CHAPTER-6 ASSESSMENT OF FINANCES OF ULBs 6.1 As Dr. Isher Ahluwalia Committee in their Report on Indian Urban Infrastructure and Services has observed "Urban local governments in India are among the weakest in the world both in terms of capacity to raise resources and financial autonomy." The financial condition of a majority of municipalities is very weak. It has undergone a significant deterioration subsequent to the implementation of the recommendations of the Sixth Pay Commission. There is today a mismatch between the revenue instruments assigned to the ULBs and their expenditure functions. Expenditure is constrained by the revenue resources, both in terms of own revenue and devolution and grants from the state government. When revenue is inadequate, it leads to under-spending on various services affecting the quality of service. Since the urban issue relates to management of growth with significant financial implications, the financial aspect of ULB management has to be dealt with in the context of overall management of Urban Local Bodies. 6.2 Theoretically, urban local bodies need to have powers for local taxation which leads to revenues commensurate with expenditure responsibilities. While there has not been enough assignment of taxation powers to the local bodies, whatever sources are available are also not being fully exploited. There is a growing dependence on transfer from the state government and very little effort to raise revenues locally. The government has also constrained their revenue raising powers. A particularly telling example of the latter is the recent Government Order imposing a stay on revision of property tax rates by the ULBs. (Annexure-VI-A). Apart from being an uncalled for encroachment on the domain of the ULBs, it is also a retrograde step that has seriously constrained the possibility of enhancing their revenue by the ULBs. 6.3 Bahl and Linn in their seminal work on Urban Public Finance in Developing Countries have observed that fiscal problems of cities will, sooner or later, occupy more of the attention of central governments as more cities face the challenge of improving public services. At the same time, along with migration to urban areas, the formal sector economy and overall taxable capacity also grow. Theoretically, this is where the local governments are in a better position to expand the urban tax base because they are better able to identify the liability for property taxes, automobile related taxes, business licences and user charges. Moreover, local governments are in a better position to mobilise more resources through user charges for investment in maintenance of infrastructure. However, this pre- supposes assistance and support from the central government in transferring necessary powers and technical assistance to implement such programmes and help in understanding which taxes they can levy and collect efficiently. -72- Third State Finance Commission 6.4 In a study of Municipal Finance in India by the Department of Economic Analysis and Policy, Reserve Bank of India (2007), it has been pointed out that the constitutionally in-built imbalance in functions and finances assigned to various levels of government eventually reflect in high dependency of local bodies on the State Government for funds. Globally it has been the experience that rural-urban migration and in situ transformation of rural habitations into towns cannot be stopped. The policy intervention needed is to promote healthy and orderly urban growth, which also helps to bridge the urban-rural divide. Urbanisation involves shift from low productivity rural pursuits to high productivity non-agricultural activities. It also requires more governmental intervention by way of planning, capacity creation and upgradation, because higher population density generates externalities which need to be addressed through public regulation and public involvement in service provision. We have tried to address the issue while discussing municipal governance. A study by NIPFP of municipalities in India, has documented the problems of vertical imbalance, horizontal imbalance, inadequate exploitation of existing resources by local bodies, high cost of administration and collection of local taxes and arbitrary system of fiscal transfers from State Government to ULB's as the common feature of municipal finances in the country. 