The Hindu Business Line : Mismatch between functions and finances of urban local bodies, says report

Mumbai, Jan 16 Urban local bodies (ULBs) should maximise revenues from property taxes, user charges, and urban land resources, said a Development Research Group study on ‘Municipal Finance in India’ released by the Reserve Bank of India.

‘Users pay’, ‘beneficiaries pay’ and ‘polluters pay’ are the cornerstones of local public finance as suggested by theory as well as practice,” said the report: “They must be fully made use of through scientific ways of identifying tax base.”

The report pointed out that the total municipal revenues in India account for a meagre 0.75 per cent of the country’s GDP, against 4.5 per cent for Poland, 5 per cent for Brazil and 6 per cent for South Africa. ULBs account for a little above two per cent of the combined revenue and expenditure of the Central Government, the State Governments and ULBs.

There is a mismatch between the functions and finances of ULBs, which explains the vertical imbalance, said the report. “While the huge resource gaps of the ULBs require major structural reforms that take time, there are no two opinions that ULBs should exploit the revenue sources already assigned to them more effectively,” the report. The study recognised capital value taxation as a desirable way to enhance the yield from property taxes. However, it was felt that such a process would be slow given the view that taxpayers in Indian cities are ‘property-rich’ but ‘cash-poor’. ULBs also lack a cadre of trained assessors to evaluate property values and update them regularly, which could also act as a deterrent.

Vacant land tax, which remains one of the most under-exploited source of revenue at the local level, can be a major source of ULB revenues. There should also be some reforms in administration of property tax, including assessment, valuation and record keeping, the report said.

ULBs should also be enabled to levy user charges for individual services in order to get the benefit of full cost recovery. Benefit taxes should be levied when the levy of user charge is not possible, said the report.

The report said that recruitment, career progression, performance management and incentive systems for municipal personnel should be designed to enable efficient performance and accountability in service delivery. “Outsourcing of staff and functions may be considered based on cost-benefit analysis. Capacity building and training programmes, including change management, need to be undertaken systematically and regularly,” said the report.