in receipts of municipal bodies, especially revenue receipts, than in their expenditure.13 The growth of revenue expenditure among the municipal authorities during 1970-71 to 1976-77 may be seen in Table 4 belowe One notices that the grovth in establishment and collection charges is marginally higher than the overall 13. Op. cit., pp.16-17. -17-W Table - 4 Growth of Revenue Expenditure of Sample Municipal Bodies. 1970-71 to 1976-77 (Per cent/year) Items of Expenditure Corporations Municipalities Tgl 1. Establishment and 13.8 13.3 13.7 collection charges 2. Public Health 13.7 13.7 13.7 3. Public Safety 15.8 12.0 15.3 4. Medical 14.6 4.7 14.3 5. Water Supply 4.4 12.9 5.5 6. Education 12.6 9.2 12.3 7. Roads 14.5 10.0 13.9 8. Others 10.7 15.0 11.1 Total: 12.5 12. 6 12 Source: NCA3R Study, p. 19 (Table III.4)a increase in municipal expenditure. The growth of expenditure on water supply in the corporations is only 35% of the general growth rate on this account, which could mean that the municipalities have been more active in this field in recent years. On the other hand, growth in expenditure in medical and education in the municipalities is only 33% of the general growth rate, thus indicating a shift of municipal priorities for environmental r1ther than personal social services. - 13 - An attempt was made in the NCAER study to compare the compound growth rates of total revenue, tax revenue and revenue from commodity taxes for the central, state and sample municipal authorities during 1970-71 to 1976-77. The result shows that the annual growth of municipal revenue was only slightly lower (15%) than for state (17.6%) and central government (17.1%). The growth rates of municipal taxes are particularly lower in the states where octroi is not levied; among the octroi-levying states, the growth rate of octroi was much higher in.the corporations and major municipalities than in smaller municipal towns. This indicates that as between the two major municipal taxes - property tax and octroi - the relative potentialities of property tas has been under- 14 utilized. Resource structure An analysis of the trend in the municipal revenue structure may be made by comparing the data available in the Zakaria Committee and the NCAER study as per Table 5. 14. Op. cit., pp. 21-22. For a detailed discussion on the constraints of resource mobilization through property taxes, see chapter 3 below. - 19 - Table - 5 India : Revenue Structure of Municiral Authorities 1960-61 and 1976-77 (In Percentages) Revenue Sources Corporations Municipalities 60-61* 76-77+ 60-61* 76-77+ 1. Tax revenue 72.70 72.33 60.90 58.43 2. Non-tax revenue 16.40 14.08 23.90 19.19 3. Grants-and contri- 10.90 13.59 15.20 22.38 butions 100.00 100.00 100.00 100.00 Source: *Zakaria Committee, 1963, p. 156. +ScAER Study, 19., ;p. 18. Compared to the corporations, the municipalities rely less on tax revenue, and more on non-tax revenues* and grants. In recent years, the reliance on grants by the municipalities seems to have increased at the cost of non-tax revenues; this seems to be the position in the case of the corporations as well, although to a lesser degree. We now turnto a state-wise comparison of municipal revenue structure on the basis of the Zakaria Committee's report and the TCPO data appearing in the .seventh Finance Commission's report. The combined data is presented in Table 6. A casual look into the figures presented would make one feel somewhat uneasy about the 1975-76 data pertaining to * Non-tax revenues comprise of rents, fees, income from commercial undertaking, interest -an investments etc. Table - 6 India: Revenue Structure of Municipal Authorities in Larger States., 1960-61 and 1975-76 (In Percentages) Larger States Tax Income Nontax revenues Revenue Grants Total 60-61 75-76 60-61 75-76 60-61 75-76 Ord. Income 1. Andhra 61.76 63.20 18.93 17.54 19.31 19.26 100 Pradesh 2. Assam 50.00 53.44 17.80 35.14 32.20 11.42 100 3e Bihar 49.75 36.55 12.79 16.75 37.46 46.70 100 4. Gujarat 70.36 24.10 19.52 69.07 10.12 6.83 100 5. Haryana - 64.37 - 28,10 - 7.53 100 6. Himachal * 70r22 - 25.96 - 3.82 100 Pradesh 7. Jammu & 85.30 48.62 14.70 49.37 - 2.01 100 Kashmir 8. Karnataka 64.78 79.67 20.51 17.75 14.71 2.58 100 9. Kerala 54.22 72.25 31.93 18.48 13.85 9.27 100 1.0. Madhya 70.54 77.68 15.39 17.24 14.07 5.08 100 Pradesh 11. Maharashtra 76.25 68.78 16.99 15.73 6.76 15.49 100 12. Orissa 43.10 51.12 14.80 22.84 4210 26.04 100 13. Puniab 68.70 79.30 30.00 -18.98 1.30 1.72 100 14. Rajasthan 61.40 78.35 25.50 21.50 13.10 0.15 100 15. Tamil Nadu 63.01 64.80 26.22 32.16 10.77 3.04 100 16. Uttar 53.22 59.78 27.60 21.40 19.18 18.82 100 Pradesh 17. West Bengal 65.22 60.10 19.55 10.90 15.23 29.00 100 All India 66.29 63.47 20.41 23.58 13.30 12.96 100 Source: Zakaria Committee, 1963, p.351 and Finance Commission, 1978) op.cit., pp.226.32. -20- - 21 - Gujarat, Karnataka and Rajasthan. On an overall basis it would appear that over time the proportion of non- tax revenues has increased, while the reliance on tax revenues and grants has decreased. By itself this may be regarded as a welcome development, but without a more reliable data base spread over a continuous period, it is difficult to come to any firm conclusion. The fact that this contradicts the position discussed earlier (Table-5), is another indication of the unreliability of 1975-76 data presented in the seventh Finance Commission report; we use it primarily for its state-wide break-up. This is also reflected in the municipal expenditure data discussed later. The variation in external assistance to the municipalities indicates lack of any settled policy on the part of the states towards grants-in-aid; in case6f West Bengal this has shot up by doubling its proportion, while in as many as 9 states this is still below 10%. A comparison of municipal revenue structure by population size-classes was compiled by the TCPO for the seventh Finance Commission for the year 1975-76, aS presented in Table 7. The data seems somewhat abnormal for the size-class II; bfarring this, it would appear that the reliance on tax resources is more on the part of the large authorities than the smaller ones. Surprisingly, the latter authorities are depending more on non-tax revenues than on grants to make up for their weak revenue bases. At the size-class II, one would have expected the proportion of grants to be somewhat more to reveal a consistent pattern. - 22 - Table-7 India : Revenue Structure of Samie Municipal Authorities by Size-Classes. 195-76 (In Percentages) Class Population Size Tax Non-tax Revenue Total Ordinary Income Revenues Grants Income I. 2,000,000 and above 71.14 18.66 10.20 100 II. 500,000 - 1,999,999 48.88 39.81 11.31 100 III . 100,000 - 499,999 69.16 16.94 13.90 100 IV. 50,000 - 99,999 64.87 22.44 12.69 100 V. 20,000 - 49,999 61.70 22.52 15.78 100 VI. 10,000 - 19,999 62.44 21.49 16.07 100 VII. 9,999 and below 54.42 30.22 15.36 100 All - India 63.47 23.58 12.95 100 Source: Finance Commission, 1978, op. ait., pp.226-7. Expenditure Pattern A comparison of the pattern of municipal expenditure during 1960-61 and 1976-77 for the corporations and the municipalities is presented in Table - 8. It would be seen that there is hardly any pattern in terms of prioritization among various municipal functions in the corporations and the municipalities. Only education - 23 - Table - 8 India : Patterns of Ordinary Expenditure of Municipa. Authorities, 1960-61 and 1976-77 (In Percentages) Expenditure Items Corporations Munic;Lpalities 6061* 76-77+ 60-61* 76-77+ 1. General administration and revenue collection 12.30 8.33 11.60 13.62 2. Public health 47.50 25.95 33.40 36.80 3. Public safety 8.20 4.62 13.10 5.22 4. Education 15.00 16.64 15.00 9.30 5. Public works 8.50 11.34 13.20 12.38 6. Others (Interest and 8.50 33.12 13.70 22.68 Miscellaneous) 100.00 100.00 1oo.00 1oo.o Source: * Zakaria Committee, 1963, p.158. + NCAER StudY, 1980, p.28. in the corporations and public works in the municipalities received somewhat stable allocations. A state-wise comparison of the pattern of the municipal expenditure between 1960-61 and 1975-76 may be made on the basis of Tables 9 and 10. During 1960-61 for Karnataka and Maharashtra the data on general administration (including tax collection) and roads excluded the municipalities; therefore, the figures are Table - 9 India : Pattern of Ordinary Expenditure of Municipal Authorities in Larger States, 1960-61 (In Percentages) -- Gen.Admn. Public Public Education Roads Loan Others Total Larger States & Coll.of Health Safety Re- Revenues pa.yments 1. Andhra Pradesh 15.29 41.38 7.16 22.29 10.66 2.06 1.16 100 2. Assam 12.80 56.30 7.30 3.10 5.70 5.89 8.91 100 3. Bihar 6.60 38.81 3.87 23.50 8.93 2.56 15.73 100 4. Gujarat 9.20 24.20 6.92 7.44 33.28 10.87 8.09 100 5. Jammu & Kashmir 13.42 34.47 8.87 - 22.70 18.54 2.00 100 6. Karnataka 2.44* 50.66 5.72 11.99 6.06* 7.07 16.06 100 7. Kerala 12.15. 34.43 23.47 0.64 13.89 4.36 11.06 100 8. Madhya Pradesh 10.34 29.92 10.01 '18.22 10.55 1.31 19.65 100 9. Maharashtra 3.73* 41.29 6.89 11.28 5.14* 15.98 15.69 100 10. Orissa 8.82 36.37 10.22 11.96 23.66 0.84 8.13 100 11. Punjab 23.71 38.78 17.55 8.43 8.74 2.70 0.09 100 12. Rajasthan 24.40 45.59 11.34 3.40 5.35 1.63 8.29 100 13. Tamil Nadu 9.51 37.88 11.36 19.02 10.35 7.30 4.58 100 14. Uttar Pradesh 13.17 18.96 20.19 16.74 9.23 6.23 15.48 100 15. West Bengal 23.77 33.64 10.58 5.67 5.87 5.04 15.43 100 All - India 13.13 32.02 12.64 14.34 12.59 4.29 13.09 100 * Excluding municipalities. Source: Zakaria Committee, 1963, pp.368-9. - 24 - Table - 10 India : Pattern of Ordinary Expenditure of Sample Municipal Authorit s Ln Larger States, 1975-76 .(In Percentages) General Collect- Public Public Medi- Water Educa- Roads Loan Others Tota Larger States Admn. ion of Health Safety cal Supply tion Re- Revenue pay- ments 1. Andhra Pradesh 7.93 1.95 22.86 3.65 0.12 16.80 18.68 20.97 0.32 6.72 100 2. Assel 16.33. 7.78 21.21 9.02 1.45 7.31 0.26 10.15 3.64 22.85 100 3. Bihar 13.70 1.07 29.92 6.94 0.93 3.65 7.44 12.31 13.24 10.80 100 4. Gujarat 5.13 4.22 8.87 2.26 6.57 2.46 10.28 0.01 9.95 50.25 100 5. Haryana 13.47 0.16 26.99 7.65 5.48 16.20 0.90 3.11 1.67 24.37 100 6. Himachal Pra- 13.95 14.13 28.47 4.85 0.30 14.17 0.05 3.62 0.86 19.60 100 desh 7. Jammu & Kashmir26.81 0.27 29.33 3.87 - - 1.71 0.31 37.70 100 8. Karnataka 16.67 17.14 8.33 1.78 8.09 1.14 6.55 40.30 100 9. Kerala 32.69 1.61 12.17 7.73 11.21 6.15 0.96 7.75 7.57 12.16 100 10. Madhya Pradesh 17.91 11.11 20.58 7.40 1.45 9.40 4.25 4.47 7.09 16.34 100 11. Maharashtra 6.53 5.91 15.93 4.38 13.51 5.10 9.30 12.03 3.99 23.32 100 12. Orissa 12.48 11.19 23.80 8.30 0.92 2.71 12.51 0.12 3.33 24.64 100 13. Punjab 12.60 17.16 28.37 8.89 1.47 9.14 0.59 4.34 8.93 8.51 100 14. Rajasthan 15.20 14.59 48.46 8.45 0.79 1.63 0.66 0.07 2.13 8.02 100 15. Tamil Nadu 15.69 0.23 24.77 4.69 5.84 11.27 14.80 4.52 7.48 10.71 100 16. Uttar Pradesh 8.05 10.97 41.33 5.03 3.31 6.50 2.22 0.35 6.24 16.00 100 17. West Bengal 27.76 2.72 21.90 5.36 2.27 6.82 7.24 2.41 0.62 22.90 100 All-India 10.63 5.44 21.25 4.78 7.30 6.16 10-03 7.23 5.34 21.84 100 Source: Finance Commission, 1978, op.cit., pp.226-32. - 25 - -26- not comparable. The Bihar data on general administration (including tax collection) also appears to be unusually low;on the other hand, expenditure on miscellaneous items in Bihar, Karnataka, Madhya Pradesh, Maharashtra, Uttar Pradesh and West Bengal appear to be unusually high. The data for 1975-76 shows a number of peculiarities; apparently the figures for at least three states are to be suspected: Gujarat, Jammu and Kashmir and Karnataka. In all these three states the expenditure on miscellaneous items would appear to be abnormal If one recalls the unusual nature of revenue data for Gujarat in 1975-76 the conclusion would be to ignore the municipal financial reporting for the state altogether. Apart from these one would also like to question the Kerala data on general administration and collection of revenue. The unusually low allocation for education in Himachal Pradesh is probably due to the fact that only the Simla Corporation has education responsibilities; for other municipal areas, education is a state function. An analysis of municipal expenditure by population size-classes may be made on the basis of data presented in Table - 11. Again it would appear that for the first two top size-classes the figures are somewhat unusual; class II * Considering the weaknesses of the 1975-76 municipal revenue and expenditure data reported in the seventh Finance Commission (as supplied by the TCPO) one should use it only for broad aggregative purposes; in the absence of any other recent estimates of municipal finances we. have used this as indicative, keeping the 1960-61 Zakaria Committee's data for benchmark and control, Table - 11 India a Pattern of Ordinary Expenditure of Sample Municipal Authorities by Size-ocsses,1975-76 (In Percentages) Gen. Coll.of Public Public Medi- Water Educa- Roads Loan Others Tot Class Population Size Admn. Revenue Health Safety cal Supply tion Re- pay- ment I. 2,000,000 and above 9.95 3.48 17.16 4.65 16.55 1.60 10.02 11.39 4.66 20.54 10C II. 500,000 - 1,999,999 5.94 5.08 14.50 2.16 5.19 6.85 8.10 6.21 8.31 37.66 10C III. 100,000 - 499,999 10.55 4.14 27.46 5.14 3.71 7.80 10.89 7.15 3.43 19.73 10 IV. 50,000 - 99,999 12.60 6.17 25.63 5.30 3.87 9.99 13.60 4.76 4.13 14.25 100 V. 20,000 - 49,999 13.83 8.74 23.70 7.29 3.86 8.49 9.96 3.33 5.05 15.75 10 VI. 10,000 - 19,999 17.98 14.67 23.81 6.96 2.10 5.75 3.97 4.19 4.03 16.54 100 VII. 9,999 and below 23.56 12.49 19.34 8.24 1.60 5.89 2.12 6.03 2.88 17.85 100 All-India 10.63 5.44 21.25 4.78 7.30 6.16 10.03 7.23 5.34 21.84 100 Source : Finance Commission, 1978,op.cit., pp.226-7. - 27 - 28 - data in particular appears somewhat abnormal. Here again the Gujarat data imperfections may have crept in. Otherwise, it would seem that classes III to VI data would represent the normal pattern, the top two classes (I and III and the bottom class (VII) would be somewhat different. As one would expect, the smaller municipalities spend proportionately more on general administration and revenue collection than on normal civic functions. A per capita analysis of municipal expenditure is possible on the basis of data collected directly by the seventh Finance Commission from.the various states for 1976-77. The per capita figures have been calculated for the major states in Table - 12. Here again, Jammu and Kashmir data is not reported fully, Tamil Nadu data is not reported at all, and in several other states the data relates to earlier years. Inspite of these imperfect- ions, one notices that Maharashtra tops the list with Gujarat trailing far behind. Even if one .ignores the contribution of Bombay corporation and the fact that the expenditure data contains capital items as well, one could say that Maharashtra is perhaps the only state in India where the per capita municipal expenditure is reasonably satisfactory. Table - 12 India : Per CaQita Municipal Exrenditure in Larger States. 1976-77 Si. 1976 Projected Municipal Per Cap- R No. Larger States Urban Populat- Expenditure ita Muni- a ion 1(in ts 2 cipal n (in Millions) Millions) Expendi- k ture (in Rs) 1. Andhra Pradesh 9.75 529.0 54.26 5 2. Assam 2.09 46.1 22.06 15 3. Bihar 7.64 166.6 21.81 16 4. Gujarat 8.64 623.4 72.15 2 5. Haryana 2.30 132.5 57.61 4 6. Himachal Pradesh 0.26 17.5 67.31 3 7. Jammu & Kashmir 0.82 23.7 28.90 12 8. Karnataka 8.68 365.9 42.14 9 9. Kerala 4.07 115.4 28.35 13 10. Madhya Pradesh 7.78 373.4 47.99 6 11. Maharashtra 19.07 2155.2 113.01 1 12. Orissa 2.08 91.8 44.13 8 13. Punjab 4.52 148.1 32.77 11 14. Rajasthan 5.30 239.0 45.09 7 15. Uttar Pradesh 14.92 540.3 36.21 10 16. West Bengal 14.55 409,2 28.12 14 All India (16 States) 112.47 5977.1 53.14 Source: 1. India (Ministry of Home Affairs: Office of the Registrar General, India), Report of the Population Projections worked out under the Guidance of the Szpert Committee, New Delhi, 1968, p.148. 2. Finance Commissions 1978. op.cit., p.222. Municipal expenditure figures for Karnataka are for 1974-75; municipal expenditure for Gujarat are for 1975-76, West Bengal figures are for 1975-76 except for Calcutta which is for 1976-77. Tamil Nadu municipal expenditure data was not available. - 29 - 2. MUNICIPUL FUNCTIONS AND REVENUES Functional Responsibilities Following the English practice, delegation of the states' functional responsibilities to the municipal authorities are made in terms of the doctrine of ultra vires, meaning that unless a particular subject is specifically delegated, the municipal authorities cannot undertake it or exceed the extent of such delegation. However, the state governments are not averse to undertake parallel functions without formally amending the extent of functions already delegated. In systemic terms this implies that the legal delegation to the municipal authorities follows the English practice, but the un- limited encroachment into the municipal domain by the states approaches the Soviet system. Municipal functions are enumerated in terms of house-keeping tasks, regulatory activities and civic responsibilities and are described even in terms of minor components, so much so that a major function like public health and sanitation would sometimes be broken- upt- into about 15 components for detailed clarification; - 30 - - 31 - mercifully, this is not attempted in all cases either because it would lead to absurdities (water supply) or the broad functional description is well understood to render further decomposition (medical or primary edu- cation) unnecessary. The practice is to divide a parti- cular state function vertically and delegate its various sub-functions to the municipal authorities; in such a delegation the state governments assume tbnt the process activities, like, laying down of standards, functional planning, construction, resource matching etc., leaving operations and maintenance activities to the municipalitiese Municipal functional domain could be influenced as matters of states' executive discretion and not on the basis of voluntary acceptance by the municipal authorities. That such intrusion at the vertical level for each function in effect means joint responsibility, with consequent - effect on the final output, is not generally appreciated. A brief description of the exact nature of municipal regulatory functions would include enforcement of building bye-laws, registration of births and deaths, controlling noxious trades and nuisance industries, regulating markets and slaughter-houses, ensuring the quality of food and drug sold, checking weights and mAasures etc. The municipal civic functions cover areaS7 such as, water supply, drainage, sewerage and conservancy, public health, sanitation, dispensaries and maternity homes, 32 primary education, street lighting and cleaning, roads and public works. These functions are spelt out more or less in identical terms in the Municipal Acts of Gu4arat, Madhya Pradesh, Maharashtra, Mysore (Karnataka), Punjab, Rajasthan and Uttar Pradesh and cover wide fieldsof activity ... The municipal Acts of Assam and Bihar enumerate the purposes to which the municipal fund may be applied, while in Andhra Pradesh, Kerala and Madras (Tamil Nadu), the same are laid down in Financial Rules. The Acts of Orissa and West Bengal do not give any detailed enumeration of the functions of municipal bodies.15 The legislative uniformity spelling out municipal functional areas are traceable to the provisions in the major legislations in the former British Presidencies. States which have come into being as a result of integration of the former Princely states, however, fellow a centralist tradition - the functional areas allotted to the municipal authorities are somewhat limited as the Princely states used to discharge many normal municipal functions though its own machinery, like, water supply, education, health services, parks and recreation etc. This explains why Karnataka, Andhra Pradesh (Telengana region), Jammu & (ashmir, Himachal Pradesh, Madhya Pradesh and Rajasthan display somewhat restrictive attitude towards municipal functional 15. India, Report of the Rural-Urban Relationship gommittee, Vol.I, op.cit., p.17. - 33 - responsibilities. Over a period of time, however, these differences have narrowed down. The outCstanding example here is that of the Bombay coigeration, conceived on the pattern of the English municipal cor- porations under the Act of 1835, where from its inception in 1888 the functional domain has remained almost unchallenged. It might be appropriate at this stage to examine the extent of concurrent jurisdiction of the states and the municipal authorities in municipal functions on an all-India basis. Absence of detailed state-wise information naturally inhibits any precise conclusion either on a national scale or in terms of a particular state or group of states. Nevertheless, available information does point out that only in regard to such minor functions as disposal of the dead, or maintenance of cattle pounds, the states have not as yet shown any active interest. Table-13 brings out clearly that out of 38 entries in the state-list only 16 entries have so far been partially delegated to the municipal authorities; of these in only 8 fields there is substantial municipal activity, in the remaining 9 fields the states' have reserved a substantially larger role and, in effect, reversed the local delegation. Since education is a single function, varying municipal and state involvement is shown in terms -34 - Table - 13 India : Functional Responsibilities for Urban Services under Municipal and State Governments S1. Subjects under the State Functions as Extent of delega- No. List (II) or Concurrent per the con- tion to the muni- List (III) listed in the stitution cipal authorities constitution (Schedule VII) (Schedule VII) or utilization by the State Govern- ments 1. 