Why panchayats aren’t able to boost revenues

UPSC Syllabus Topic: GS Paper 2-devolution of powers and finances up to local levels and challenges therein.

Introduction

The 73rd Constitutional Amendment in 1993 gave Panchayati Raj Institutions financial powers to reduce dependence on government grants. Gram Panchayats were authorised to levy local taxes, user charges, and earn revenue from local resources. Yet, despite these powers, own source revenue remains weak across most States. Legal gaps, capacity issues, unclear roles, and weak tax systems have limited the ability of Panchayats to generate sufficient revenue for local development.

Current status of PRIs’ own source revenue (OSR)

1. OSR is a small share of total receipts

• According to the study titled “Preparation of a Viable Financial Model for Generation of Own Sources of Revenue” (commissioned by the Ministry of Panchayati Raj), own source revenue forms a small part of total Gram Panchayat receipts.
• OSR contributes about 18% of total receipts, while grants from the Centre constitute around 57%, showing heavy grant dependence.

2. RBI data also shows OSR is limited: In a wider assessment, data from Reserve Bank of India for 26 States/UTs indicates that OSR (tax + non-tax) is about 6% of total revenue receipts of Gram Panchayats.
3. Very large inter-State differences in OSR share: There is high variation in OSR performance across States. For example, OSR’s share in total receipts ranges from only about 1.05% in Uttar Pradesh to 40.88% in Andhra Pradesh. Other States show mid-level shares such as Madhya Pradesh (2.96%), Odisha (9.62%), West Bengal (12.86%), Gujarat (15.41%), Karnataka (25.76%), and Maharashtra (39.18%).
4. High grant dependence in low-OSR States: In States with very low OSR like Uttar Pradesh and Madhya Pradesh, Gram Panchayats get more than 95% of their receipts from grants. This dependence limits local accountability and financial autonomy.
5. Most Gram Panchayats have low OSR share: Among sampled Gram Panchayats, about 55% receive less than 20% of their receipts from OSR, and 16 GPs receive under 10% from OSR. Only 4 GPs receive over 50% of receipts from OSR.
6. Per capita OSR is very low for many Panchayats: About 25% of Gram Panchayats had per capita own revenue below ₹10, and 14 GPs earned zero OSR in the reported year, mainly in Odisha, Uttar Pradesh, and Madhya Pradesh.
7. House tax is dominant but low: House tax accounts form about 40% of OSR where it is levied. In 2023–24, around 60% of GPs collected only up to ₹50 per capita from house tax, and only 2 GPs collected more than ₹400 per capita.
8. User charges are weak overall: Over half of the GPs earned less than ₹50 per capita from user charges in 2023–24, while only 4 GPs earned more than ₹400 per capita. However, in some GPs, user charges form the majority of OSR.
9. OSR effort falls as grants rise: There is a clear negative correlation between OSR and grants from Centre and State . This suggests that higher grants often reduce local revenue efforts.

What are PRIs’ revenue sources?

1. Property and land-based taxes: Gram Panchayats are empowered to levy house tax, property tax, land tax, and vacant land tax, though methods of assessment vary by State.
2. Taxes on economic activity: Some States permit taxes on commercial activity, factory lands, village produce, and on entry of goods for sale.
3. Water and sanitation taxes: Water tax, special water tax, conservancy tax, and scavenging tax are authorised where systems are constructed.
4. User charges for services: Panchayats can levy fees for licences, markets, tenders, mining transport, commercial establishments, building permissions, and related approvals.
5. Income from Panchayat assets: Rent from shops, markets, community halls, and Panchayat-owned property provides non-tax revenue.
6. Common Property Resources (CPRs): Minor forests, water bodies, grazing lands, fisheries, and irrigation assets can generate income if control is with Panchayats.

Challenges faced by PRIs in mobilising revenue

1. Incomplete and unclear legal empowerment: Some State laws, such as in Uttar Pradesh and Odisha, do not authorise Gram Panchayats to levy property tax. Other legal provisions lack clarity on valuation, rate revision, and tax definitions.
2. Ownership disputes discourage property tax: Ownership disputes and ambiguity in property rights discourage property taxation, especially for commercial buildings.
3. Weak State support and unclear directives: Gram Panchayats often lack clear executive orders and operational guidelines from State governments. Without such hand-holding, Panchayats struggle to assess tax bases, fix rates, and ensure compliance, even where legal powers exist.
4. Overlapping control over common property resources: Forests, grazing lands, fisheries, and water bodies often remain under departmental control. Incomplete activity mapping across the 29 subjects further limits Panchayat access to these revenue sources
5. Limited administrative and technical capacity: Persistent staff shortages, lack of trained personnel, and weak technical skills undermine revenue mobilisation. Panchayat officials are overburdened and often lack training in tax assessment, financial management, and enforcement.
6. Lack of control over service delivery: Basic services such as drinking water and solid waste management are frequently managed by line departments or scheme-specific agencies. Since Panchayats do not control operations and maintenance, they cannot levy or collect user charges.
7. Informal and fragmented user-charge systems: In several areas, water supply and sanitation services are run informally through user groups or self-help groups. This keeps Panchayats outside the revenue cycle.
8. Sub-optimal revenue practices: Due to unclear fee structures, Panchayats auction licence and fee collection to third parties, resulting in revenue loss.

Way forward

1. Remove legal gaps in State PRI Acts: Several States still do not empower Gram Panchayats to levy key taxes like property tax. These gaps must be corrected through amendments or clear executive orders.
2. Issue clear rules for tax assessment and rates: Ambiguity in definitions, valuation methods, and rate revision weakens collection. States should issue simple and uniform guidelines, especially for property-related taxes.
3. Adopt simple assessment methods where capacity is weak: For Gram Panchayats with limited staff and skills, flat or area-based assessment methods should be used to ensure minimum tax collection.
4. Strengthen State handholding and supervision: Low OSR often reflects lack of guidance. States must actively support Panchayats through circulars, model rules, and regular monitoring.
5. Transfer service control along with revenue rights: Water supply, sanitation, and waste management systems are run by line departments. These must be formally handed over to PRIs so user charges can be collected.
6. Clarify ownership and control of common property resources: Overlapping control with departments like Forest or Fisheries limits revenue. CPRs should be clearly mapped and transferred to Gram Panchayats.
7. Standardise licence fee structures: Lack of clarity leads to auctioning and revenue loss. Clear, progressive fee structures based on size and location of businesses are required.
8. Strengthen human resources and skills: Staff shortages and skill gaps reduce efficiency. Every Gram Panchayat needs trained personnel for tax assessment, collection, and financial management.
9. Use digital platforms for OSR management: End-to-end digitisation of assessment, billing, and collection through platforms like Samartha can improve transparency and compliance.
10. Reduce grant dependence through incentives: Performance-linked incentives should encourage higher OSR mobilisation and strengthen local financial autonomy.

Conclusion

Gram Panchayats are legally empowered to raise revenue, but lack of clear laws, weak administrative capacity, unclear control over services and resources, and high grant dependence limit their ability to mobilise sufficient own source revenue. Clearer legal frameworks, full control of local services and resources, stronger human resources, standardised tax systems, better data and digital tools are essential to strengthen financial autonomy and effective local governance.

Question for practice:

Discuss why Panchayati Raj Institutions (PRIs) in India have struggled to mobilise their own source revenues despite constitutional empowerment.

Source: Businessline,