Bolster ULBs’ capacity to raise revenue

December 25, 2020 6:00 AM

The inability of urban local bodies (ULBs) to raise resources has limited the growth of municipal income and led to a fiscal crisis like that seen in the case of Delhi’s municipal bodies

This reduction came on the back of a decline in own-source revenue from 56 to 44%.This reduction came on the back of a decline in own-source revenue from 56 to 44%.

By KK Pandey

Buoyancy and elasticity of a municipality’s own tax and non-tax revenues is essential to enable urban local bodies to upgrade services for productivity, environment and quality of life. As against the municipal revenue of Rs 4,624 per capita, own-source revenue was only Rs 1,975 in 2018 (ICRIER, 2019). Despite a quantum jump in the fiscal transfers (after insertion of article 280(3)(c) in the TOR of National finance Commission and creation of state finance commission as per Article 243Y), the inability of ULBs to raise resources has limited the growth of municipal income and led to a fiscal crisis. This affects the low-levels of municipal services and translates into salary delays for employees (e.g. Delhi). Although it is envisaged that municipal revenue should be 1% of GDP, between 2010 and 2018 revenues declined from 0.48% to 0.43%. This reduction came on the back of a decline in own-source revenue from 56 to 44%. On the other hand, McKinsey reports that an eight-time increase in per capita expenditure is needed to provide services at desired levels during 2010-2030.

If we are to assume 1% as a proxy-level for municipal revenues, Indian cities need a five-times jump to provide services similar to Poland, a three-times jump to reach the level of South Africa, and seven-times jump for Brazil. National Finance Commission and RBI, while submitting their interim report (2019) and permitting additional borrowing of 2% (from 3 to 5%) of SDGP to meet revenue shortfall due to Covid in July 2020, have requested further mobilisation of own sources including property taxes. In India, property taxes only account for 0.15% of GDP, whereas in developing economies they account for 0.6% and the global average is 1.04%. Eight main actions need attention to enlarge municipal kitty:

To double the property tax collection from Rs 200,000 million to Rs 400,000 million by 2024, the property tax base needs to be expanded using GIS mapping, cross-checking with building licenses, ration cards, mutations, electricity/gas accounts, and review of exemptions. This also needs to cover government properties as per GoI circular 2009 and the SC judgement in Rajkot Corporation vs Railways, which said that PT needs to be levied provided the charges are not more than state government properties. Similarly, rates need revision in the guiding value for rent or unit area; for instance, in Delhi, rates are fairly low. The vacancy rate (12%) needs to be reduced through innovations. The city of Barcelona takes control of the properties left without tenants for more than two years and rents them out at 50% rates. The collection process needs to be automated too. ABC (Always best Control) analysis should be done to target the top 10-20% properties, and measures such as attaching bank accounts must be implemented.

Second, the value capture taxes need to include upward revision of building license fee and new sources like impact fee, as imposed in Telangana, exactions and betterment levy like the one imposed in Gujarat.

Third, an advertisement fee needs to be levied. Thiruvananthapuram listed the sites and plugged leakages for 33,170 unauthorised boards to double its income from 2018 to 2019. South Delhi MC has achieved a three-time increase with revision of rates in a ratio of 1:8 as per location and by dividing the city into clusters.

Fourth, local fee/charges also have immense potential such as (i) recovery on user charges (water, etc) which is only 20% (ii) right of way from gas/electricity and fibre optic lines, (ii) cell tower, (iii) leasing electricity poles (iv) and giving maintenance of parks to RWAs. In Delhi RWAs maintain parks for Rs 8,000 per park, which is much lower than having a municipal employee.

Fifth, the potential of participatory funding (private sector, CSR and local community) needs to be tapped as has been done by Bengaluru, Ahmedabad, Mathura (Hybrid Annuity project), Indore and Pune. This provides a broader scope for better uses of own-source income.

Sixth, small and medium-sized municipal bodies—with 41% urban population, but only 28% municipal income—need special attention for assigning and activating fiscal instruments. Better mobilisation of own sources may also lead to revenue account surplus. This has been achieved in Ahmedabad, Pune, etc and it also enables access to the capital market.

Seventh , article 243X needs suitable revision to allow larger inclusion of fiscal instruments above within the scope of a municipality’s own sources.

Eighth, over 3,000 census towns not having city government need special attention to create ULBs in line with MoHUA’s advisory in 2016. It will create an innovative and effective financing framework for sustainable urban development.

The author is Professor (urban management), IIPA, New Delhi. Views are personal

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