2. 3. 4. 1. 11/6 Public health and sanitation Ms 2. 11/6 Hospitals and dispensaries 3. 111/18,19 Adulteration of food- stuffs and other goods; drugs and poisons mS 4. 11/17 Water supply Ms 5. 11/10 Disposal of the dead M 6. 11/13 Roads, bridges, ferr- ies and other means of communication Ms 7. 111/35 Mechanically pro- pelled vehicles, including princi- ples of taxation thereon S 8. 11/18 Land mS 9. II/11 Education: primary Ms i :secondary mS 10. 11/33 Places of entertain- ment and amusements Ms Contd...p.35 -35- 1, 2, 3. 4. 11. 11/12 Libraries, museums and similar institutions; ancient and his- torical monuments and records mS 12. 11/28 Markets and fairs Ms 13. 11/26 Trade and commerce ms 14. 11/31 Inns and inn-keepers ms 15. 11/9 Relief of the disabled and unemployable ms 16. 11/16 Pounds M 17. 11/15 7eterinary services mS 18. ? Public safety, including fire services, control of dan- gerous and dilapidated buildings and street lighting Ms 19. ? Public housing and shelter ma 20. ? Recreational facilities Ms 21. ? General welfare *s Note: Municipal (M/m); State (S/s). Capital letter indicates major responsibilities, while small letter indicates minor participation. The constitutional position of the last four functions is not clear. 36 of primary and secondary education; this has resulted in a total of 17 instead of 16 functional entires referred to earlier. These fields are : (i) medical services, (ii) prevention of food adulteration, (iii) land-use/land-tenure and property rights, (iv) education (secondary), (v) libraries/museums/monuments/archives, (vi) trade and commerce including enterprise activities, (vii) tourist lodges, (viii) welfare of the disabled, and (ix) veterinary services. The remaining 8 functional areas where municipal activities concentrate are : (i) public health and. sanitation, (ii) water supply, (iii) disposal of the dead (exclusive), (iv) municipal roads, bridges and ferries, (v) education (primary), (vi) places of entertainment and amusements, (vii) markets and fairs, and (viii) pounds (exclusive). It would thus be seen that the major civic functions that the municipal authorities handle are public health and sanitation, water supply, public works and roads, primary education, and dispensaries and maternity homes. Other functions are relatively minor or incidental to the major responsibilities. Only one function in Table-13 has been derived from the concurrent list of the constitution: prevention of adulteration in food staffs, drugs etc. This power has been recently been placed in the concurrent list - 37 - with a view to take over the municipal responsibility in this regard and entrusting the state authorities to undertake this function directly. In the absence of detailed information regarding municipal functional responsibilities - apart from whatever is mentioned in the various enabling municipal legislations - it is difficult to assert to what extent municipal functional domain is being eroded. However, experience suggests that the centralization trend at the state level is pronounced, mainly in the fields of social services. Also, there is an increasing trend to hive-off municipal functions to specially-created ad hoc bodies under state auspices. This has been expressed by an official committee in the following vein: In India, there has been an increasing tendency on the part of the State Governments to take over more and more local functions, either directly or by creating special purpose agencies. This has been justified mainly on grounds of the poor performance and inefficiency of the local bodies in the discharge of their functions, inadequacy of efficient staff, want of financial resources, factionalism and mal- administration and indifference of citizens to civic affairs ... the remedy lies not in depriving the local bodies of t1eir functions but in improving and strengthening their organisational and administrative set-up, allocating to them adequate resources and giving expert and technical h lp in the discharge of their functions.16 16. Op. cit., pp. 16-17. At this stage, one might also point out the inadequate constitutional provision for four functions, such as, public safety, public housing and shelter, recreational facilities and general welfare. Quite a few corporations undertake fire services, while all municipalities control dangerous buildings; it is not clear whether the term 'public order' (List II/1) would cover this activity. The constitution is totally silent on public housing; perhaps slum clearance could be subsumed under 'public health and sanitation' (List 11/6). Recreational facilities in the urban areas are a major municipal function, like, provision of parks and playgrounds, river-front development, access to scenic spots and other recreational measures; it would be difficult to cover all these under 'places of entertain- ment and amusements' (List 11/33). All municipal legislations contain a residual omnibus power of general welfare or well-being; the state governments also have expanded their welfare services considerably, but some of these cannot be derived either from the constitutional entries on 'relief of the disabled and the unemployable' (List 11/9) or 'social security and social insurance' (List 111/23). On a strict interpretationf the entry on 'land' (List 11/18), as enumerated in the constitution, it is doubtful if even th9power of development control 39 - is subsumed there.* Revenue Authority Municipal taxation As in the case of municipal functions, municipal revenue authority also is derivable from the tax powers allocated to the central and state governments and delegated to the municipal sphere. Table-14 attempts to identify these taxes and see to what extent the municipal authorities enjoy exclusive jurisdiction on their utilization. It will be seen that out of 10 taxes that could be identified with the existing municipal revenue authority, only two are left for their exclusive utilization, viz., (i) taxes on advertisement, and (ii) taxes on animals and boats. In the remaining 8 tax items, the municipal authorities enjoy major tax powers for 7 and the state governments have in effect taken over the remaining tax item on motorized vehicles. The tax item which has not so far been utilized is the capitation (poll) tax. What is noticeable is the increasing tendency on the part of the state governments to encroach into the traditional municipal tax field, *In a Supreme Court case (Maneklal Chhotalal v. M.G. Makwana, AIR 1967 SC 1373) it was held that having regard to tbp pith and substance of the subject matter a town planning legislation is covered by Entry 18 of List II(Land); it could also come under Entry 20 of List III(Economic and Social Planning). The legal confusion thus stands confirmed. m 40 as described in Table-14. Compared to the position earlier (mid-fifties) when an expert committee noticed only one state (Assam) levying a professions tax as a 17 solitary example of state intrusion, the situation today covers a wide-spread tendency to levy parallel taxes in 8 out of 10 items. Commenting on the tendency of encroachments on the part of the state governments in the field of local taxation; another official committee later (mid-sixties) expressed the following view: .. the remedy does not lie in appropriating to the State Governments on area of taxation that legitimately belongs to local authorities and thereby further crippling their already meagre resources but in promoting measures that would / ensure proper exploitation of those resources by local bodies.. .18 The question of reservation of tax fields for exclusive utilization by the local bodies was first raised by the Taxation Enquiry Commission, which recommended the following six taxes for the purpose: (i) taxes on lands and buildings, (ii) octroi, (iii) taxes on non- mechanically propelled vehicles, (iv) taxes on animals and boats, (v) taxes on professions, trades, callings, and employment, and (vi) taxes on advertisements. The 17. India (Ministry of Finance), Report of the Taxation Enquiry Commission, 1953-54, Vol. III, Delhi, 1955,p.359. 18. India, Report of the Rural-Urban Relationship Committeej op. cit., p. 88. 41 - Table - 14 India : Revenue Authority for Urban Taxation under Municipa- and State Governments Iems under the 3xtent of delegation Central List (I) or Taxation heads as to the municipal Sl. State List (II) in per the constitution authorities or No. the constitutiLon (Schedule VII). utilization by the (Schedule VII) State Governments 1. 1/89 Terminal taxes on goods and passengers, carried by railway, sea or air Ms* 2. 11/52 Taxes on entry of goods into a local area for consumption use or sale therein (octoi) Ms** 3. 11/56 Taxes on goods and passengers carried by road or on inland waterways (terminal toll) Ms*** 4. 11/55 Taxes on advertisements other than advertisements in newspapers M 5. 11/49 Taxes on Lands and buildings Ms+ 6. 11/57 Taxes on vehicles sditable for use on roads, including tramcars ++MS 7. 11/58 Taxes on animals and boats M 8. 11/59 Tolls Ms+++ 9. 11/60 Taxes on professions, trades, callings and employment (subject to a maximum on any one person by any state or local authority of a 250 per annum) Ms@ 9. 11/62 Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling @@ms 10. 11/61 Capitation tax * Tax on passengers to pilgrim centres and bound for Calcutta and Howrah. 3 Entry tax in M.P. and for the Calcutta Metropolitan area in West Bengal. *** Only in Jammu and Kashmir. +House tax in Punjab, urban land tax in Tamil Nadu, multi-storey building tax for Calcutta in West Bengal, Bombay building repairs tax in Maharashtra.++Wheel tax of Bombay in Maharashtra and taxes on non-mechanically propelled vehicles elsewhere. +++ Bridge tolls in Bihar, West Bengal and Karnataka. @Rmployment tax in Test Bengal, professions tax in Maha- rashtral U.P.,Jammu & Kashmir, M.P. and Assam.@Theatre tax in Maharashtra and Gujarat, show tax in Tamil Nadu, Kerala and Andhra Pradesh. Note: Municipal (I/m); State (S/S); C2pital and small letters i=dcate substantial or minor utilization respectively. -42- commission also recommended that the local bodies be permitted to impose a theatre or show tax and a duty on transfer of property to be collected by the state governments. The local bodies may also recommend imposition of a terminal toll wherever such taxes exist and also tolls on bridges constructed by them. These recommendations have been supported by thn Zakaria Committee and the Rural-Urban Relationship Committee. An earlier official committee, on the other hand, suggested a much wider area of exclusive local tax jurisdiction. In addition to the six tax fields already mentioned, it was suggested that terminal taxes, taxes on mineral rights, taxes on electricity, terminal tell, tolls, capitation taxes and the entertainment tax should be included in the 19 local tax field. It has also been suggested that there should be an exclusive local tax list in the constitution for use by the elective local authorities, since entry 5 in the State List of the Seventh Schedule in the Constitution contains a mixed bag of authorities like the 'municipal corporations, improvement trusts, district boards (since replaced by the zilla oarishads), mining settlement authorities and other local authorities for the purpose of local self-government or village 20 administration" . 19. India, Report of the Local Finance Enquiry Committee, Delhi, 1951, p. 67. 20. Mohit Bhattacharya, "Delimitation of Municipal Tax Jurisdiction", in Nagarlok, vol. III, No.4(October- December, 1971). - 43 - Fees for licences and services Indian constitution takes a distinction between fees for licences and for services rendered; for the first category of fees there need be no correlation between the amount levied and the cost of administration. This in effect makes licence fee as another form of tax and Judicial pronouncements have upheld the contention that where licence fees are in the nature of a tax, all the procedural formalities for imposition of a tax are to be complied with before such a fee is imposed. In the case of municipal taxation such a procedure is extremely 21 cumbersome. In the case of fees proper, that is to say, fees for services rendered, the obligation is implied for a reasonable correspondence between the cost of services and the amount of fees charged. The rule of quid tro quo is applicable here. Fees may be charges for any function allocated to the municipal authorities and it is possible for a particular function to be financed from both earmarked taxes and fees (water supply, education, roads) or from either of these alternatives. Although it has been suggested by an official committee that the municipal authorities should 22 utilize licence fees for revenue mobilizatioh, one has to 21.For details see : Report of the Rural-Urban Relationship Committee, Vol. I, op. cit., pp. 87-88; also S.N.Jain, Composition of a New Tax by a Municipality : Procedural Problems in Law"', in Nagarlok, Vol. III, No.4(October- December, 1971). 22. Ibid. consider that : There may be found a number of licence fees which could be utilised as a revenue measure as effectively as for regulatory purposes. On the other hand there ma be not a few licence fees which could be eliminated or whose rates could be reduced.23 On balance, however, utilization of licence fees is urged not so much for revenue as for better regulation of trades and business. Other non-tax revenues The 4uestion of undertaking municipal trading and enterprize activities has been debated in India for some time as a means of increasing municipal revenue and thus placing relatively less reliance on taxation. However, the municipal functional lists do not support an indiscriminate extension of municipal enterprize activities, except for public utilities or for promotion of general well-being. The Zakaria Committee thought that if any profit is earned by a municipal utility undertaking, it should reduce the rates charged, rather 24 than be looked upon as a source of municipal income. On the other hand, the Rural-Urban Relationship Committee thought that "municipal concerns should be run on a commercial basis and be a source of revenue to the 25 local body". From the point of view of the revenue 23. Zakaria Committee, p. 51. 24. Op. cit., p. 52. 25. India, Re-ort of the Rural-Jrban Relationshi- Committee, op. cit., p. 105. - 45 authority one has to conclude that the nature of municipal legislations in India do not support a profit-oriented approach to municipal services and in this respect is different from the practice under the 'general competencel approach of the continental local government and also different from local administration under the 3oviet system where local taxation is not a major source of local revenue. Role of Municipal Governments Municipal functions and taxation From the foregoing examination of municipal functional responsi.bilities and revenue authority the following conclusions may be derived: (a) Overlapping jurisdiction: In both the municipal functional and tax domain there is state intrusion; so far no convention could be effective and, therefore, official committees have suggested either constitutional reservation of a local tax field or regarding local government as a third level of the government set-up within the country. Perhaps a local tax list, on the lines suggested by the Taxation E3nquiry Commission covering 6 tax items, indicated earlier, could be incorporated in the constitution. But this, by itself, would not solve the problem of inadequate tax base of municipal government, as the potential revenue yield of - 46 - these taxes is not substantial. The 4uestion of overlapping functional jurisdiction between the municipal and state governments is somewhat more complex; perhaps it would be bett3r to allocate the state functions to the municipalities without detailing these too much and allowing the municipalities to undertake activities not specifically reserved by the concerned state government through statute. This would mean allowing the 'general competence' power to the municipalities within the framework of states' functional competence. (b) Insufficient constitutional entries: It was found that a number of functional areas already being undertaken by or allocated to the municipal authorities do not flow from any reorganizable entry under the state or concurrent lists of the constitution (e.g., land-use control, public safety, public housing, recreation and general welfare).' This needs to be co- rrected without resorting to unrealistic or implausible interpretations of the existing constitutional entries. (c) Revenue sharing: Since the major tax powers lie at the centre, thoughts must be given as to how some of these taxes could either be assignedto or shared with the municipal authorities in the same manner as these are being done for the states. Specific - 47 - pass-through provisions, as in the case of revenue sharing scheme in the USA, could be devised t get around the constitutional status of the municipal authorities. This is already effectively done in the case of terminal taxes; there is no reason why this could not be attempted for income-tax. Moreover, the municipal professions tax is being underutilized, due to its constitutional restrictions to keep within a low ceiling (Rs 250 per annum per assessee) and on the oths. hand, the high-exemptionlimit for personal income tax (R 15,000 and above assessable income per assessee). Here either the limits of professions tax are to be increased to tap the income-tax exempted assessees, or the municipal authorities are to be compensated by the centre for under-utilization of the personal income tax. It may be wiser to give up the right to professions tax altogether in order to have a municipal surcharge on income-tax. Without an access to the more elastic tax sources in the country, it is not possible for the municipal authorities to make a fiscal break-through. (d) Larger municipal tax powers: Strengthening of municipal governments needs to be done primarily on the score of its share in the total taxation system ; from the present level of 4.5% of share of the country's tax resources, the limit needs to be pushed to at least 10%. - 48 - A lrger share of GNP to be routed through the municipal (and local) governments rests on the belief that unless local government is an important partner in the governmental system, reforms in local finance would not be worth attempting. In doing this, apart from reservation of local tax field in the constitution, thoughts are to be given as to how through a system of municipal surcharge on some of the state and central taxes, the relative tax jurisdiction of the municipal governments could be improved to reach the 10% target. (e) Minimum level of municipal services: One could come to the same conclusion fror the angle of municipal expenditure on various functions. It was estimated in the mid-sixties that to provide a minimum levei of municipal services a per capita income of R 30 (at 1962-63 prices) was essential; barring a few major municipalities an. corporations (17% out of the 98 samples selected from all over the country), the majority of the municipal authorities fell below the expenditure limit.26 The situation has not improved in the mid-seventies, as the data collected by the seventh Finance Commission shows. Making price adjustments, a minimum per capita level of desirable municipal expenditure would be around Fs 90 (at 1980-81 prices). This cannot be met without drastically overhauling the municipal fiscal base or revenue authority. 26. Op. cit., p. 84. - 49 - Mnicipal role in urban services 11e h:ve already indicated the a,ture of urban services performed by the municipal authorities fr,)m a national viewpoin . 