Municipal workers cleaning the streets
The combined budget of all municipal corporations in India is much lower than that of the central and state governments, concludes an RBI analysis of urban local bodies’ finances. The study titled “Report on Municipal Finances” reveals how municipal bodies are increasingly dependent on state and center fund transfers, while their revenue earning capacity is limited. Studies show that their revenue raising power has gone down. Limited funds aside, about 70% of this is spent on salaries, pensions and administrative expenses and the rest is left for capital expenditure. And above all, municipal corporations don’t borrow much, leaving them gasping for funds.
The taxes earned by the Municipal Corporations in India are grossly inadequate to meet their expenditure requirements. In India, own tax revenue of municipal corporations, including property tax, water tax, toll tax and other local taxes, constituted 31-34% of total revenue over the FY18-FY20 period. This share was low compared to many other countries and has declined over time. The share of own revenue (both tax and non-tax) in total revenue of urban local bodies in India has declined, while government transfers have increased, as shown in the figure. chart 1,
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Using budgetary data from 201 municipal corporations across India, the RBI report calculated their total revenue receipts – which includes own tax revenue, own non-tax revenue and transfers. In 2017-18 (actual), it was estimated to be 0.61% of GDP and as per the budget estimates for 2019-20, it increased marginally to 0.72% of GDP. This was much lower than Brazil’s 7% and South Africa’s 6%.
Large differences can be seen if the own tax revenue of municipal corporations is reduced state-wise. Own tax revenue of municipal corporations as a share of state GDP crossed the 1% mark in Delhi, Gujarat, Chandigarh, Maharashtra and Chhattisgarh, while it stood at 0.1% in Karnataka, Goa, Assam and Sikkim in 2017-18. % or less. chart 2 plots these state-wise variations.
Another major issue with the revenue-raising abilities of municipal corporations was their reliance on property taxes. In 2017-18, property tax accounted for over 40% of municipal corporations’ own tax revenue. Despite such dominance, property tax collections in India were very low as compared to OECD countries due to low assessment and poor governance, argues the report.
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A report published in the Chennai edition of this paper on Monday highlights the problems faced in property tax collection. In Chennai, out of 13.27 lakh assessees, only 6.94 lakh paid property tax, while 6.33 lakh were yet to be paid. The shortage of tax collectors has further affected the revenue.
chart 3 Shows property tax collected in ₹ crore in FY18, FY19 and FY20 across major cities. The graph shows that most major cities managed to increase their property taxes over this period, although rising urbanization rates and increasing population density may have played a role.
chart 4 Shows the percentage of total expenditure of municipal corporations in India in 2017-18. More than 70% was spent on revenue expenditure such as salaries/wages/bonus (25%), operation and maintenance charges (16.2%), pensions (7.4%), etc., while less than 30% was capital expenditure.
Corporations are mostly dependent on transfers, as their capacity to generate revenue is limited. Property taxes are not collected efficiently. The money generated is mostly spent on revenue expenditure, leaving little pie for capacity building.
Source: RBI Report on Municipal Finance
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