6.5 The authority of ULBs to raise resources flows from the State legislation, namely, U.P. Municipal Corporation Act 1959 and U.P. Municipalities Act, 1916 as applicable to Uttarakhand. While a Municipal Corporation under the U.P. Municipal Corporation Adhiniyam, 1959 has statutory revenue raising powers under Sec. 172, no such power is with the NPPS and NPs. It is a discretionary power under sec.128, to levy taxes like property tax, trade tax, profession tax, theatre tax, vehicle tax, dog tax, animal tax, cinema tax, water tax, drainage tax, scavenging tax, conservancy tax etc. In actual fact property tax is the main tax levied by the municipal bodies. All ULBs, except three, have been levying property tax. The three ULBs that do not levy the tax are Tehri from among NPPs and Chamba and Shaktigarh among NPs. Apart from property tax the ULBs also have a variety of non-tax sources of revenue. The main sources of non-tax revenue for the ULBs are licence fees, tehbazari, income from property fines and entry fees into certain areas. 6.6 The revenue base of Municipal bodies consists mainly of (i) their own tax and non tax revenues (ii) transfers from state government by way of devolution and grants in aid and (iii) other receipts. Since the urban local bodies are statutorily not permitted to incur budget deficits, and because of constraints on their market- borrowing ability in the absence of credit rating, they are hardly able to take recourse to 'debt financing', thus leading to a very high dependence on the State government. -73- Chapter 6 : Assessment of Finance of ULB 6.7 The analysis of finances of ULB's has been done on the basis of information provided by them in response to the questionnaire of the Commission. Nagar Nigam, Dehradun 6.8 As is clear from the Table below, for the Dehradun Nagar Nigam government grants constitute more than 80% of total revenue receipts, whereas own resources constitute only around 17% of total receipts. There are also wide fluctuations from year to year in receipts under different heads. For instance rent receipts were ` 1.58 crores in 2006-07 which went down to ` 0.072 crore, in 2009-10. Table 6.1 Receipt - Municipal Corporation Dehradun, (2006-10) (` in lakh) S.No. Head Year 2006-07 2007-08 2008-09 2009-10 Average i- Tax revenue 1- Property tax 251.34 296.78 290.81 342.17 295.28 2- Show tax 1.11 2.28 3.01 1.80 2.05 3- Advertisement tax 42.78 55.61 57.71 38.96 48.77 4- Other sources 1.15 0.16 0.51 0.20 0.51 Total (i) 296.38 354.83 352.04 383.13 346.60 ii- Non tax revenue 1- Licence fee 14.35 15.37 8.49 22.81 15.26 2- Rent (House, shop and other) 158.76 11.13 8.68 7.29 46.47 3- Parking fee 15.95 12.51 11.84 9.48 12.45 4- Slaughter house fee 4.22 4.72 3.97 4.18 4.27 5- Other sources 115.01 132.73 173.16 13.38 108.57 Total -non tax revenue 308.29 176.46 206.14 57.14 187.02 Grants iii- State Finance Commission 1793.00 2146.33 1852.63 2146.33 1984.57 iv- 12threcommendation Finance Commission 68.58 68.58 v- Incomerecommendation from other sources (a) MLA Fund 5.63 8.89 1.30 5.27 (b) MP Fund 1.00 1.92 6.22 3.05 (c) Other 789.84 2.25 1228.45 284.00 576.14 Total Grant 2658.05 2159.39 3082.38 2436.55 2584.09 Total income (i+ii+iii+iv+v) 3262.72 2690.68 3640.56 2876.82 3117.70 Property Tax as % of Total Tax 84.80% 83.64% 82.61% 89.31% 85.09% revenue Property Tax as % of Own 41.57% 55.86% 52.10% 77.72% 56.81% Revenue TotalTas Tax Tax Revenue Own Revenue as % of Total Income 18.53% 19.75% 15.33% 15.30% 17.23% Source: TSFC-Questionnaire -74- Third State Finance Commission Nagar Palika Parishads 6.9 The aggregate receipts for all NPPs for the four years from 2006-07 to 2009- 10 is given in the following table. Table 6.2 Aggregate Receipts for NPPs: 2006-07 to 2009-10 (` in Lakh) S.No. Head Year 2006-07 2007-08 2008-09 2009-10 Average i- Tax revenue 1- Property tax 630.51 688.51 710.62 739.36 692.25 2- Show tax 4.32 5.53 4.22 5.53 4.90 3- Advertisement tax 30.51 47.34 30.28 50.20 39.58 4- Conservancy tax 0.07 6.67 0.12 0.10 1.74 5- Water tax 25.52 29.22 27.66 29.21 27.90 6- Stamp duty 566.19 651.92 1346.64 248.82 703.39 7- Other taxes 119.48 185.57 153.10 162.59 155.19 Total (i) 1376.59 1614.76 2272.64 1235.82 1624.95 ii- Non tax revenue 1- Tehbazari 174.38 221.68 217.68 255.08 217.20 2- Licence fee 110.56 48.29 129.82 57.58 86.56 3- Rent (House, shop and 372.68 476.92 479.15 573.54 475.57 other) 4- Parking fee 47.07 37.33 79.13 111.77 68.83 5- Slaughter house fee 18.75 29.05 24.61 21.63 23.51 6- Other sources 818.53 803.06 711.37 795.87 782.71 Total (ii) 1541.97 1616.32 1641.77 1815.47 1653.88 Grants State Finance Commission iii- 6023.61 7118.41 6611.70 7558.25 6827.99 recommendation iv- 12 th Finance Commission 399.19 180.30 0.00 7.80 146.82 recommendation v- Income from other sources (a) MLA Fund 84.93 65.24 174.03 104.33 107.13 (b) MP Fund 35.66 18.00 85.91 67.74 51.83 (c) Other 7068.38 1886.40 2258.80 2791.66 3501.31 Total Grant 13611.77 9268.35 9130.44 10529.78 10635.08 Total income (i+ii+iii+iv+v) 16530.33 12499.42 13044.84 13581.06 13913.92 Property Tax as % of Total 45.80% 42.64% 31.27% 59.83% 42.60% Tax Revenue Property Tax as % of Own 21.60% 21.31% 18.15% 24.23% 21.11% Revenue Own Revnue as % of Total 17.66% 25.85% 30.01% 22.47% 23.57% Income Source: TSFC Questionnaire.