00Ciou1ly, t0e .L:-. be wide variations between the major corpuations and the average municipality. In t'-vh metropolitan areas, with the exception of Bombay, Poona and Ahmedabad, even the municipal corporations are hemmed in by special purpose authorities for v2rious functions. At the other !nd of the scale, in the smaller towns the municipal bodies function mainly as sanitation and roads authorities. Again, depending on whether it is a large or a sm.ll state, the functional devolution would v2ry; the smaller states really combine the dual role of the state and local authorities. The inherited tradition of centralization of powers would also pervade the attitude of a state created as a result of the integration of the Princely states. * We present in Table-15 the involvement of municipal authorities, state functional departments and special authorities created by the state in the provision of major city services in Jaipur. It will be noticed that many a primary activity which one would expect to be discharged by the city municipality are in fact operated by state departments. This is due to the fact that the city was a Princely state earlier and after its integration the locally-based state functions have not been devolved. The situation would be different in Ajmer, another city in the same state of Rajasthan, which was a former British territory. One would also notice the existence of a local special authority (urban improvement trust) functioning both as a Table - 15 Inventory of Governments in Jaipur City Relative City Services Imrortance Jurisdietion 1. Folice protection s Rcvenu- district 2. Traffic control s City 3. Public health and sanitation M City 4. ~-atir supply State 5. Drainage and sewerage State/City 6. Highways 3 State 7. Roads M,sa City *Outer city and scheme areas 8. Education s State 9. Public transport SA State 10. Housing SA State 11. Urban redevelopment SA City (scheme areas) 12. Hospitals S State 13. Parks and recreation S,m,sa State/City/cheme are as 14. City beautification State 15. Building regulations M City 16. Town Planning U State 17. Stadia mS Inner city/State 18. Electricity SA State 19. Land development. SA City(Outer city and scheme areas) 209 Burial and cremation Msa City 21. Fire services 5 State 22. Museums and monuments 5 State Source: Mohit Bhattacharya, "Organization for Urban Plan Implamentat- ion", in Management of Urban Government in India, Delhi, Uppal, 1966, pp. 138-40. Note: Capital letter indicate major involvement, small letter indicates minor participation. M/m = Municipality; S/s State Government departŠent; SA/sa = jpecial Authority. - 50 - - 51 - redevelorment agency within tie walled-city as also a land development agency on the outskirts of the city limits. Other state-wide functional agencies cover city transport, housing and electricity. Apart from the location of environmental engineer- in- services, the situation in Jaipur typifies the functional role of the municipal authority in a medium- sized city in the country. The situation in the metro- politan cities may be seen in Table 16. The position may be sunmrized as follows: Funcctional extent Metropolitan 'ities I I Bombay Calcutta Madras Exclusively municipal 12 7 7 Exclusively state 6 8 11 Jointly by municipal and state 25 2 Total : 20 20 20 It may thus be seen that the three municipal corporations of Bombay, Calcutta and Madras handle 12, 7 and 7 items respectively out of a total of 20; the state governments of Maharashtra, West Bengal and Tamil Nadu 4andle 6, 8 and 11 of the total functional list, while the joint stete-municipal sectors cover 2,5 and 2 of these functions respectively. Apparently the sway of the Bombay corporation on city services is predominant; Table - 16 Inventory of -Governments in Metro Politan Cities in India Bombay alcutta Madras l. Police Protectiin L(S) L(S) L(S) 2. Traffic control L(S) L(S) L(S) 3. Public health and SanItation L (L) L (L) L(L 4. Water supply L(L) L(L),M(S) M(S) 5. Drainage and sewerage L(L) L(L),M(S) M(S) 6. Highways 3(3) 3(3) S(S) 7. Roads L(L) L(L) L(L) 8. Education: Primary L(L) L(L) L(L) 9. Secondary L(L), S(S) S(s) L(L), S(S) 10. Public transport L(L) M(S) M(s) 11. Housing im(S) L(S),S(S) M(s) 12. Urban redevelopment 1(s) M(S), L(S) S(s) 13. Hospitals L(L),S(S) S(s) S(s) 14. Parks and recreation L(L) L(L) L(L) 15. City beautification L(L) L(L) L(L) 16. Building regulations and developmentcontrol L(L) L(L) L(L),M(S) 17. Stadia L(L) L(S) L(L) 18. Electricity L(L) m (S)ßp(S) S(S) 19. Fire services L(L) S(s) L(L) 20. Museums and monuments $(S) S(s) S(S) Source : Abhijit Datta and Bappaditya Chakravarty, Organizing Metropolitan Develoc-ment, New Delhi, IIPA, 1981, p. 43. Note : L= Local; M=Metropolitan, S3= State. Outside notation indicates jurisdiction, notation within brackets indicate ownership. - 53 - the Tamil Nadu Government on the other hand, overshadows the Madras corporation in this respect. The functional jurisdiction in Calcutta resembles Madras, where the state special authorities seem to predominate. Given the present trend of centralization in city Services, how does one view the future? The following quotation sumps up the future outlook: a closer look at the centralisation process reveals two underlying causes for this phenomenon: (a) the hope of retaining service chrges and borrowing by the ad hoc authorities to finance the functions, and (b) the desire for uniformity in the coverage of social services. The performance of the ad hoc authorities on resource mobilisation has been dismal and since these are to be subsidised from the state-exche,uer, there is a possibility of a reversal of this trend in the urban areas. Therefore, thB -iuestion of decentralisation of state functions is really tied up with the question of improvement of municipal finance.27 Municinal Fiscal Gap Quantification of service levels There is a viewpoint propagated by the functional experts that it is possible and desirable to work out physical norms of various civic services and calculate the quantitative service gap with reference to actual physical performance. This then could be converted in money terms 27. Abhijit Datta, "Municipal Administration in the Coming Decades", in The Indian Journal of Public Administration, Vol. XXVI, No.3 (July-September, 1980). - 54 - and aft=r adjusting for population could be expressed as a rough indicator of the expenditure gap in per capita terms. The concept is erroneous, not only because it ignores the limitations of public revenues, but because it unwittingly assigns a higher priority for a quantifiable group of civic services at the cost of more basic regulatory and public health type of civic services that could be classified as pure public goods. The priority and scale of public services are determined on the basis of their placement in the obligation hierarchy of the governmeht; while pure public goods are provided on the basis of a politically determined level of scale, the semi-public and privat.e goods are subjected to an estimation of the citizens' demand (not need). There is no inherent right on the part of the citizens to expect an artificial scale or 4uality of public services, except tha in the case of a purely public good everybody may expect an equal share. This is not to say that quantification of public services may not be attempted; such -uanitif cation ofspecific services subjected to user charges or for the purpose of budgetary control in terms of a programme and performance budgeting framework could be useful both for allocative andcontrol purposes. However, ease of quanitification is no justification for prioritization of public, including municipal, services. Apart from fixation of quantitative norms, data limitations would prevent a satisfactory estimate of availability of various civic services in terms of a target population or a given area, except perhaps for a - 55 - few mechanized services. The seventh Finance Commission, for instance, attempted to assess the per capita availability of a few selected civic services in a few sample municipalities (with the assistance of 2CPO) but, except for arriving at the per capita availability of water, came to the conclusion that quantification for other services was difficult. The Zakaria Committee had attempted, on the basis of a study prepared by TCPO, to juantify the gap between the desired and the actual levels of municipal services. According to that estimate, the municipal authorities of al types had a total revenue gap of 19 910 million in 1960-61, being the difference between thmir total revenue of Rs 1203 million and the desire Ilevel of revenue of O 2113 million. At current prices this gap would be at least three times the 1956-57 level on which the TCPO data was based, i.e. about Rs 2730 million, even if the larger growth in urban population since 1961 is not taken into account. The 4akaria Committee's estimates are presented in Table-17. From the table it will be seen that the backlog in maintenance expenditure was heaviest in medium-sized towns (classes B and C), followed by small-sized towns (classes D and E), larger.towns and cities (class A) Table - 17 Desired and Actual Per Capita Recurring Expenditure of Municipal Authorities, 1960-61 _In Rurees) Function Classes of Municipal Authorities Class A Class Class Class Class Class Special A B C D 1. Water Supply 10.80 10.20 9.80 8.64 7.56 7.42 2. Drainage and 12.20 11.90 10.80 9.30 8.70 8.20 Sewerage 3. Roads and works 2.50 2,20 1.80 1.35 1.20 1.10 4. Street Lighting and electricity dis- tribution 3.00 2.85 2.50 2.30 2.15 2,00 5. Education 6.00 5.00 4.00 3.00 2.00 1.00 6. Medical and health 3.00 2.00 1.00 0.75 0.50 0.25 7. Fire fighting 0.50 0.40 0.30 0.20 0.10 0.05 8. Horticulture 0.50 0.38 0.20 0.08 0.06 0,05 9. General adminis- 5.00 4.00 3.00 2.00 2.00 1e00 tration (a) Total: Desired 43.50 39.93 33.40 27.62 24.27 21.07 expenditure (b) Total: Actual 33.95 22.22 15.06 12.74 12.49 11.19 expenditure (c) Deficit (a)-(b) 9.55 16.71 .34 14.88 11.78 9.88 Percentage of (c) to 21.96 41.85 54.88 53.89 48.55 46.90 (a) Note: Population Class A Special = 2 million and above, per industrial cities 1 million and above. Other population classes: A = 500,000 to 1,999,999 B = 100,000 to 499,999 C = 50,000 to 99,999 D = 20,000 to 49,999 E = 19,999 and below. Source: Zakaria Committee, pp.36 and 151. - 56 - 57 and, lastly, the largest urban centres (class A special). The optimum revenue was pegged at a higher level than the desired maintenance cost on a sliding scale to emphasize that it is possible to operate the 'essential' municipal services through appropriate user charges, leaving the social services to be financed from general 28 taxation. Highest exrenditur,e standard Departing from the TCPO's approach (as adopted by the Zakaria Committee), the NCA]R in its study worked out an estimate of additional municipal financial require- ments based on per capita highest expenditure standard (iS) for various services. In the absence of norms for optimum level of municipal expenditure, except through the internal budgetary allocations or externally through a well-designed grants system, the HES has been taken as something achievable within the existing constraints of municipal resource mobilization and prioritization. The EMS on each service belonging the municipal authorities within the same class was taken as the 'standard' level of expenditure and compared with the Zakaria estimates after adjusting the prices for 1976-77. The results are presented in Tables - 18 and 19. 28. Abhijit Datta, "Financing Municipal Services', The Indian Journal of Public Administration, Vol. XIV, No.3 (July-.eptember, 1968). Table - 18 Per Capita HES level of 3xpenditure for Munici0al Services, 1976-77 (In Ruiees) Class of Municipal Services General Total Municipal Water Sewerage Street 3du- Medi- Roads adminis- Authori- Supply disposal light- cat- cal tration* ties ing and ion and fire health A Spl. 7.27 26.13 5.10 33.63 27.06 13.13 54.65 166.97 A 15.59 18.19 14.21 19.68 3.1 33.65 72.42 176.85 B 10.31 17.20 7.31 20,03 4.00 12.78 116.23 187.36 C 28.44 21.00 10,43 12.11 7.85 24.49 37.98 142o30 * Including miscellaneous and interest payment. Source: NCAER Study, p.24 (Table II1.7). Table 19 Level of Per Capita Expenditure on Municipal Services, 1976-77 (In Rupees) Classes of Suggested by Highest Actual in sample Municipal the Zakaria expenditure municipal authori- Authorities Committee* standard (HES) ties A Special 139.42 166.97 118.42 A 125.09 176.85 58.10 B 107.05 187.85 48.39 88.52 142.30 73.20 * Inflated for 1976-77 prices. Source: NCAER Study, p. 24(Table III.8). - 58- - 59 The :CAER StudZ makesthe following observations on the HES analysis: The existing gap between the actual and desired levels is so large that highest is still below the desired level in many cases, but is achieveable ... On HES basis the desired level of expenditure of sample municipal bodies should have been ( s 4663 million) in 1976-77 compared to the actual of (h 2357 million) in that year. This indicates that the resources of municipal bodies need to be doubled for improvement in the level of their services.29 In terms of the Zakaria Committee's norms the municipal authorities need an additional 40% of their current total revenue, but in terms of the =;S norms ofthe NCAER the additional municipal.revenue requirement would be 100% to improve their level and quality. The NCAER projects the municipal revenue receipts to R 6482 million and expenditure to R 4884 million for 1982. The expenditure norms of the Zakaria Committee and of the IES, as adjusted for population growth and increased cost of services, are Fs 7660 million and Rs 10,270 million respectively, leaving a large gap between the available revenue and 30 desired expenditure of the municipal authorities. 3 29. NCAER Study, p. 25. 30. Ibid. 3. MUNICIPAL RZ-ENUE MOBILIZATION Sources of Municipal Domestic Revenue Tax revenue Property taxes and octroi are th. major sources of the municipal authorities; other municipal taxes are professions tax, non-mechanized vehicles tax, taxes on posters and hoardings, taxes on animals and boats, tolls, show tax etc. The structure of municipal taxation is presented in the Table -20. It will be seen that relatively speaking property taxes are more important than octroi; together they account for about 95% of the municipal domestic revenue. Over time , the municipalities are leaning more towards octroi and other taxes compared to the corporations where the tax structure remained stable. Other taxes are less significant in revenue terms and their actual levy varies from one municipal authority 31 to another. The cost of collection of these taxes 31. NCAHR Study, p. 29. - 60 - Table - 20 Structure of Municipal Taxation in Samole Munici-;l Authorities, 1970-71 and 1976-77 (In Percentages) T;Mes of Municipal Taxes Types of Authorities/Year Property Tax Octroi Others Total Corporations 1970-71 55.74 38.38 5.88 100 1976-77 55.45 39.64 4.91 100 Municipalities 1970-71 44.11 50.63 5.26 100 1976-77 40.11 55.31 6.58 100 Total 1970-71 54.59 39.59 5.82 100 1976-77 54.08 40.86 5.06 100 3ource: NCA6R Stud.7, p. 29 (Table 111.11). - 61 - - 62 - seems to be high and in their present form these cannot be utilized subst;ntialy for reienus purtoses. The overall growth in municipal tax-revenue was more or less the s!:me f-r the corporations (15.2%) and the municipalities (15-); this included the rates of growth in property taxes - 15.1% in the corporations and 11.3% in the municipalities, and octroi - 15.8% in the corporations and 14.1% in the municipalities. Therefore, from the point of view of utilization of the major municipal taxsources, the corporations have done better 32 than the municip7lities. Tax composition The major distinction that one could maka in the area of municipal taxation in India is between the states where octroi is levied and the states where it is not. Such a categorization is made in Table 21. It will thus be seen that the number of states on both sides are exactly eiqual and the larger (population- wise) states are still relying on octroi. But the trend seems to be for some of the larger states to give up octroi and some of the smaller states opting for it; regional the only exception seems to be West Bengal where a/entry tax 32. Op. cit., p. 30. Table - 21 Octroi and Non-Octroi Stabas in Ildia 1980 Octroi-lev7inE states Non-octroi states S1.No. States Whether recently S.No. States Whether re- introduced? ce nt ly 2bolished? 1. Uttar Pradesh No 1. West Bengal No (except for Calcutta 2. Haryana " metropolitan area) 2. Assam I 3. Punjab " 3. Nagaland ? 4. Himachal Pradesh 4. Tripura 5. Jammu & Kashmir 5. Sik"kim ft 6. RaLjasthan 6. Bihar f 7. Gujarat 7. Tamil Nad,A 8. Maharashtra 8. K=rala " 9. Orissa Yes 9. Andhra Pradesh Yes 10. Meghalaya i 10. Karnataka 11. Manipur 11. Madhya Pradesh " - 63 64 - (octroi) was imposed in 1970 as a source of urban development finance for the Calcutta metropolitan area. TraditiDnally, octroi-levying states hEve poor property tax administration, except perhaps in Ujarat and Mahar-shtra. The implications of octroi abolitidn would, therefore, have consequences for better utilization of the property tax, as well as for the method of compensation devised for the municipalitims, leading to a change in the composition of the municipal revenue structure. We shall revert to the uestion of octroi abolition in the next section on :'obstacles to revenue mobilization' Tax incidence Considering the small share of municipal taxes in th- total taxes levied in the country, it is unlike-ly that any channge in these taxs -:"i brin nå5ut any substaEntial change in exis-ing pattern of iricidence of central and state taxes. Although no detailed study of municipal tax incidence has so far been attempted, available evilence indicates that the tax incidence of octroi is negligible - about b 0.01 per head per day. Considering that items of mass consumption are taxed at a low rats, the incidence of octroi on the poorer 33 people would be even leass. 33. Op. cit., pp. 33-34. 65 The tax incidence on property tax is somewhat more complex. Assuming that property taxes are wholly shifted to the tenants and that the rateable value is correlated with the tenants' income, one could say that -the incidence on property tax is progressive. Among other taxes, professions tax might be somewhat progressive, while the tax on non-motorized vehicles would be regressive. Non-tax revenues The term non-tax revenues covers a wide variety of revenue sources, such as7 re-nts, sale of land, licence fees, fees for services, income from public ( utilitities and interest on investments. In 1976-77, non-tax revenues formed 9.56% of the revenue receipts in the municiral authorities. Between 1970-71 to 1976-77 the share of non-tax revenues increased somewhat in the corporations compared to a slight decrease in the municipalities. The annual growth in non-tax revenue of 15.5% during 1970-71 to 1976-77 is comparable 35 to the annual growth of 15.2% in tax revenue. 34. Ibid. 35. Op. cit., p. 37. -66 Obstacles to Revenue M,obilization Reluctance to levy direct taxes -The Municipal Councils have generally been averse to levying fresh taxes or enhancing the rates of existing taxes. From a study of the tax structure of 100 local bodies, it appeared that as recently as 1962-63, 21% of the local bodies were levying do property taxes, 34% were levying no service taxes, while 27% were levying no vehicles tax. The Committee on Augmentation of Financial Resources of Urban Local Bodies (Zakeria Committee) has also reported that in 1960-61, 35% of municipalities in Gujarat, 18% in Madhya Pradesh, 38% in Punjab, 83% in Rajasthanand 40% in U.P. were levying neither property tax nor any of the ser7ice taxes. In Rajasthan, the levy of house tax7 tax on professions, trades ahd callings, and octroi are obligatory and their rates have been fixed by the State Government, but many local bodies are not collecting house tax or the tax on professions, trades and callings. In Assam and Kerala, the municipal law provides for the levy of a duty on transfer of property, but no local body has utilised this source of revenue. Even where taxes are levied the rates fixed are kept low and the incidence of municipal taxes falls unevenly on different sections of people.36 While there is a general reluctance to levy direct taxes on the part of the municipal authorities, particularly in the octroi-states, one has to concede that the states have failed to induce the municipalities to act in this direction, despite their enormous hold over the municipal destiny. Take the case of Rajasthan (an octroi-state) where more than 80% of the municipalities have neither imposed property taxwr any of the service 36. India,Eatort of the Rural-Urban Relationshic Committee, op. cit., p. 89. - 67 taxes; therM imposition of these taxes a-o not only obligatory, but the state has fixed their rates as well. To the extent of fixed rates, technically these could be regarded as state taxes and the ultimate responsibility for their collection also devolves on the state. The municipalities come into the picture when they would approach to state government to increase the rates and only the collection of the non-statutory part of the tax could be regarded as legitimate municipal responsibility. Apart from these technicalities, there seems to be a dichotomy in the fixation of maximum rates. The maximum limits to municipal tax rates were fixed originally with two considerations: (i) since municipal taxation is a delegated state power it was considered proper to fix a limit to such delegation to satisfy the courts, and (ii) the lurking fear of the colonial administration that without such a limit the elected native gentry might hike the tax rates so high as to affect the colonial commercial interests adversely. The first assumption is misconceived, in the light of the procedural formalities in imposition of a new tax or increasing the rates of an existing tax by the municipal authorities; the second fear was unfounded from the beginning and is irrelevant now. There is, thus, a case for abolition of the maximum limit to municipal taxes altogether. - 68 - As in the case of municipal functions, in municipal taxation also not much useful purposes is served by classifying municipal taxes as compulsory or optional, once municipal discretion is conceded. Where such discretion is interfered with, the consequential responsibility for such action technically lies with the state. In municipal taxation, the only area in which municipalities have freedom is in the fixation of rates, and this includes fixation of not only the minimum and maximum rates, but also at the intermediate ranges, based on a classification of goods, rateable value etc. Recently, the new Calcutta Municipal Corporation Bill (1980) proposes to lay down the entire rate determination of property taxes in the state itself (maximum, minimum and the intermediate ranges); this would mean that the tax can no longer be regarded as purely municipal and, at best, could be treated as an assigned tax. The suggestion that the levy and collection of municipal taxes may be taken over by the state governments, has been rejected by an official committee 5s it strikes 37 at the very root of local self-government. The more practical and effective approach would be to link municipal tax efforts to a system of incentive grants. 37. Ibid. - 69 Proierty taxes (i) Tax components: Property taxes consist of a basic house tax on building with its appurtanant land and a number of service taxes in tha form of surcharges on the basic tax for water, conservancy and drainage, lighting, fire, education and so on. The service taxes are to be distinguished from service charges or fees; these tied taxes are levied where the service in Question is available irrespective of its actual utilization by the tax-payers. This distinction, however, does not operate in Calcutta where a consolidated property tax is levied, -combining both the house tax and the service taxes. Even there, whenever a particular component of service, like, water, drainage and sewerage is not available or privately provided, an appropriate rebate is allowed. The principle of uuid pro 4uo latent in service taxes is inconsistent with the ability-to-pay approach, however crudely defined, in property taxation and the benefit approach in service taxes cannot be easily reconciled with the general concept of the basic 38 levy. A consolidated property tax, without any built-in concessions for particular municipal services, would yield larger revenue. 38. K.S.R.N. Sarma, "Municipal Property tax Rate Structures: A Critique", Naarlok, 7ol.lII, No.3 (July-September, 1980). - 70 - (ii) Tax rates: Generally, the municipal enact- ments envisage a flat or a proportional tax rate. In Calcutta property tax rate structure is progressive with a rate of 15.5% to 33.5% of the annual rental value (ARV). Similar enabling provisions exist in the legislations cover- ing corporations in Andhra Pradesh, Kerala, Madhya Pradesh, Tamil Nadu and Uttar Pradesh. There are at least three problems connected with such progressive rates (a) generally this is accompanied with a high exemption limit and the large majority of properties subjected to taxation (80-85%) falls within the first two brackets, resulting in high cost of administration for the remaining brackets in maintaining tax differentiation; (b) progression necessarily implies introduction of a step or a slab system between the intermediate range (covered by the minimum and maximum rates), resulting in 39 widespread evasion or inequity at the margin; thirdly, the superficially high tax rates at the top of the tax schedule create an illusion, the average effective rate of the tax (ARV/tax revenue) is not apparent. The existing property tax rates in selected municipal authorities is presented in Table 22. 39. This problem has been sought to be corrected by the Calcutta Municipal Corporation Bill (1980) by joining the maximum and minimum rates on a straight line, thus creating an infinite number of rates for the intermediate range. Howaver, the revenue implications of this method are thought to be negative. See K.0.R.N. Sarma, "Froperty Tax Structure in the Calcutta CorporationBill, 1980" Nagarlok, fol.XIII, 'o.2 (April-June, 1981). Table - 22 1rozertv Tax Rates in eected Munici-Pal-Authorities, 197 6-77 (Per cent -er annum) 81. No. Municipal State House Service taxes Total property Authority tax and surcharges tax on ARY Rate 1. Agartala Tripura 3.0 7.0 - 10.3 10.0 - 13.3 2. Alleply Kerala 7.00 8.0 15.0 3. Ambala Haryana 12.5 - 12.5 4. Asansol West Bengal 7.5 17.0 24.5 5. Baroda Gujarat 12.0-30.0 11.0 - 14.0 22.0-44.0 6. Bhubaneswar Orissa 11.0 35.0 - 37.5 45.0-47.5 7. Bikaner Rajasthan 7.5 - 7.5 8. Bombay Maharashtra 25.5 36.0 61.5 9. Cannanore Kerala 12.0 9.0 21.0 LO. Cochin Kerala 5.0 10.0 15.0 Li. Coimbatore Tamil Nadu 7.3 16.7 24.0 L2. Dhanbad Bihar 10.0 20.0 30.0 LS. Faridabad Haryana 10.0 - 10.0 -4. Gauhati Assam 10.0 12.0 22.0 L. Gorakhpur U.P. 4q0-9.0 12.5 16.5-21.5 .6. Hoshiarpur Punjab 10.0-15.0 - 10.0-15.0 .7. Hyderabad Andhra 2.0-15.0 15.0 17.0-30.0 Pradesh .8. Indore Madhya Pradesh 6.0-20.0 6.0-20.0 -9. Jaipur Rajasthan 6.3 - 6.3 JO. Jamnagar Gujarat 10.0 3.0 13.0 - 71 - Cntd ..p.72 72 S1.No. Municipal State House Service taxes Total Prorert* Authority t.zx and surcharges tax on ARV Hat e 21. Kanpur Uttar 10.8-18.8 7.2-6.2 18.0-25.0 Pradesh 22. Kharagpur West Bengal 10.0 16.5 26.5 23. Ko1 r Karnataka 8.0 7.0 15.0 24. Ludhiana Punjab 12.5-15.0 - 12 .515.0 25. Madurai Tamil Nadu 10.0 17.0 27.0 26. Mangalore Karnataka 10.0 13.3 23.3 27. Mysore Karnataka 20.0 3.8 23.8 28. Nasik Maharashtra 19.0 - 19.0 29. Rarchi Bihar 12.5 25.0-30.0 37.5-42.5 30. Sholapur Maharashtra 22.0 5.0-10.0 27.0-32.0 31. Simla Himachal Pradesh 12.5 12.5 32. Tiruchira- pally Tamil Nadu 6.00 26.3 32.3 33. Thane Maharashtra 19.0-22.0 2.0-12.0 21.0-33.0 34. Vishakha- Andhra Pradeshl0.0-12.0 14.1-19.8 24.1-31.8 patnam Source NCAER Study, p.. 41 (Table IV.3). - 73 It would be seen that progressive rates have been adopted both in the corporations (3aroda, 'yderabad, Indore, Kanpur and Ludhiana), as well as in the municipalities (Agartala, Bhubaneswcar, Gorakhpur, Hoshiarpur, Thane and 7ishakhapatnam). In one municipality the house-tax is on a progressive basis, while the service taxes are on flat rates (Gorakhpur); on the other hand, there are also reverse exa@ples of a flat house-tax rate and a progressive service tax schedule (Agartal@, Bhubaneswar, Sholapur and Ranchi). We also have examples of imposition of house-tax alone without any service taxes (Ambala, Bikaner, Faridabad, Indore , Jaipur, Ludhiana and Nasik). Lastly, there are municipal authorities where both the house-tax and the service taxes are on progressive rates (Baroda, Kanpur, Thane and Tishakhapatnam). The rate schedule presented in Table-22 also indicates a number of instances where the maximum total rate exceeds 25%, such as, Baroda, Bhubaneswar, Bombay, Dhanbed, Hyderabad, Kharagpur, Madurai, Ranchi, Sholapur, Tiruchirapally and 7ishakhapatnam. This in a way is indicative of the ineffective valuation of properties, since with a proper valuation it is difficult to conceive of a tax on gross rental exceeding 25%, with an assumed property life of 20 years and a rate of return of 10%. (This is equivalent to 5% rate on a capital value 74 basis of assessment). If, therefore, under the rental system the ra-e of taxation exceeds 25%, with life of asset and rate of return being normal, it is not possible to pay the tax out of current rent. There is thus an economic limit to property taxatiDn. Whenever the rate exceeds this limit and if there is no evidence of property sales subjected to such taxation, one could safely assume that it is tolerated due to the cushion of under- valuation. In effect, therefore, there is a derating of properties and one could regard this as an alternative method of getting around an inelastic or frozen tax base. It might also be mentioned in this context of discriminatory rates for certain types of properties; for instance, the Gauhati and the Bombay Frovincial Municipal Corporations legislations permit charging of a higher rate for certain classes of trade, in Calcutta a 50 per cent additional cess on property tax is being levied for premises used for commercial or aon-residential purposes. (iii) Tax exemptiDn: Among the properties exempted from taxation are those occupied for religious worship, charitable purposes, below a certain rateable *This is dramatically apparent in Bombay where the rates of municipal taxes have touched 61- on top of this there are a number of state taxes that use the urban property base for tax purposes, taking the combined total to around 641,%. - 75 - value on account of indigence, properties belonging to foreign embassies and legations, agricultural lands etc. These examptions, if withdrawn or reduced, would not entail substantial difference in tax revenue (except in Del-ai and New Delhi where there is a case for compensat- ory grant from the centre an account of exemption of foreign embassies). The most important exempted category, however, is those belonging to the central government under the constitution (Article 285) which provides that until a central legislation is enacted governing the method of taxing central government properties, these would be tax-exempt. Sven after the lapse of 30 years since the constitution came into being., no such legislation is in sight and the present arrangement is based on executive discretion in this matter, providing for service charges 40 in lieu of taxes. Basically the concept of tax exmption for central government properties is wrong in the present Indian context; it is a hangover from the earlier privileges of the British Crown. The central legislation in this field was attempted, but was supposed to have been successfully vetoed by the centre's major property-owning departments - the railways, posts and 40. India, Reuort of the _ural-Urban Reletionship Comittee, op. cit., p. 100. - 76 - and telegraphs and defence. There is a need to distinguish between the commercial properties of the central government and other properties for differsntial taxation, al so whenever progressive rates are in vogue the chargeable rate could be fixed at the middle rate for office 41 buildings. There is also disagreement about the method of calculation of service charges, particularly with regard to the historic cost of buildings and land. As for the state government properties, the practice varies: the Rajasthan municipal legislation d-.es not permit it, prior consent of the state government is needed in Karnataka, Maharashtra, Madhya Pradesh and Gujarat for taxing state properties, except for levying serv,ice charges. In other states, the concerned depart- ments do make a contribution on this account, although these are not regularly passed on to the municipal authorities. There is, therefore, a need to rationalize the system on a uniform basis for taxing all government properties - central and state. The other important category which is lightly treated, more by convention than through express legal sanction, is the owner-occu-ier. Favourable treatment of the owner-occupier is accorded through a rebate,usually 41. NCAL:R0 p . 55. - 77 - of 25,%, in assessment; in U.P., this is permissible under law. One study of the property taxation in Gujarat shows that this factor alone, if corrected, 42 could double the tax,yield. (iv) Land taxation: Except in Calcutta and Hyderabad, no other state legislations permit taxation of vacant urban land by the municipal authorities; Tamil Nadu, however, has its own urban land tax. The main justifiCation for taxing vacant lands is to capture a part of the land values that accrue to urban land mainly due to the facilities created by the local authorities. Itwas suggested in a model assessment code that such land be taxed on the basis of its estimated market value at 43 the time of assessment. If the tax is on land value increment Der se then a separate urban land tax could be introduced, as in Tamil Nadu, but its success would depend on : *(a) close collaboration between land registration and taxation authorities, (b) creation of a centralized valuation agency, (c) progressivity in rates, 44 and (d) effective action to correct under-valuation. 42. S.P.Gupta, m'Reforms in Urban Property Taxes - A Case Study of Municipal Corporations in Gujarat", Anvesak, June, 1971. 43. Indian Institute of Public Administration (Centre for Urban Studies), Assessment Code for Valuation of ProDerties in the Municipal CorDorations, New Delhi, March, 1977, p. 15. 44. Abhijit Datta, "Taxation of Urban Land 7alue Increments", in H.U. Bijlani and M.K. Balachandran (eds.), Law and Urban Land, IIPA, New Delhi, March, 1978, p. 154. 78 On the other hand, one could also think of an urban land tax component attached to the municipal property tax system, as in Calcutta and Hyderabad. (v) Taxation base: The most controversial aspect of municipal property taxation is its basis. Following the English practice, in India property taxation is based on the gross annual rental as obtained in a "free market. Due to the operation of rent control in Indian cities, the free market has ceased to exist and the municipal authorities are supposed to value properties for tax purposes on the basis of fair rent prescribed in the rent control legislations, as per the various judicial 45 pronouncements. This has virtually resulted in a freezing of property tax base, particularly for old structures. In order t get away from this impasse, various alternative bases have been suggested: (a) capital value, (b) site 46 value, and (c) area-measurement value. It is realized : (a) that as in the case of rental value, capital value. base also assumes a free market (for property transfer), 45. For a survey of the legal position, as interpreted by the federal court (Supreme Court) see : M.K. Balachandran, "Legal Aspects of Property Tax Reforms, "Naparlok , Vol. XII, No.3 (July-Septem ber, 1980). 46. For a survey of the alternatives, see :Abhijit Datta, "Rental Valuation for Property Taxes", Naarlok, Vol. III, No.3 (July-September, 1971); G. Jha, "Area 7aluation for Property Tax", Nazarlok, Vol. XII, No.3 (July-september, 1980); and Rakesh Mohan, "Indian Thinking on -roperty Tax Reform", Na,arlok, Vol. XIII, No.2 (April-June, 1981). 79 - (b) that except for the undevelooed areas and new townships it would be difficult to adopt the site value system, and (c) that the area method, being a tax on quantity rather than on value, would introduce a large element of subjectivity and be inequitous in its impact. In the absence of a suitable alternative valuation basq there are two ways of tackling the problem (a) to amend the rent control legislations directly and separate the fair rent concept from notional rent for tax purposes, or (b) to allow de- rating of urban properties through increases in tax rates for older properties, even beyond the ARV itself (this is analogous to the English derating of agricultural and industrial properties after the depression of the thirties). Both these measures would call for suitable legislativ7e action by the states. It is estimated that due to the freezing of rents as a result ofthe rent control acts, the revenue loss to the municipal authorities amounts to a third of their total revenue in the larger cities and somewhat less in other towns, due to variations in rental and owner-occupied properties in their respective 47 jurisdictions. 47. A literature survey of underassessments of property taxation appears in a paper by Deva Raj, "-Rent Control, Housing and Property Taxation', Nagarlok, Vol. VIII, No.3 (July-September, 1976). Also see, Maharashtra, Report of the Maharashtra State Municipal Finance Commission, Bombay, 1974. - 80 - (vi) Assessment orocedures: Most municipal legislations provide for a uiniuennial valuation of properties for tax purposes and an annual assessment of properties that are newly constructed or where substantial improvements or alterations have taken place. However, it is not unusual that the assessment lists are not regularly revised and in th process the municipal authorities lose revenue. In U.P., once the quinquennial valuation is made, it is not open to change the list through annual assessment: elsewhere, such rigidities do not exist. The assessment lag mainly occurs due to paucity of staff at th,e municipal level and the process of revision of assessment is regarded as cumbersome, mainly because most of the municipal authorities (barring the corporations) do not have any regular machinery to undertake the task. In a few corporations (Bombay, Ahmedabad, Baroda, Madras) every year a part of the municipal area is taken up for valuation and the entire city is covered within the stipulated period of 5-6 years. The lag in assessment introduces ine-uities in the tax base and results in 48 loss of tax revenue. The other aspect of assessment concerns its 48. Larry Schroeder, "Property Tax Assessment Problems in the United States and India : S-ome Contrasts and Comparisons", Nagarlok, ol. XII, No.1 (January- March, 1980). - 81 - organization. All official commissions and committees that have so far considered this issue, starting from the first Taxation Enquiry Committee (1925), were unanimous in suggesting the creation of a central valuation agency at the state-level. The ostensible reasons for such centralization are (a) the municipal tax revision committees consisting of municipal councillors bring down the assessments arbitrarily and to a substantial extent, and (b) professionalization in property valuation demands a centralized cadre under a single authority, not subjected to local pressures. The experience in centralized assessment attempted so far has not been too happy. In Maharashtra and Andhra Pradesh the attempts failed. The experiences of Assam and Orissa are also not altogether happy on account of : (a) lack of legislative support, (b) lack of clarity in the valuation base, (c) lack of understanding by the municipal staff about the methods adopted, and (d) staff not being immune from local pressures, since the actual 49 valuation is mostly carried out by the municipal employees. West Bengal has recently (1978) passed a legislation creating a central valuation board, which stipulates 49. For Assam experience, see Abhijit Datta, Report on Valuation of Property Taxes in Assam, IIPA, New Delhi (Mimeo), 1971. For Orissa experience, see :NCAER Study, pp. 48-49. 82 - the setting up cf a central board and a number of local valuation authorities. These are practically inde-endent of one another, each to function as a valuation agency for an area. 'What the enactment provides is, in fact, the setting up of a local valuation agency, which also constitutes an Assessment Tribunal for hearing appeals against the general valuation of properties carried out by the agency. It is not clear whether the valuation authority would, once set up, continue to function after completing the valuarion and disposing off appeals5 or it will cease to exist hereafter. The Act is also silent on the organization that will amend the list to include new buildings constructed or alterations and additions to the existing building after the general revision is over.50 (vii) Tax collection: On the score of tax collection efficiency, the municipal authorities in the northern and eastern India, where the staffing situation is chaotic, are particularly weak. The situation is much better in the south India, such as Tamil Nadu, Andhra Pradesh and Kerala as also reasonably satisfactory in the western India, viz., Maharashtra and Gujarat. A brief description of the situation would be as follows: In Madhya Pradesh, during 1961-62 majority of the Municialities collected less than 50 p(r cent of the dues; 6 less than 10 per cent; 7 between 10 per cent and 20 per cent; 13 between 20 per cent and 30 per cent; 22 between 30 per 50. D.D. Malhotra, "Organization of Property Tax: Valuation and Assessment", Na-arlok, 7ol. XI, No.3 (July- September, 1980. - 83 - cent and 40 per cent; and 2.0 between 40 per cent and 50 per cent. In West Bengal, out of 87 municipalities the collections made by as many as 35 were below 50 per cent.51 Apart from improvements in staffing, a better collection efficiency could be achieved through better supervision by the states. Improvements in this sphere could be achieved through a system of incentive grants, tied to collection performancee Timely action on the tart of the municipal authorities concentrating on the major tax payers may also yield substantial.results. Ultimately, however, the chief municipal officer is to be made personally liable for all collections falling below a specif.ied limit, say, 52 75 per cent. (viii) Future outlook: A major break-through in property tax reform in India lies in the direction of reforming its rental base; without either abolition or liberation of the rent control restrictions this seems unlikely. On the other hand, there ar2 formidable difficulties in adopting alternative tax bases. Absence of-reform attempt might promote effective derating having adverse distributional consequences. In the near term 51. India, Reuort of the Rural-Urban Relationship Committee, op. cit., p. 99. 52. Ibid. 84 - however, creation of a central valuation agency would help; improvements in tax collection efforts are also called for through streamlining of the collection system and linking tax recovery with incentive grants. Octroi and terminal taxes The recent literature on octroi and terminal 53 taxes revolves around the question of their abolition. From the revenue angle one could discuss some of the current issues in terms of (i) administrative problems, (ii) the alternatives, and (iii) experience of octroi abolition. We would discuss these in seriatim. (i) Administrative -oroblems: These would include high cost of collection, leakage, harassment to traders and transporters etc. Many of these--roblems could be solved if octroi is regionalized or limited only in big cities. A regionalized octroi, or an entry tax, could be operated only under the auspices of the state government (as in West Bengal and Madhya Pradesh) as it would be difficult to work out inter-local agreements in this area. For the major cities, however, there is a case for a terminal tax where the problem of refund might be obviated. 53. A summary of the current issues on octroi and terminal taxes appears in Nagarlok, Vol. IX, No.4(October- December, 1970). * The constitutional propriety of a regionalized octroi (entry tax) is open to doubt as :ctroi is leviable on goods entering into a local area and (not into a region or a state) for consumption or sale therein. -8 5 - The hardships to traders and transporters could be mitigated through a number of methods: (a) collection ofthe tax through the major transporters, (b) construction of bonded warehouses outside the city limits, (c) introduction of permits for through-traffic, (d) construction of by-passes around the city, etc. The problem of high cost of collection relates to smaller cities and towns; in major cities, like, Ahmedabad and Bombay, the cost of octroi collection is even less than the state sales tax (less than 3%). With regionalization, this problem would probably disappear. The points of octroi leakage are the importers, transporters, agents and the check-post staff. Introduction of a mobile vigilance squad, rotation of staff between the field and office, exercise of discretion limited to the senior staff, collection of octroi intelligence, rationalizatio of the rate schedule etc. are being tried in various places with some degree of success. (ii)Alternatives to Octroi: Octroi substitution could be discussed in terms of taxes on the same base or on alternative bases within the same jurisdiction. So far the alternatives have been discussed by disregard- ing the possibility of alternative local business taxes. Among the state-wide indirect taxes, a progressive turnover tax is less desirable than a flat-rate levy, since the latter would have a built-in flexibility and pose - 86 - lesser administrative problems. A surcharge on sales tax or a municipal sales tax would create several problems of inter se distribution of the tax proceeds to the local authorities, introduce distortions in the sales tax structure and deprive the local authorities of the 54 buoyancy in existing octroi revenue. (iii) Experience of octroi abolition: In Andhra Pradesh, octroi was abolished in the Telengana region (coastal Andhra and Rayalaseema regions did not have octroi). The municipal authoriti3s receive full compensation from the state's own revenues on a fixed basis. This has resulted in a deterioration of municipal financial position. Various alternative levies have been suggested at the state-level, the most preferred being a surcharge on sales tax. There is even a thinking on reintroducing octroi. In Madhya Pradesh, on the oth3r hand, octroi was abolished after a careful consideration of the steps to be taken to find an alternative source of compensation and the method of its distribution among the local authorities on an e,,uitable basis. Here also the municipal authorities complain that the compensation does not cover the lost elasticity in octroi revenue. 54. Abhijit Datta, "Abolition of Octroi and Compensation to the Local Uathoritiss", Naarlok, Tol. IX, No. 4 (October-December, 1977), 87 - (iv) uture outlookc: The 4adhya Pradesh schme of a state-wide entry tax for the municipal areas operates on the basis of declaration 'by the registered dealers, as in sales tax, without the necessity for local check-posts. Other states, notably Karnataka, are opting for such. an entry tax in substitution of octroi. The dentre is in principle committed to octroi abolition, although it has not evolved any incentive scheme to goad the states inIt this direction.. Taxes on -rofessions, trades, callins and employment. We have already advocated an effecti,e merger between the local 'professions' tax and the central income-tax. This was suggested elsewhere as well: Although it is recognized that the 'professions' tax is a type of income tax; it has not been found possible to utilize the source properly for two main reasons (a) it is not comprehensive enough to #ackle all sourcesof income or all types of assessees; and (b) the constitutional restriction of Rs 250 Dlaced on assessment limits its proper utilization. Although the - 88 Local Finance Enuiry Committee (1951) and the Taxation EnLjuiry com.Lission (1955) suggested the raising of the maximum limit permissible, this is not the heart of the matter. Under any scheme of local income tax, the greatest difficulty arises as to how non-residents are treated, to what extent unearned income is taxed, and whether it is possible to bring corporate income under local taxation. Even if we leave the question of company taxation for the present, to be equitable, the local income tax has to allow rebate or at least impose somewhat lower rates on the residents and, correspondingly tax unearned income at higher rates than earned income, if not also to allow certain deductions to take into account differential family circumstances. None of these refinements can be achieved under the existing local 'professions' tax. The logical solution to this problem is to impose a supplemental levy on the income tax to be distributed among the urban local bodies on the basis of 6rigin. The pointthat needs to be added to this is that after the separatio of central corporation tax from income-tax, the personal tax component has correspondence with the residence of the assessee and the place of collection, the standard contrary assumption of the successive federal Finance Commissions notwithtanding Fees and user charges We have already indicated the constraints of auid cro-auo in respect of service fees. Judicial pronouncements in this regard make it clear that (i) fees must be in consideration of services rendered by the municipality 55. Abhijit Datta, "Financing Municipal Services", op. cit. - 89 and accepted by the person making the payment, and (ii) the amount collected must be earmarked to meet the expenses for rendering the services and not go into 56 the general municipal fund. Apart from this there are other difficulties, like, the absence of a tradition for relying on fees and user charges for financing municipal services, the practical considerations regarding non-exclusivity in regard to the major municipal services, like roads, fire-fighting, garbage collection and disposal, street lighting and so on. Social services, like, health and education, are regarded as merit goods and cannot be properly charged for. There are instances of municipalities undertaking remunerative schemes and projects, especially in Kerala and, lately, in Tamil Nadu. In Kerala, the state government has set up the Kerala Urban Development Finance Corporation (KUDFC) as a government company in 1970 with the objects of (i) providing financial assistance to the urban local authorities for their development schemes, (ii) making available technical assistance and2uidance to the u*rban local bodies in implementing their development schemes, and (iii) rendering he.lp to the urban local bodies in 56. Kerala, Reuort of the MuniciRal Finance Commission, 1976, Ernakulam, 1977, p.114. 90 - improving their administrative machinery and procedure. The results of the corporation's activities are t some extent reflected in the municipal income in that state the head 'income from municipal properties' shows 12% of total income in 1974-75; interestingly in Kerala the structure of municipal income in 1974-75 shows the following composition : tax revenue 61%, non-tax revenue 25%, grants and contributions 14%. Almost half of the non-tax revenues of the municipal authorities in Kerala comes from remunerative ventures. These cono'ist of markets, bus stands, cart stands, slaughter houses, shopping centres and the like. Their average growth rate is about 14%, as against 13% growth rate for total municipal income. The local bodies are also becoming increasingly involved in the execution of such schemes encouraged by the availability of the loan assistance from the Kerala Urban Development Finance Corporation. In many cases the profitability of the projects is also sound. But the execution of schemes which demand large scale diversions from the general revenues of the local bodies for amortization of the loans should be attempted only if the resources of the local body admit such diversions even though such schemes facilitate building up of assets.57 Similarly, in Tamil Nadu, the state government is encouraging the municipalities to undertake remunerative * For an evaluation of the operations of the KUDFC, see f.n. 99 below. 57.Op. cit., p. 115. - 91 - enterprize schemes especially since the new munici-al tax sources are meagre and the state governmentls ability to help them by way of grants is limited due 58 to financial constraints. Similar suggestions have also been made by the NCAER: So far, the role of remunerative enterprises has been limited in most municipal bodies. There is, however, need and scope for such schemes which can prove useful in the lonE run - even though their contribution to total revenue receipts may remain insignificant. Small investments in municipal markets, public utilities, etc. are capable of yielding quick returns, besides helping municipal administration in im roving the level and 4uality of civic amenities.59 The NCAER Study also reports that in Tamil Nadu the pay-and-use public conveniences have been 60 tried recently and proved to be very successful. The policy with regard to the municipal enterprizes and remunerative schemes seems to be changing towards permissiveness, inspite of the general philosophy underlying the municipal statutes, due mainly to the unwillingness or inability on the part of the states to allocate new municipal tax sources or to increase the 4uantum of grants or shared-taxes. But the wider implications of these ventures need to be carefully 58. Tamil Nadu (Rural Developmentand Local Administration Department), Renort of the MuniciDal Finance '2nuiry Committee, Madras, May, 1980, p. -07 (0Imo.) 59. NCAER "tudz, p. 38. 60. Ibid. - 92 - considered for the role that the municipal authorities have been traditionally assigned, as providers of purely public and. merit goods to the local community. 4. INTER-GOVERNMENTAL FISCAL AND FINANCIAL RELATIONS Inter-eovernmental Relations in Urban Finance Federal-municiial fiscal relations In India local governments, including municipal authorities, functi-n within the exclusive jurisdiction of the states under the constitution (List 11/5), and the centre can do no more than use its influence, advice, exhortation and incentives to the states for an enlightened approach in this matter. One has to admit that so far the centre has been extremely cautious and circumspect to pressurize the states on this.count, but i-. is possible to imagine that in future this attitude might give way to a direct federal involve- ment in urban affairs, including municipal finance, as h-s happened in most other urbanized federations, especially in the USA and Australia. The recent revenue sharing plan in the USA and the commonwealth fiscal support to the Australian local authorities have direct relevance to the Indian situation as well. A recent paper indicates such a possibility in the future: 93 - - 94 - The political bal: nce between the Centre an.1 the States ... might undergo some change if the federal fiscal transfers to the major municipal corporations are made with pass-through clauses in order that the States may not divert ear- rarked Central assistance for urban development. With rise in urban population in thm major cities the necessity for federal concern to improve the -iuality of life in the urban areas would certainly increase and attempts would be made, as in other developed federations, to ways of by-passing the rural-dominance of the State governments.61 State-municiral fiscal rel-.tions Unlike federal-state fiscal relations which are regulated by express provisions .in the constitution, at the state-municipal 2evels these relationships are wholly on informal lines and in the absence of any well- established institutional arrangement for periodical review through state-appointed finance commissions, the entire area of state-municipal fiscal relations remains vague and uncertain. Appointment of state-municipal finance commissions was suggested by an official committee before the setting up of each federal Finance Commission: to examinethe financial requirements of local bodies for meeting their financial obligation for water supply, sanitation and health and other obligatory services and expenditure on schemes of planning and development... The Commissiot should make an assessment of prospective revenue which the local body should be expected to realise from the resources allocated to it and lay down the scale for having certain taxes divisible between 61. Abhijit Datta, "Municipal Administration in the Coming Decades" , op. cit. - 95 - the state government an. the local bodies. After addin2the revenues which the local body cran realise from non-tax r-esources, the balance may be covered by grants-in-aid to the local bodies out of the consolidated fund of the state.62 In 1972, the Central Council of Local Self- Government and the All-India Council of Mayors urged the state governments to appoint municipal finance commissions on the lines suggested by the Rural-Urban Relationshic Committee in 1966. Several state govern- ments have since appointed municipal finance commissions and their reports are now available, such as, Andhra Pradesh (1971), Orissa (1974), Maharashtra (1974), Karnataka (1975), Kerala (1976) and Tamil Nadu (1980). The latest Commission of this genre has been appointed in West Bengal which is expected to finalize its report. later this year (1981). What distinguishes the West Bengal Commission from others is that it is expected "to cover not only the familiar ground of municipal finances as such, but also simultaneously examine the state's finances for an optimum level of resource transfer to the municioal bodies to make these viable in relation to their 63 needs". It is also supposed to examine the municipal 62. India, Report of the Rural-Urban Relationshi2 Committee, op. cit., p, 88. 63. Abhijit Datta, tMunicipal Administration in the Coming Decades", op. cit. - 96 - Pan and non-plan re uirements vis-a-7iS the state' s resources and make specific recommendations to meet the existing and projected shortfall. One interesting aspect the West Bengal Commission's terms of reference is an examination of the municipal size and its effect on municipal 64 finances. In essence, the terms of reference of the West Bengal Commission follows the footsteps of the federal finance commissions and truly reflects the purpose of such commissions, as originally envisaged by the Rural-Urban Relationship Committee. The experiment in West Bengal is thus the first attempt to integrate municipal finance with that of the state and, ultimately, of the centre, thereby holding the promise of ending the isolation of municipal finance from the mainstream of fiscal policy in the country. Fiscal Transfer to the Municipal Authorities The fiscal transfer mechanism from the states to the municipal authorities takes several forms, such as : (i) assigned revenue and shared taxes, (ii) revenue grants, and (iii) plan assistance. Assigned revenue and shared taxes In India the assigned revenue and shared taxes have taken certain equalization slant; the official reports 64. For details see, West Bengal (L.G.& U.:D.Department) Resolution dt. December'6, 1979. - 97 - ha-ve in no small measure contributed to th confusion of these measures with general grants. As it has been point-d out the assigned an- -aared taxes are compensatory in nature where the recipient gov3rt:nt= share the revenue as of right, and not it accordance with their needs ... Assigned and shared taxes must necessarily be distributed on the basis of origin, while the needs element predominates in the allocation of general grants.65 The examples of assigned revenues to the municipal authorities are few : these include the receipts from fines in breach of municipal laws in a few states, the proceeds of entertainment tax in Tamil 1adu and Andhra Pradesh, land revenue in Gujarat, and entry tax in Madhya Pradesh. The list of shared taxes, on the other hand, are somewhat varied : entertainment tax, land revenues, and property registration fee are generally shared with the municipal authorities: in West Bengal the Calcutt- metropolitan entry tax is shared with the municiPal authorities. The most important item of shared -ax in the municipal field is the motor vehicles tax. This was originally a municipal tax, but since the thirties it has been provincialized and the munici-al authorities receive compensationon the basis of revenue foregone, calculated on the average of three 65. Abhijit Datta, "State Grants and Shared Taxes", Nagarlok, Tol. III, No.4(October-December, 1971). years' receipts immediately before the takIeover. Essentially, therefore, this is not a shared tax, but a compensatory grant. Over time, various other considerations have crept in the manner of its distribution - population, road mileage, volume of traffic etc. The original fixed compensation has now been given up, but generally a fixed percentage of the total receipts (say, 25) is distributed on bases that are not always explicit or rational. Even when this is distributed as a compensatory grant for a functional responsibility (road maintenance), the distributable share needs tobe determined on the basis of the functional division of responsibilities between the state and the municipal authorities, the inter se distribution among the municipal authorities might be made on the basis of objective and measurable criteria. Revenue grants The policy towards grants to the municipal authorities has been well-expressed by the Rural-Urban Relationship Committee: * Such an attempt is now in vogue in Kerala where its inter se distribution among the municipal authorities is based on 'load factort, calculated on the basis of ielative traffic densities in various types of roads under state or local authority jurisdictions; however, the amount available to the municiral authorities is the residue after deductinz the state- expenditure on road maintenance from the tax collection. - 99 - The system of grants-ih-cid has the advantage that the grants can be related to the needs and resources of urban local bodies. For the smaller and financially weaker municipalities, grants-in- aid are of great importance in the,initial stages to enable them to stand on their own legs.Moreover, grants-in-aid alsoserve as an instrument for the implementation of state policies by encouraging the local bodies to undertake special programmes.6 Among the advantages of the grants-in-aid over tax sharing, the Committee listed : (a) greater flexibility of revenue, (b) possibilities of relating grants to the differential means and needs of the municipalities to that the smaller and financially weaker municipalities could be differentially treated during their initial stages of growth, and (c) the possibility of using grants as an instrument of state policy. Earlier, the Taxation inquiry Commission suggested the adoption by the states of a few principles, such as, (a) devising a system of general purpose grants to the bigger municipalities and corporations, (b) classification of the local authorities in terms of population, area, resources etc. an relating the grant to these factors as well as the size of the local budgets, (c) the basic grant should be adequate, after takin into account the municipal domestic resources, to finance their basic functions, (d) the basic grant should be 66. India, Rerort of the Hural-Urban RelationshiT Committee, op. cit., p. 103. stable over a reasonable number of years, say 3 or 5 years, and (e) in addition, specific grants are to be given for particular items or services, eing conditional on maintenance of efficiency and exploitation of their own resources by the-local authorities as indicated by 67 the state government fro+time to time. Following the recommendations of the Commission, three states have formulated well-defined policies of grants-in-aid to the municipal authorities : Madhya Pradesh (1962), Gujarat (1965) and KerFla (1966). In Gujarat and Kerala, the state governments appointed high-level committees on grants-in-aii (Gujarat: 1965 and 1972, Kerala : 1964). (i) General-ourTose grants: The basic features of the general purpose grant in the three states of Madhya Pradesh, Gujarat and Kerala are that the municipal authorities have been classified on the basis of population and a per capita grant has been fixed for each category. The per capita multiplier is inversely related to the various municipal size-classes so that the larger the class in which an authority falls, the smaller the multiplier. For instance, in Gujarat the pattern is as follows: 67. India, Report of the Taxation 7nquiry Committee, op. cit., p. 367. 101 - Size Class Poculation iange Per Capita grant A Over 100,000 0.30 P. B 50,000 - 100,000 0.45 P. C Less than 50,000 0.60 P. The idea is that the municipalities of smaller size have less income potential and need to be compensated to a greater degree. In rJadhya Pradesh, the municipal corporations are in a separate category, while the municipal corporations and the major municipalities are clubbed together in Kerala. The municipal corporations are excluded from the scheme of per capita general purpose grant in Gujarat. The per capita grant undoubtedly ensures certain objectiviity and stability on the basis of grant- distribution; however, it suffers from the disadvantage of emphasizing only the needs aspect, while neglecting the efforts or capacities of the municipal authorities. A general purpose grant, as an equalization device, must take both aspects of the fiscal picture for inter se distribution. In order to correct this lacuna, Gujarat has introduced an incentive grant, calculated at 25% of total grants paid in the preceding year and its eligibility is decided on the basis of awarding marks in terms of the following standards of -erformance: 102 - Standard fixed for grant 3ligibility Olass of Minimum Rs ItemS municipality per capita Marks er annum L. Income from A 45 25 -xation 40 C 35 2. R-evenua income A 60 25 B 55 c 50 3. ýxpenditure on Not morn then 95% of 25 e st a blishment municipalitgt (non-selfo ,Dwr incom-e f r,m non-self supportinng) supporting items 4. R.ncovery of municipal dues (excluding octroi) 955 15 5. Expenditure on Minimum of 10% of 10 medical relief and the municipality's public health income activiti3s 100 To the extent the overall performance of a municipality falls short of the standards, the incentive grant is reduced proportionately. Another grant on devrness allowance's at the rate of 501 of the total expenditure incurred by the municipalities on such allowances to their staff are :o be paid on the following basis, rates and conditions: - 103 - percentage of property tax Percentage of desrness rata on AR7 levied allowance grant admissibile 16% or more 100% 12% - less than 16% 75% 8% - less than 12% 50% Below 8% Ni 1. The newly established municipalities are to be paid full dearness allowance grant for a period of 5 years from the date of establishment. Th.e grant is not to be pai.d to the municipal staff of commercial enterprizes, school teachers, etc. Only the municipal staff that are appointed against rosts created with the senction of the state government or the director of municipalities would be entitled to the dearness allowance grant. All the three elements of the Gujarat general- -urpose grant system - the basic per capita grant, the incentive grant and the dearness allowance grant - are mutually interdependent, designed to correct the needs as-ect of the per capita grant by the peiformance indidators of the incentive grant and.the tax efforts criteria laid down in the deCrness allowance grant. The fiscEl cal:acity aspect seems to have been assumed but not empirically tested, through the inv2rse per capita grant method. ihe tax effort conditi3ns laid down for the 104 - 'earness allowance grant is less relevant for this type of grant than, say, an inflation-compensation method based on a cost of living index. In any case, while there are various facets in a general purpose grant to be considered together, the tiuantum of such grant must be large enough to make such an effort worthwhile. In Gujarat the per capita general grant comes to around 6% and the de:rness allowance grant claims about 230 of total grants. On the other hand, the share of revenue grants in the total municipal revenue income in Gujarat was a bare 7% in 1975-76 (see Table-6). Under the circumstances, the impact of the Gujarat general- purpose per capita gr,nt on municipal revenue is marginal and in order to make any sense, all the three variants of the general grant - the per capita, incentive and compensation for dearness allowance - need to be worked out together. A better alternative might be to opt for a single formula-based general-purpose grant, as suggested in a paper cited earlier: In order to introduce these fiscal parameters in the grant distribution system, one has to device a formula-based grant. Such a formula grant would take into account necessary refinements of the concept of needs, and would also measure the relative fiscal efforts and capacities in an objective manner.68 * Recently Gujerat has introduced another general-purpose grant for development purposes paii out of a share (20%) of the state entertainmen- tax, distributed to the municipal authorities through the newly created Gujarat Municipal Finance Board (GI1F) . The GMF_ distributes the grant in terms of an elaborate set of yardsticks, criteria and conditions fixed by the state government for the municipalities and municipal corporations. The total amount available for this grant is around 5% of total state assistance. 68.Abhijit Datta, "State G-rants and Shared Taxes",op. cit. - 105 - (ii) Secific qrents Traditionally, state grants to the municipal authorities have developed on specific lines. There are two broad types of specific grants: recurring and non-recurring. Recurring grants are given to meet the maintenance exenditure for a particular function, usually these are based on unit- cost principles, as in education and health. In addition, there ar; a number of compensatory grants in lieu of the transfer of particular items of municipal taxes, income from fines, etc. The variety of such grants is baffling and one may find a number of such grants for financing a particular functional head. The bases of many of these isolated grants are also not clear and one might -uestion the purpose of continuation of these grants on a recurring basis, each to be tied to the apron-strings of the functional departments of the state governments. If exercise of state control is the objective, such control could be exercised in relation to a system of state-wide priority of attainment of a minimum level of service provision and dovetailing these with the pattern of state plan assistance. Adoption of such a system of development assistance would ultimately cause the disappearance of a motely array of non-plan recurring grants. Non-recurring specific grants consist mainly of a variety of project grants to the municipal authorities, depending on the budgetary position of the state governments - 106 - and the initiati,e displayed by the municipalities in this regard, coupled with lobby pressure. Madhya Pradesh and Gujarat have adopted elaborate patterns of capital grants for the municipal authorities, elsewhere these are restricted to a few critical areas of development. The pattern of Madhya Pradesh, being most elaborate, is indicated below: Municipal Size-classes Less Municipal 50,000 20,000 10,000 than Type of Grant corporations and above to 50,000 to 20,000 10,000 1. 'ater supply 30,: 30 30 30% 30% and/or drainage scheme 2. Dwelling houses for 30% 35% 35% 40% 40% municiTal staff, office buildings etc. 3. Public Works, roads, - 30% 30% 40% 40% drains, :avings, footfaths ,1trines, urinals etc. 4. Equipment for sani- taion, public 30% 35% 40% 40% woriks, fire fi!hting etc. The situation in this regard has been summed up thus: It is fair to conclude that capital grants to the municipalities are not linked with national planning, and municipal development has not moved beyond undertaking isolated projects. ithout integration of municial and State (Contd.) - 107 - p lanning, it is not possibl to en.su-r nece3sar devlopmentnv inance to the municipal institutions, n or c ther3 be ny coorinated locl deelot:ment of a.ny signfi,cnce magnituds.69 With regard to development or plan assistance, in Gujarat there are two types of schemes (a) implement- ation of development p Zans, and (b) watsr supply and drainaga schemes. The pattern is as follows: (a) De -7elo1rment Plans: (i) Gross cost of works and/or lan- ac,uisitiojn: Grant Loan MuniCial Olass 33½% 66½$ 50 % 50% B & C (ii) Balance cost of development plans to be met through financial assistance by way of loan to the municipalities. (b) Wiat.er su?r,ly and drainage schemes: The quantum of grants for wat3r supplv and drainage schemes approved by the Government are to be as follows: Water surlv Dr9inage Municial Class 20% 35% A 30% 45% B 35% 55% c The centage charges are to be levied åt 10% of cost and th.n municipalities are required to deposit only their share of the cost. 69. Ibid. - 108 - Th- weakness of this type of open ended formula without any concrete exercise regarding the total draft on the plan finance of the concerned state for municipal development is obvious. Moreover, the revenue implications of any development project needs to be taken into account in quantifying assistance for gaps in municipal plaland non-plan budgets. A system of develor- ment assistance to the municipal authorities presupposes an effective integration between the municipal sector and the state plans, similar to the firalization of the state plans and the commitment of central assistance for the same. Such integration is not only not being attempted, the very idea seems to be alient to the existing system of state-level planning. Nevertheless, the idea has been expressed thus Given an integrated system of municipal and state planning, one can visualize a two-tier ca-ital grants system . schemes having overall state priorities might be entitled to patterned grants, while block grants could be given to the municipal authorities to finance their own plans. Since the state governments Are also providers of loan funds for municipal development a block grant-loan package may be offered to the municipal bodies on an agreed, say, # :, basis for 70 financing plan projects in the municipal sector. A similar formula for block central assistance exists for financing the state plans at the national level. A block plan assistance to the municipal sector 70. Ibid. - 109 - at the beginning of a plan period -oould obviate the need to ,olici.ng the diversi:n of plan assistance in schematic and pro.ject terms; moreover, this would bring in the distinction, for plan assistance purposes, between the state-sponsored and the municipal sectors of development within the municipal plan budgets. Presently, the purely municipal develo.ment sector is not recognized for plan assistance purposes. "ize of fiscal transfer One could compare the size of fiscal transfer to the state governments and the municipal authorities in ter.ms of their budgetary resources, as attempted in Table - 23. Table - 23 Fiscnl Transfer to the Stats and the Municipal Authorities: 1970-71 anA 1976-77 (rn Fercentages) Transfer to the Statns Transfer to the Municipal iAuthoriti es Ynar Shared Taxes Grants Total Contributions Grants Total 1970-71 22.4 16.8 = 39.2 7.13 8.11 = 15.24 1976-77 18.6 16.6 = 35.2 6.10 8.44 = 14.54 Source: NCASR Study, pp. 26-27 (Tables I.9 and III.10). WhIile the proportion of fiscal transfer has been reduced in recent years, compared to the domestic revenues of the states and the municipal authorities, the disparities in - 110- th- size of transfer between the two levels of government is 2laring. This strengthens the plea for institutionali- zatiDn of th e mechanism of stat- nicipnal fiscel relations, on the pattern existing at the federal-state lvel. State Control of Muni-i-oal Finance 71 Borrowing No municipal authority can borrow without an explicit sanction of its state government when the loan amount is below % 500,000 or the repayment period is within 30 years; beyond these limits local borrowing needs central approval in terms of the provisions under the Local Authorities Loans Act, 1914 (a central legislation). The borrowing powers of the premier corporations of Bombay, Calcutta and Madras are, however, defined in their respective governing legislations which indicate the upper limits of public borrowing expressed åther as a percentage of the total ARV within their jurisdictions or as a definite monetary limit. Effectively, however, with the excetion of afew corporations, other municipal authorities may botrow only from the state governments. When the corporations borrow fom the open market, they have to satisfy the 71. Summarized from A.JH.Marshall, Local Government Finance, IULA, The Hague, pp. 243-4. -111 - state and central governments and also the Central Bank (Reserve Bank: of India) as to the needs and Curooses of such borrowing. The securities issued by the corporatimns of Bombay, Calcutta and Madras are deemed to be "trustee securitins" under the Indian Trust Act, 1932 (a centr.l Act). In cases of emergency, the municinal authorities sometimes borrow from commercial banks or approach the state government for ways and means advance. The central government does not directly lend to the municipal authorities, although central funds are routed through the states for undertaking specific municipal projects. In terms of the provisions of the Local ,uthorities LoRns Act, 1914, the municipal authorities may incur loans for municipal works, relief operations, prevention of epidemics and repayment of previous loans. The loan must be spent within the municipal jurisdiction and may not ordinary exceed Rs 500,000 when raised in the ooen market or Rs 2.5 million when provided by the state governmentq The period of repayment is usually 30 years, but in the case of a corporation it varies from 30 to 60 years. Apart from these restrictions, the state governments fix interest rates and timing of municipal borrowing, includinz the terms and conditions. The final approval is accorded only after consultation with the Reserve Bank - 112 - of India and, sometimes also, with the centr=l fineance ministry. The Reserve Bank of India settles the timin2 of all public borrowing in the country and usually these are not made more than once a year. The interest chArged by the state governments is usually the bank rate plus 1% guarantee charge on government loans. In case of market borrowing with state guarantee, the Reserve Bank of India does not permit payment of an interest rate higher than on ordinary government borrowing. All other terms and conditions of municipal borrowing are either prescribed by law or settled by the concerned state government. 72 Taxation State control over municipaltaxation takes place in two ways: (i) control over imposition of a new tax, and (ii) approval of tax rates. (i) Imposition of a new tax: When the governine municipal legislation does not mention a particular state tax for exploitation by the municipal authorities, they may approach the state government for permissio to do so. When a municipal authority wishes to impose a tax already permissible under law, there are three types of procedures to be followed: firstly, a t-ax may be imposed by a resolution of the municipal council; secondly, publication 72. Summarized from A.11. Marshall, op. cit. p. 237. - 113 - o.C a notice reaarding the imposition of the tax an:d inviting public objections is necessary and, thirdly, a reference along with objections and replies is to be fo-,arded to the state government for final sanction. (ii) A-Proval of tax rate: State control over municipal taxation is governed by detailed provisions of law or rul3s made thereunder. Apart from fixation of maximum and minimum rates under statute, some municipal legislations prescribe procedures for abolition or alteration of a tax. In a few corporations, the sanction is essential before an existing municipal tax is abolished; while in Tamil Nadu, Ierala and Andhra Pradesh the municipalities must inform the state government regarding such abolition. In Madhya Pradesh, a reduction in municipal tax rate has to be notified in the gazette. All ind3bted municipalities need state government permission to abolish or reduce a municipal tax. Budeet and ex2enditure Usually corporations are competent to sanction their own budgets; in U.?., however, when a corporation is in debt, it requires state approval of its budget. In a number of states, municipal budgets need state sanction. For an indebted municipality, however, such sanction is mandatory. State budgetary approvTl is for a global sum for all services and taxation proposals contained in the municipal budget. Such aprroval means administrative sanction to formulize the budiet proposals. State control over municipal expenditure, - 114 - on the othar hand, is 4uite extensive and rigid. I r- few states, even the corporations have to approach the state governments for sanctioning of estimates. In certain states, the municipalities enjoy higher expenditure powers than are accorded to the corporations in some other 73 states. Table-23 summarizes the positions Audit and insoection Municipal external audit being *a stata responsibility the state governments have their own local audit sections under finance departments, known as the 3xaminer of Local Fund Accounts. There are, however, two exceptions to this: in 'West Bengal and Bihar local audit is conducted by the Comptroll3r and Auditor-Gen3ral of India (through the respective Accountants-General) on behalf of the states; the municipal coroOrations of Maharashtra, Gujarat and Karnataka functioning under the Bombay City Corporation and the Bo,-jay Provincial Municipal Corporations Acts have their own auditors responsible to the council and independent of the municipal commissioners. Apart from these exceptions, all external annual audit is conducted through the state- 74 appointed examiners of local accounts. Regarding the 73. India (Ministry of Works and Housing), Reort of Committee on Budzetary Reform in Munici-al Administr.tion, New Delhi, June, 1974, p. 83. 74. Abhijit Datta, "Reforms in Municipal Financial AdministraI70ion" . -(October- Decem'oe_,j 19.70). Table - 24 Extent of State Control Over Municipal Ex=enditure State 3xenditure Limit beyond which State approval is needed Corporations MuniciPalitias 1. Tamil Nadu Exceeding 9s 500,000 Exceeding 1s 8,000 2. West Bengal Rs257000 to %602000 by the Divisional C5 ommis s i one r 6. 60,000 by the State Government 3. U.a. All road scheses cinanced out om road grant need sanction o1 District Magistrates 4. Karnataka E 200,000 3xceeding 60p00 5. Kerala - 100,000 IS507000 6. Andhra Pradesh R3 50,000 rUE~57000 having a Grade Ix engineer, % 25,000 and more having a Grade I Cngineer 7. H"imachal Pradesh 6b 20, 000 N.A. 8. Bihar For all loan or grant 3xceeding E s 10,000 aided schemes 9.b Maharashtra 3xpenditure for primary education Fo 10,000 fsor A & B classes xin 5,000 for class 10. Gujarat Nil s4.Q 5,000 11. Haryana RS 25 000 need tach- nical sanction and 50,000 and more need adinis- trative sanction 12. Oria-sa % 20,000 13. Punjab N.A. Exceeding tb 50,000 for technical sanction and s 1,00,000 and over need administrative sanction. 14. Rajasthan Exceeding Rs 5,000 - 115 - 11l6 - duality in thf audi set-u- in the mun i ci authori-ims (external or internal) an expers committee commerted in tne following vein: ... audit by a remote authority will no d:oubt be more independnt,but at the ane timn it will be less appreciative of the difficulties faced by local bodies and the tenor of audit objnctions will, therefore, tend to be more negative than in the present system where the Auditor is part of the local set-up.75 All the municipal IgisIlations provide for special audit and inspection powers of the state governments over municipal expenditure. These powers are backed by powers of supervision and direction, d,3fault powers, emergency powers 2na so on. By and lirge the statest supervisory and control powvers are meaningful onlv when these are backed by a proper support system and improvements in the suality of municipal personnel. The techniIues of supervision and control, as exercised in the states have oeen handed down from the British d=ys. -ome of them ar3 indirec and lass rigorous such as giving directions, calling for information and reports, review of local action, conditional grants-in-aid, etc; others are more drastic and take the form of annulment of local decisions, prior approval of local actions, action in default, suspension and removal of elected members and dissolution and supersession of the Council. The latt3r types of control are negative and their frequent -xercise has adverse effect, undermining the confidence of the people in the system of local government. By and large, the techni-¿ues of supervision and control in India - especially in the urban areas have remained rather static, unimaginatiive and negati7e 75. Inia, Report of Committee on B3.d2--tr.r fr m in ui op cit., -. 104. 76. India, 2-ort of the Rural-Uran -,31-tionship Committee, o-. cit., 117. - 117 MPchinery for iunicital 2ur-rvis on Secret:riat Orvanization Following the British system, Indian local government is undår th2 chCrge of a major functional department at the state lzvel, usually this is public health. However, there has been some changes in this conception. The first major change since Inderendence is the bifurcation between secretariat responsibilities for rural and urban local government; the excertions being Tamil NSdu and Guj-rat where one secretariat department is concerned with both. The second major change has been ushered by Maharashtra where all the major urban development functions including municipal aministration, have been sought to be covered by one omnihus derartment, much like the British department of the environment. Since this is also the central model, the majority of the states are attempting to do this. The third pattern was originally followed in .est Bengal with a single department of local self-government and later of municipal affairs. In a few states, like Karnataka, this is combined with other disparats aspects of state administration, like labour, where the emphasis is to combine "minor" subjects together to make a single viable department without any attempt at inter-dependent relationships. - 1.18 - ~ith the transformation of the stat local government departments into urban develoment depertrents, the hDuse-keeping role of the stat. governments vis-a-vis municipal authorities has declinied. uite *ften the urban de.veloEment wing of the state department adopts an anti- municipal government stance, du.e to its direct resumption of urban development responsibilities. In case this continues, it might be desirable to locate the States' house-keeping responsibilities for municipal governrnt to its home department, analogous to the central sup-ervision of States in India and at th, local level follows the JS prstice. Such a shift might also be necessary to ward off the motely relationships of th st_t- functional departments with local government which run counter to the general philosophyof state-municipal relation One choice seems to.be to follow the lead of Mvaharashtra and attemrt unification of the im-cortant _Iuncti,nal responsibilities for urban development, including municipal administration. Here the problem is that it is impossible to do this since the concept of urban development touches almost all the aspects of stat3 administration. Important urban functions like transport, roads, education, medical sarvices etc. would be left out. It is also not advisable to s3parate the preventive and the curative spects of health administration. Nnw functions like pollution control would probably be administered separately under a state department of environment, as in the centre. Therefore, such a move would makea unwieldy department and unification of urban responsibilities would always be 77. Abhijit Datta, "M1unicipal Administration in the Coming Decades", op. cit. - 119 - elusive. The other choice could be to revert b-ck to the original West Bengal model of a single department in charge of both rural and urban local govsrnment, without any functional mix-up, as in Gujjarat anj Tamil Nadu. This would have the advantage of concentrating on the house-keeping role for local government and would be an extension of the home responsibilities of the government (department of the interior). In India, with the existence o field administration having super- visory responsibilities over local government ib the district, such a- state secretarict department may be more effective and functionally neutral. Directorates of municiLal administration The earlier pattern of supervisory organ at the state level was through an inspectorate of the state department attached to the field administration (Tamil Nc-adu, West Bengal and Bihar). Tith the bifurcation of rural and urban local government supervision, the states have adopted a more direct responsibility in this regard through the creation of directorates, under the supervisory department. It may be emphasized that the ambit of supervision of the state directorates includes only the municipalities and not the corporations. By now 12 of the states in India h.-:ve directorates of municipal administration, although in 6 of these the directorates are really part of the departmental set-up, the stata director being concurrently a secretariat officer. - 120 - Again, the mann)r in which the directorates exercise supervision and control differs a great deal, in some states there are regional directors appointed to deal with field supervision, in others the district administration machinery is beinc used for the purpose, in still others the state-level director does the field supervision as well. The situation is summarized in Table-25. Obviously, the third pattern is the least effective. The case for establishing state-level directorates, with effective regional inspecting staff, was first mootted by the Rural-Urban Relationship Committee to "'guide and advise local authorities in the solution of their current and future problems and advocate their cause with the relevant departments", having specialized sections on personnel, cen6tral valuation, planning and finance, and-general supervision, with an inspectorate at the field level, having one 78 inspector for a division or a group of districts. However, the actual working of the directorates have belied the original hope of these -organs working a.s the spokesmen of municipal authorities to the relevant departments for several reasons: (a) the status of the directorate being a subordinate organ of a state 78. ReDort of the Rural-Urban Relationshi Committee, op. cit., p. 120. Tabl - 2 Indie :Stste M1,c'.ninery for :uiciol Sucer71ision "t ts ~it uncit -:-ttra 6-f Dotol irectorste :irect gi.onel Field C9ntrol ¯irectortes idis- .. .r'r-:Are-esn Yes - .es 4. rs s - -, 4. :ujrat~ "*; -- s . 21ral " - zes - 6. NXhya Fredesh "es - 7. MII, rashi1 re * - - r .:- - Yas 10. Tamil 1L adu" 11. U7ttcr iradesh" Yes . est eengl zes - -. 13. 3ih!r No - - 1es ». Himchal Prade sh - - 1S. .3,mmu P n ::.asmir -- 16. ICnrn t- k - - 17. 0rissa -g l.9. 's--lnd. " 20.7,-ani-ur"-- 21. rinur " s - - th' con1current se.creterit:. resp.onsibiliti es. - 121- 122 - department, in practice it is difficult to negotiate with other concerned departments directly by the directorates (active directorates in some states, like, Tamil Nadu and Kerala, have prodded the mother department to do the negotiating role), (b) since the directorate is an agency of the government, importanaz constitutional, regulatory and punitive powers could not be delegated to it, 79 resulting in their ineffectiveness, an.a (c) the directorates have not so far been equipped with specialized sections, except for municipal personnel where - unification of municiTal personnel system has taken place. Without such centralization of personnel function, entailing recruitment-promotion-discipline- ounishment of municipal staff, the state directorates have not justified separate organizations, away from the secretariat departments. Functional su?ervision Apart from the general supervision and control exercised by the state house-keeping departments (local government, finance, personnel etc.), there are important functional supervision over municipal authorities meted out by the various state municipal departments and directorates on education, health, roads, water supply and sanitation, social welfare and so on. It is -ossible 79. Mohit Bhattacharya, TState Agency for Munici-al "upervision" , in Essays in Jrban Government, Torld Press, Calcutta, 1970, p. 107. -123 - that the aproach of the funtional departments might be at variance with that of the states' house-keeping departments. Generally, the functional tepartments are prone to use the municipal authorities as their agents, sometimes this is attempted through specific grants, but often through detailed scheme scrutiny and technical sanction, earmark-Oing of municipal funds for functional purposes, and even creation of functional boards within 80 municipal authorities. In a four-state study of state- munici-cal functional relations it was found that the general tenor of state-municipal relations was substantially different from-what the functional departments were 81 attempting to do through the municipal authorities. It is possible that even within a state there would be variations in the relationship pattern among the functional departments and also between the supervisory department on the one hand and the functional departments on the other. The aberrations of the functional departments' attitudes and practices could be corrected somewhat if (a) the local government depertment is powerful within the state government (which it is not), or (b) the municipal authorities could assert their autonomy vis-a-vis the 80. Mohit Bhattacharya,State-'unicial elations: A Functional Analysis, IIFA, New Delhi, 1972, pp.48-49. 81. Ibid. - 24 - state functional interference (which rarely takes place due to their institutional weakness). The result is a web of control around and through the municipal system, much of it beinE exercised without regard to an overall design ozi consistency in state-municipal relations. 5. MUNICIPAL FINANCIAL MANAGEMENT Prevalent Praetices Budgetary Procedure Following the practice of the central Rnd state governments, the municipal buJgeary s.Btem has been geared to subserve the twin considerations of financial accountability and control of expenditure, The Main objectiv,e is to ensure that funds raised anl moneys are s;ent by the executiz e departments in accordance with rules and regulations and within the limits of sanction and authorisations by the legislature/council. Budget preparaion is usually the occasion for determining the levels of taxation and rates and the ceilings on expenditure. With this object in view the structure is so framed and the procedures are so evolved that the system ensures that the Jpending is writhin the ceiling laid down and is in accordance with the manner intended.82 (i) Bud7etarv structure : Munici-al budget format and heads of accounts vary from state to state; similarly there are variations between the corporations and the municipalities within a single state. The budget format is laid down in the governing legislation or in the rules made thereunder. Sometimes, this is left to 82. India, Rerort of Committee on Budgetary Reform in Municiral Administration, op. cit., pp. 38-9. 125 126 - be determined byv thå municipal authoritises (usually the corporations) themselves. ith i n the mun*cipal budgets, there is no strict separation between revenue a:nd capital items: isu.ally there is a Iheald c-lled, extra-ordinary items which cover most of the capital transactijns. Conceptually, the municipal budget is a single document combining current and extra- ordåinarv items. There are, however, a number of special f unds (e.g. ro:ds) or, in som3 cases, separate budg-ets for specific municipal functions (e.g., education) or enterprize acti-ities (a.g., water supply an sanitation, transport, electricity etc.). Th-re is no doubt that these separats fund accounts distort rationel budgetary allocations, while sparate buldgeting for particular activities takes the idea of fund accounting to its logical extreme and thereby restricts the operation of the general municipal fund. (ii) Bu.dset cyele: Municipal authorities follow the go7ernment financial ear st,arting in April and ending in March of the following calendar year. In the corporations the bud.et cycl starts with the heads of dep,-rtment> submitting their estimates to the commissioner (through the municipal accounts officer1, the commissioner in turn integrates these estimates vnd sumits his 127 - prOPosals to the standing committee of the council, th standing commit-et3 modifies the commis.si:nnr's bDgeI and submits it to the corporation, the cororation finally approves it , with or without mo-ifications. The corporetionIs budget is then snnt to the s-ate vovernment or information and, in some cases. -:3r iltimate sanction. The time cycle of the corporati)n budgets is indicated in Table-26. Table - 26 Time 27cl3 fo- mUdajst Drm:ra.tion in Selected Corporations Month Heads of Depts. Commissi-ner to Standinz To the Commissionnr the Standing Committee to Committee the Corporation September Baroda, Poona October Hyderabad, ior?, ,holapur November Ahmedab2d, 3anglore, yderabad, Borbay Indorse, Bombay December Sima, Hubli - Ahmedabad, Hyderabad harwar, Baroda, Allh,abad Simlp, Hubli- Dharwar, Poona, Sholapur, KanpTur. January handernagore Pat na, Bangalore, hmedabad, 'llahabad, Baroda, Chan dernagore Simla, Indore, Bombay, Poona, ñn"ur. February Patna, Banglore. Hubliu-Dhar;qr, -llha bd, rhanderngore. Masrch Sholau:r. 123 It will thus be seen that ctob-r an- D7ember r the powular months for the headcs of the deartments to submit thir proposals to th comm1issin.er, the comrmisioner usu,ally sends his buget to the stanling committee around December and the standing committee submits its proosals to the corporotion in Janu!ry or February. After the budget is fi-nally passed by the corrorstion, it is sent to the stes government in February or March, for inf-ormation Pnd, where necessEryV, for s?nction. The budgetary cycie in the municipalities follows the general pattern in the corrorrtiDns the dep--rtmental heads frame their proposals and su,bmit these to the executive officer or chairman, the executive officer/chairman then compiles these in a proper form and sends to the council for approval either directly or through the standing committee if there is one, after the council app_roves the budget it is sent to the state government through the states field administration (-nd the director of municical administration) for final sanction. As for the time limit prescribed for the various stages, gen-rally the budget proposals are initiated in the months of October and ovember and after the council's apI roal, the budget is sent to the st;,te gernment by the end of February or mid-March for snnction. In a number of stat;es there !:re no firm dates for - 129 - There is perhaps a cEs3 for rsducing the total erid of budget ;.repreti:n .ni finalizsti-n within period of 3-4 minths, ending in ebruery-Mearch each year. (iii) EudGetary content: During the stEge of initial budget estimates the figures -re workad out on the basis of actuals of past few, s-v 3, ye~rs alon- with the estim-te for the current vecr (re,ised budget: 9 minths' actuel and 3 months' estimates). The dep -rtment2l tendency is to be conservrtive in anticipating income. The second stcge consists of scrutiny of the estimates by the chief accountant or the chief finance officer about the correctness of the figures and lso the general economic trend, including prospects of income from srecific sources. The munici-al·e.ecutive budget, as prep-red in this fashion, is then submitted to the standing committee in the case of the corporation or the council in the case of the municiralities. It is at this tstEge that substantiEl chnges occur in the munici-al budgets in the form of an increase in income estim-at-s, followed by a corresponding increase in municizal outlay. This unrealistic enhancement is generally motivated by two factors, namely, (a) to sanction more exenditure U-geinst the increased income estimates; and (b) to avoii increasinrig rates of taxes or levying new ta.:es, which they ap*.rehend, - 130 - mirght ainov the elsctirate. Égainst these incre.vses, schemes/projects J-n -.hich councillors are interested are generally sanctioned. This resiults in a seemingly balrnced buJI9t at the beginning of the yeEr, ending into aeficit at the close of the financial year.3 (iv) Bud-vet clessification: Munici-cal budgets are classified in terms of the legislative re,uirements into 'ajor an. Minor 1eads, Primary Units etc. :vcenditure on establishments, contingencies and debt chsrges are shown separately in the line.-item type of service-wise budgeting. *,stab1ishment expenditure is based on the strength of the establishment as per the approred -stablishment Schedile and other rcrticulars regarding emoluments. Contingency expenditure is based on the actuals of the past 3 years, the current budget and factors. such as, increases in 4uantity and price. Sometimes, there is an attempt to show large capital works under a separate capital works bu,dget; in such a case, the minor capital workz-s would be included in revenus new works. In some corporations (e.g. Bombay, Delhi) there is a practice. of makii2 special provision f or w.orks in the various electoral constituencies; this is comronly known as 'constituency fund' and is spent at the instance sni discretion of the concerned elected councillor. 83. Ibid. - 18 1- The councillors diefend 'his przctice on .he ground of meeting iunforeseen exenditure of an rgent nature,tough it might sometim-es le,d to undLue ineiualit;in the leiels 84 of improvements in di-ferent areas. Suspense accounts in munici,al budgets cont-in immediate budget heads or block entries reliting to common services to the executive departments, like, central stores, printigr press, laundry, -ehicle depots, etc. These entries are c leared off when the cinal allocation is made. -lowever, in the works deoertments there is a practice oL' delayed reedjustments of susr.nse ellocations leading to : (a) excess over ;pprowed budgetary prouision, (b) instEbility in the ways and means situation, and (c) unreclistic estimates for 85 the following year. Under law municipal budgets are to show a minimum positi7-e cash balance et the end o--. the year. 2ue to unralistic budgeting, guite often the budget runs into leficit and this is met by drawing on opening balc.nces, or rp.ising temporarv ,.ays and means advtance from the state government. Sometimes this practice of in-direct deficit financing is resorted to deliberately with the ho--e of being ultimately baled out by the stetz government. 84. Ibid. 85. Ibid. 132 - (2) Performa nce budetine: At th 2 cent re Ca state-levels efforts arg being mae for installati-n of a system of perf orma-nce budget; as a first step towards thi s ob j ct iv-e the accounting classification has been modifi3d in terms of a functional cLsssification. At the munici-al le vel a crude functional cctegirizatiDn does exist, with varying degrees of detail; biut thew, '^e not classified with the objectives of pe_rf ormance budgetin-. In fact the features of a line-item type of budgeting predominate within broad functional categ.orizat- ion. .4;hat is really needed is to extend the accounting heads of the centre and the states to be extended to the munici,cal level as well, with detailing of subheads, so that the same classificatiDn structure extends to all the levels of eovernmen-l. Ap art f rom such clas sifi cation, efforts are needed for output measurement and unit cost eszimation of various niipal services, as well as identification of costs and responsibility centres. This is as much necessity at the municipal, as at oth-r levels of go vernment. (vi) Decentralization of budget: There are a number of municipal functions, especially in the corporations, which are decentralized and entrusted to the vPirious wards. For instance, in Bombay out of 14 major Lun-tions of the corporation, as many as 8 arA decentralized - 133 and the w:rd officers are fully responsible for them. The ward bud gets are, however, prep.red by the departmental ward functionaries separately Pn consolidated department- wise. The consolidation of all the departmental proposals for works executed at the ward level are not consolidated at that level; this leads to an absence of monitoring of progress of work and development in the ward and some degree of decentralization of municipal budgeting, on the 86 expenditure side, is thus called for. 3:enditure control Due to the special features of the municipal executive system, the system of internal control of munici%.al expenditure is markedly different from the system derived from a parliamentary-cum-cabinet syttem of governments at the centre and the states: At the upper tisrs of government, the system of financial administration is designed to subserve the needs of financi.l control - in the legislative, executie and audit fields. No such explicit reåuirement is discernible at the municipal level. The reasons seem to be -two :(2) the integration of legislatire and executive powers in the municipal council maes it difficult for its executi7se committee to function as an in.-istorial body as well, an (b) tha seration of executive powers and functions in municip-l go-ernment cannot accomodate the existence of an iedepndent finance officer responsible only to the municipal council or its ex.cutive committee. These two distinctive features of municipal government - the first adopted from the English practice of local government, while 86. Ibid. 134 the secon-d bAing a product of iczigenous c:Dnial past - militate agginst the a:io-ction of the f :,mili9r tools of legi9-iti,e o~r txecuive ortrol of oublic expenditure in the munici:al Shere. This leaves the system of external aulit by the state government as the only meanin1ful instrumient of controlling municipal expenditure.7 Along with external audit, one could also a.d the extensive state control over sanctioning of municipal expenditure referred to earlier (Table - 24). Accounting system Municipal accounting and budget formats are neither simplå, nor easily comprehensible, sometimes providing inadeiuate inf ormation and at other times a surf eit of informnation. Both these situEtions -are not geared to a proper system of management information. Moreover, both these are inadeiuate for proper monitoring of various municinal activities. There is, thereffore, a need for the municip.al budget and accounts to be (a) simple and comprehensible, and (b) effective tools of management. The other aspects of municipal accounting concern the accounting of municipal enterprizes and relating the municipal accounting system to the needs of manpgement. Following the pr!ctice in government eccounting, the system evolved for maintaining municipal accounts in India pays scant attention to the pecu.liar needs of those municipal activities which are -ither fee-financed, or financed through the levy of specific taxes. M4any of these servi,ces are in the nature of I,rivatn goods' , where thir consumptiin is tied with the payment of service charges. It is necessary, in this situation, to have 87. *bhijit Datta, "Refforms in Nunicipalinancial Administ ration", op . cit. -135 - detailed accounting o: not only their oc ratirn cost, but also marginal cost. Unfortunatel,~the v1rious munici-al accounts code, or manuals do not :o into the details of thisJ type of cacul,ti>, aL... It is much easier to relatC munic2ipal accountin to the needs 0w municipal manvgement for the simp l reason that accounting is an internal responsibility of the municipal organisation. In the case of the state and central governments, the executi.e is somewhat isolated from the accounting processes as the entire public accounting is done by the Comptroller and Auditor General. However, the traiition of regarding accounting aj a mere recording :tevice exists at all the ltvels of Rovern- ment. Municipal accounting, in this respct, has a good deal in common with commercial concerns and there is no reason why advantage should not be taken of this situation.88 Financial powers The distribution of- financial powers within the munici-al authorities di" fers markedly between the system operating within the corporations on the one hand, and the municipalities on the other. Within the corporations the axecutive authority is distributed among: (a) the corporation, (b) the standing committee, and (c) the commissioner. The financial powers ars' divided among these authorities, although the extent of such powers varies. In the municipalities there are four authorities vested with financial powers : (a) the council, (b) the chairnman, (c) the executive/standing committee, and (d) the executive officer. However, very few states have provided for a nandatory executive/standing committee; also where the municip.al chairman is also the chief municipal executive, _ _. Ibid. - 136 - th-3 eX8cuCti7e officer does not formally enjoy sautr inancial powrers but eercises these to the extent del?gted to him. The formal systerm of laying down specif ic limits of financial powers to a hierarchy of executi-,e levels, which includes both elected members and appoimced officials, creates mutual distrust and antagonism. Also, municipal legislations do not provi de -de,uate provisins for delegation of financial powers, especially across ahe elected-app)ointed lines, resulting in compartmntalizsion in decisiTnng. Where this is possible, delegatio takes place within the appointed hierarchy; even hnre not all the financial powers could be- so delegated to appropriate dep-rtmental responsibility centres. These difficulties havn resulted due to the somewhat confused state of the system of municipal executive in the cou nry. Fi scnl Planning n. Pro9 r,mming Long-term fiscal planning a-nd programming does. not exist in any municSal authority in India, the reasons being (a) there is no on-going system of corporate plnning of which fiscal planning and programming could be regarded as an essential ad.junct, ani (b) the stat plan assistance flowing into the municipal sector is nat related to the finalization of eith.r an :ggreg,tive s ctor plan, or sepor2te corporate plns for ech municipal 3L ority -137- Since2 e vila bl eurrant s;ur-ls with the nici;1 fthiorifties io msrginal~, their entir- cl_nning initit-i7e rests on the rosrects off recei7ing pin assi3t-nce from the state.-level. Thern,fore, any rmneLngful svst :m off munici--l fiscal pianning and programm mustjalso be loc-ted at the stat-.level. Perhaps only the major mun±i l corpo rti mel0a find it worth-,rhile to attenmt l ong-term fisc-,l planning and progrgmming, pro>rided their development plans. ere linked with the stat3 plnning rrocess, especially to indicate the volume of st.te ffiscal tr.nsfer needed to effectuate the plans. There seems to be some degre of conf usion regarding the apropriataness of introducing capital budgeting in the munici:Pal context. An exp-rt cornmittee sought to compile information on present pra-tices in municipol'capital budgeting and ecded up wit h ! long list of capital irojectbng E executad by- the munici-al au-;horities. Fro m this base, the commi-ttee made the recornmendation for introducing separate cpital buZdets of the merican munic al v riety, without considering the differences in the institutional milieu aýndl the existence of P sytem of national planning and financing, covering 89 ll development eforts under public auspisces. Also, 89. India, Eort o-f 2ommi.tee on 3ud tary ý-form in Munici Administr tion, op'* cit. , Ch. V. - 138 c lc.:ital OUJde'ing, My no be .uite rele-fnt ,s the concqt o nt is not iortan n governmerit as* in privat unnsrt2king. Juccessful Financial n ement ractices W.,e re3ort here two cases of successful municial financial nanagement practices - one from the premier municipal corpocation of Bombay, and the other from the municipalities in the state of Tamil Nadu. ,psn of Bomha-,CorCoration gnong the successful financial management rracti-ces adopted by a municipal autority menti>n should be made of Bombay corporation, well-known for its innovative approach to management. Som3 o' the recent practices introduced in Bombay in the area of financial management are listed below: (i) Watch over reienue income and exenditure: The municipal commissioner keeps a watch over the corporation's revenue earnings and outgoings throu.gh a system of monthly and quarterly returns. These returns are designed to record all budget grants and variations therein on account of plus and minus, transfers as '.rell as additional grants and the final amended grants. Any adverse vJriation from the trend aas to be explained. A senior officer of the Internal Audit is in charge of this rrangement. The sy3stem is such that any excess of enpenditur3 over the grant couli be immadiately check-d. This regular monitoring is being utilised for finacial control for taking correctve st ns in cass o1 a - 스 .rA 0 ri -r-1 ri -P Fl tf) H 0 Sri n ýC5 cu Fl 0 0 r-4 c. - r', t-in 4J q," 0 ýJ Q) ý-l bi ýýj .'-1 0 C) -P 4.-1 r, F1 c) r-4 r_i i :_5 4-3 cuý r-I f -13 f til 0 til 0 __< ri n? c-) 0 r4-1 (1) P-4 -,1 o 4-3 D G) F-i ri) r__4 ---I rA Q) F-1 Cl) P -r-] tin u) <), JE,' (1.) FA f -f & ::ý w ý4 -r-j ý_1 s:ý 43 CN -r-I 'C4 4-1 4-D (1) C) F-4 0 FA C) r__ý c: W F~-] 0 cu Q1 r__i 0 til o Q1 CP 0 bl 21 s,4 -I- .,-i ý_1 .ri Cj 5-1 _Cý ri) rn tj) PA r_1 r 4-1 cu .H r-lo tkri (D 0 0 til) F-, b.fi 0 til (ri ri m CP 9:5 -4-> OP (J) P4 til) r__] 4-3 cn 0 0 tit) rf-l -0 cu 0 (1) 0 0 0 6. MUTICIPAL PROVISION OF PUBLIC SERTICES N-en-w Are Deve lore nt ScoDe of muni ciACI action Municipal autorities in Indis are usua11y constituted on th besis of compret built-up are-s; therefore, th.3 score of municial sction in new area ddveloment is limited as the newly develoring areas fall beyond the municilvl jurisdiction Municipal legislations in Karnatake 'n. AIndhr Pradesh empower the munici,al !uthocities t exercise develorment control over the fring' areas upto two-mile limit. In J.. the municipal corporations slso en..oy this po-:,r. However, bhe trend in Indie is either to consotitute secial planning an. development authorities for ringe Iezelo::mnent through the imp.rovement trusts or regulatory powers vested in 3,rescribed suthority (usuelly, the district officer). ?.hen such ere is lredy developed, there is usually a pressure on the state gov3rnment, to extend municiJa ju-is diction end thDreby availing the municipal fPcilities in th3 dereloped fringes. -142- h-3 existin-: munici;a b no ropar17 'nÆ:ed for t -2:Ž. os arnnno is limited sn: thny cannot plan for nre?s b a y, n t h m u n J c ,slm t s h a t e territorial jurisdiction al1owed to them in c?rtarin j;un-ii_a ietsoes not wzorkc Ss~ifatoril7 rnd otn invol,-~-:e3 s conflict o2 jurisdiction~ bo twe .iffer?nt local bodies. Th3 'unicipal Boërdsv er &lso h::acped on~ accounit of' their limited res;ourcas sid lë3ck 2 technic&L personnciel so necessjry or or4 planingsaa execu~tion of ci7elagmenit plns8 Mnnnrer of munriciral1 resconse M-ici' lities are not keen -n hsve tbeir boundaries extended to incduds el.m fringe; however, i: 13n3 frines consis3ts of industri3s the ususl -ttitude of the runicilities wo ul2 b3 to re thz fringe (both private cand public) would like to remain otsid1e, Pr.y to rvoid na1ing mor? ta nIs nd ,rtly for th- fi~r that the nrivatization of civic fscilities lre dy provil.ed by sutch industries~ f'or their emplRoyrees might e watered down in the event of munici;iztion. Such consi!ereti:ns trou1d lso b'e dominent in the case of mi dd le or upper-income residientiël suburba.n Je,relopment outside the municipal re s. Here the tendc woui be o form a sp srise mu a suthority, i possible, o that the residets ma enjoy higher levels of cii services. b.ndia, iecort of the <ñarel-rt tn C 701.ý- I,, oca, S-iI-o.,y i.f2 긔 긔 二 L,ýi 7 -i t ,.i r to un._1,3rtak-3 uzb-ri in b,-lýe-us.-, of n.os"i-å.s invol-veýd. Jnlike in '1jhe gre-s, core eilu,ý7 th,2 niunici--al qu-.horili-*L=,,-D wý-ýlcom.,ý- tlunetiDnin£ of the im-ro-,.ýemnnt trusts an.d over the -rrý),lects for -:)ubsp-ý,uen-t meint.:ýn,---nc,n, mainl.-,7 due to the in I ' .1 u ,hi sý n c o s ýD f 1 a n, ý. e c - J-L s i t i o n f o r l). r baý n r,--ý ne w ýn - thg incrzas-z in ratm-ble ý7,5lue of such M 1,1 ni c ip a 1 cor"ror.c.tions ',ievin.ý: such im-crovement Jcunctions .C* - - ( n . -,i . i n 30m'ora".r ýý hr--i v-- e.ý one limi t -ý-mou nt s of u -.b,-n re acti-Iities in th-----:, old citý,r; hoý,ý-pv3,r7 as in oth-r --iti-.s thesýý Carn, by th.n improvement. trusts -ni develw,-m.ent --he 42~tent o such d,::'vnlo-ment has been r2E,ther limited and the progress hes been s 1 oýýr -The cosý'us of urban retieý,ýP-1 in the cor.---ý, city !ýre.-7s arz-z. met -L -L CI o*t-,ýýh scIn nlv --,r3veet lariu to bi_-.,siness int-nre stS, imros_i-tion, o.-ý' bettkerment leý7y on tqn. adj oini n4- p roperty oTiýn -3rS n,ýýf 111 tti nq f rom incra,-::Lses in L-nd values. The income from bette-rment le<avy ýias been too me,--er:-z to constitate a major source of develoument finence. By c.nd large ý conversion of use rom re sidenti al +.3 busines 3 -,.ur-losn- s has ::ýee a m<-=4,j'o r re su lt ant of urbc-in re n the olld city ý,= ra as - 148 - Mu-niciaeDevelorment ns Nature and limitations The desirability of prep-:ring municipal development plans has been discussed in IndiA from time to time, followin the exhortation of the 1lnning Commission in this regard in the esrly sixtigs. It was rroposed during the Third. Plan period that as many towns an. cities as possible and, at any rate, those with population of one lakh (100,000) or morn, should come into the sc.%eme of planning in an org.nic wie,y, each city mobilising its own resources -nd helIing to create the conditions for better life for its citizens. It was in pursaance of taiis policy that the Planning Commission addressed P letter to t.- stats go-ernments in Aust, 1962, to get the municipalities and corporactions to drw up their «ive Year Plan embracing all such rrogrammes of water suplv and sanitation, housing Pna slum clearance, educational, medical and hesalth facilities as well as develorment of communications ani other urban utilities. These city development plans were to be coordinated with the state rlans forming their integral part. The response to this re,uest of the Planning Commission was, however, far from Sncournging snd it was found that e-7en at the stage of for' . of the i:ourth Five Year Plan most of the. st&tes had not been abl to get the urban local bodies to drEw up their crogrammes and resource rlans an, tie them uD ,ith the state plans.96 Since the situation in this regard remains much the same as of now, it might be useful to identify some of the unstated policy gaps in this regnrd. 96. Indian Institute of Public Idministration, Fivs Year Municioal Develo-ment Plans, IIPA, Nw Delhi, 156,p.20 149 - (i) ielf-inanccinaconcett: From the beinning it h:s been 2mhesi4ed ý h t the municip-1 puthoriti?s must find their own resou.rce.s to fund their develo-lment pl-ns; this is done on thL assumt.tion h3 t thesse plns coul- Å' self-fi-n-ning by .sing lani s a resource for developmnrt. -Ihat is not stat=d is th--t either in th national 3r in the st-t plans the allocation for urbnn development bein-- m&rgin al (around 2% 0 the nAtional plan), non-plan resources must be tap -id t3 finance city development plans. The municical athorLties are advised to fall back on f,inding sources outside the l,n ra.meters, suc h -.s, profits through lni s eculati>n un.er mu nici-l auspices. This is dependent on the supply of end demand for urban land. 'imLult-n eously, this also conditions the nature and size of municial de-relonment plans. (ii) C t it:l im-ro7ements -r,-r,mme: The methodology o repration of the city deJe-lonment plans as :rearzd by the TC O wes to serie as a model for 97 repar tin. of the municipal deelopment plans as weil. This methodology was -crep,-red for area development -cuirposes and not for corporate planning within the municipal authoritias. Moreo-:er, the city development plans represent 97. See, "Note on Kathod>logy for the Pr2p!ration of City Develo-.menit Pl,:ns" in Fi-e .e7 r 'Junici.al Develorment Flns, op. cit.. 6-13. LO-0 tas financial -juiys for selected capital improvement schemeas 2nd1 are not~ e2sily recorccilable with the prevalsrit methods of plan outlys in the central and sate bi-ts Jnless these acrital developm1ent rogrammes ae inc.ed in ths plan bud.ets of the state, their realisation would de-end on the surplus av2ilabie out of urbian land speculation under public aegis. (iii) Intgration with th st,-" pl,ns: From the beginning, the Planning Commission has been insistin,- that the munici!.al develoment mls must be integrated with the state plans: unfortunately,the modalities of such integration have not been worked out in operational terms, either by the Planning -ormission or by the TCFO. Since this w.ouli entail higher resource commitments on the part of the states for urba.-n deelopment, such integration of stCte and municiepal plans has not taken place. Instead -ithe municipal development plans are concei7ed in very differnt terms thnn the national and state planning system. --.hat is implied is that there ought to ba functional integration of the state and . municipal -olanning, but the fiscal needs for the latter component are to be met nriimarily from non-plan sources. iunicipal develoement projects In the absence of a reognized system of reparation of munici-al development plans, the municipal 98 Op. cit 55. - 1.51 - uthits nrt½k3 projec~t plnn~in~ an sche ma fouatf :3nting by the 7rius sjata functional ertmenL-r s out 0f their p provisi3ns. projects and schemes follow detailgti technic.1 n=ui-elines provided by the state departments; sometimes tha state t echnical departments prepars specific municipal pro,ject plans on agency basis anr levy centage charges on the munici,.al authorities to cover the costs. The financing methods very from project to project, deperd- inr on the state plan ;riorities. 3y nd large, only major capitl ;orks are thus financed and several states have block assistance for this purpose in terms of the loan and grant components. ~ince thesn arm isolated schemes, no assurance from the stata to finance a total municipcl development plan is made; also, the si~e of this type of assistance varies in terms of project size, functional pri-ritiztion of the state, the overall state' s resource position, and the bargaining power of the concerned municipal authorityv. In Kerale, the state go'vernment took the initiati7e in promoting the Ierala Urban Development F,ijance orporation (=7C), wiith the municipal and urban develo-ment authorities as share-holders. The municipal authorities ars res.uired to in-est their revenue surplus in the KUDFC, The i7'_, is incre:si nly becoming one of the major 긔 0 r[l 4-l:) tf) t)(] 5-1 Ir) tn 0 r-I n Cil n ý-l wi n C) rf) 4-3 c: 4_2 bf) -13 Cl) T5 H 0 4-:) C., 0 F-" pi 0 F-, (IN ý: c F-4 tf) cu (1) (U ý-4 -ri (1,1 (p b.) C) Q3 (1) C! -P 0 n ri (13 F4 C -P 4-3 F-4 c, ti) ri ti) In r4 F-4 0 rl 4_4 4ý r-] r-) H 4-1 c7) P-4 4-1 P.I ri !: ý-i (1) ir) .,,1 0 1> 4-1 ri 0 F-4 -P rA Qj 4-1 ri r4 F-A F-; :ý1 :J 'In -;_3 5-1 -,j cu 0 C. 43 F- (LN ri F-, 4-3 C-i r_ý -t-" X: 4-5 r4 0 Cil 0 4-1 4--J ri F~, r__] 4-3 C.j 0 C) 4--1 W -r.i 2ý el ý ?, cl (D cl (3) r] r-A rl M ri .51 ý7, CU ý1 0 cý r-] C) (u U tv ri -ri -ri ý_) 4.:1 :J (1) (J) CD t, 0 cý q--4 0 - 154 - ser-7ic 3 en- facilities. Barrinwg a few ma.jor corortiins and mru.nicipalities, ewen this target seems to be un- £ttainabl in th- for3seeable future with th 9xi 3ting municial re0venu 1. acuthority. tht is needed, therefore, is s commitment on the part of the higher le7els of gcovernments to effectiefly decentrnlize fiscal powers and public functional capabilities at the local levels. UndouÅbtedlv, the central governmant's role in strengtIening municilpal authorities is crucial in 9 centrqlized fed,rgtin like Indis. Citizen-particiretion in local resou.rce mbilizRtion is another promising are for rolicy action, especially ärhen the loyalties o_ the urban ioter-client are sou)ght to be actiiized and the municipal authorities are to b seen to be effective in the delivery of localized public services. What we are saying hls el;ays been cle.aýr to the students of management that organizations deriva resources from the environment; internal strernlining of organizations at best might improve organizational cma,pabilitv to optimi :s resource raising, in aJdition to plug loopholes in resource generation !nd reduce w,stes in exrenditure. The potential contribution of munici--al man:gement in resource mobili,zation jnd thereby increasing the tuFntum of civic services, although - 155 - im-ort r , may not be r cil to m:e subtnti, lifer9nc. u.r s nssin for I!rser shSre of7 GI to bA ro3te through th: local ( nn i mnicia) ro-Ternment m:y thus be rei.t rat,d here: this is hased on t,3e JÄr,mise that unles, 1cl go7ernm,3 nt is an imlortant p1rtner in the governmental system, reformS in !DcVl (or muiniciral) finance woulld not be iorth attempting. -owever, when we ccentrate on the potentialities of munici-p mn91 gement improvement, we see two constraintsi () in the form of almost 9nd3mic cnfiict between the elected end the zppointed elements in the municipal corpor tions, and (ii) the esen1ce 20C anny recognizable system of st?ffing th-t is conerent nä eared to common organizntiona1 objecti7e. The first defect ari ses from the defectiTe constitution of the corporation.s an withut a radical restrcturing of the execqtive system it is not possible to solT3 the croblem at its roots. The second problem arises due to the imposition of a vvriety of persowiel system wit'hin a sile municipal cthority, each segment being responsible to lifferent control points within and outsile the organization. 'Thile the virtues of a separete personnel systemn are conceded for the lower function-ries at the hi g hsr levels there are deputati nists, in tegrated and u nifi 3d system r ersonnel an. sa9prate system staff of 72ro-s 1r1-,aations apointe:3d by 72rious l-7els of -xecti e 156 - Cuthorit y. Ihis m ke s the mi ci orgIrni _:ti look like n onian in terms o persocnel system, each at rotpting on its own peth, -vithout inuagrpting for c common purpos. or motiv-tion. ,.ecessrily, this breeds initernal jealousies -ll conflicts which, in the municipal corporations at any rate, sarpens the existin, conflict at its executire lävel. improvements in the municipal management, including its fisc,l and financial component s, i s a f unction of munil cal e -c:uti 1e and -ersoncel systems. It is here th-t m-jor policy ections need to be direct;ed for imp roving the internl D rganizat- ional strength of the municipal -uthorities. From the point of view of the orgeo izational ethos, the municiral au.)thorities have largely copied the bureaucratic pr.-Lctices of the state go-rernments that are not always suited to their peculiar needs rnd circumstances. Howe 7e r, since, he munici i n u horities enjoy t x powers vnd disch,r-e reguvlatory (police) functiDns, it is lso not propr uo e.ute them with public corporations, as management specialists wouli be tempted in doing. To the extent certein municipal enterprize functions coul be con-7e'niently hived off from the general 2ctivities o a municipal authority, it is possib13 to su 2dest aJotion of comm Nrci o n- nt ins in b,d3ting p:ricing and secounting mttars . However, one shouldi, cnz s -mu i onsidmr - im c:o 2.4 ons a rc-i-- f - 1.57 iuni cipl;: entr- riu3 is e.xDnmous onlr in form )n r1 n7 1nr,~ i tic pri c1 nr sch 1 or men-fl gear oC it3 laöou.r force . '·rnr ," th, - -..,Lc.,-c il.ities ja tjUs b. it2ble cnit3s for mun-iial r i rIther thn own r-ershir. tere we hsve refrained to sraest M3 Cu- i steps to reau ith ihe constraints o mu.ni.cir,1 mana n as t - fc us of th2 a'cer is mu nicipcl fi . rowav3r, sice finanice is a u-syt± oc ore. - , c- J !1 .7 3 3- ..ce- - n man agement G, it is imrortant to b :r of th wa.. nesses of th lgr sy m It is ho,·.1ver, possibl to influence the larger system through specific measures at the interf ace, such as, improvemnts in b: ating and ci control. Research Issues for th: anlk As in h cass of policy action Lj J t- rese s ý cin -Jo i ch th-nigh r i fl lyua t k resrhwudbe iin the ,-1 3 f i l. o f ics en -yr Dnment o: munici:._I org snition, co, -j n. (c rZmu nerptie servics, (c) -e-m70nic DI 1- 10 "t7 iee3 r- - - ni r. cr~ fi cr rr -- rg l Sff 0. ' ' - rn -:.Ui an ,a d d) jpub i - C E? Ul, E? IUU , . nr I. 7o~' -s w-n.p r shen si;-2 bib ior y se _hrm Pn .nr3 n