ForumIAS announcing GS Foundation Program for UPSC CSE 2025-26 from 10th August. Click Here for more information.
Source: The post financial challenges of local government bodies in India has been created, based on the article “Having panchayats as self-governing institutions” published in “The Hindu” on 21st February 2024.
UPSC Syllabus Topic: GS Paper 2-polity- devolution of powers and finances up to local levels and challenges therein.
News: The article discusses the financial challenges and potential solutions for local government bodies in India, known as panchayats. It highlights their struggle to generate their own revenue and dependence on state and central government funds, suggesting ways to improve their financial self-sufficiency.
What is the current financial status of Panchayats in India?
Panchayats in India generate only 1% of their revenue through local taxes.
The majority of their income, approximately 95%, comes from grants by the central and state governments.
80% of panchayat revenue is from the Centre and 15% from States.
Tax collection by panchayats decreased from ₹3,12,075 lakh in 2018-19 to ₹2,71,386 lakh in 2021-2022.
Non-tax revenue also saw a decline in the same period, from ₹2,33,863 lakh to ₹2,09,864 lakh.
The allocation for rural local bodies increased from the 10th to the 15th Central Finance Commission (CFC), with amounts of ₹4,380 crore and ₹2,80,733 crore, respectively.
What are the challenges faced by Panchayats in India?
Lack of Tax Collection Authority: In several states, gram panchayats lack the authority to collect taxes, while intermediate and district panchayats often don’t have this responsibility either.
‘Freebie Culture’ and Public Resistance: The reluctance to pay taxes due to a prevalent ‘freebie culture’ in society poses a significant challenge.
Elected Representatives’ Hesitance: Imposing taxes might affect the popularity of elected representatives negatively, leading to hesitation in enforcing tax laws.
Increased Central Finance Commission Grants: With substantial increases in allocations from the Central Finance Commission, panchayats show less interest in collecting local revenue.
What should be done?
Educate on Revenue Importance: Raise awareness among elected representatives and the public about the significance of local revenue generation for panchayat development.
Effective Tax Implementation: Panchayats should enforce appropriate financial regulations for taxation, including determining tax rates and enforcing collection.
Encourage OSR Activities: Promote activities that generate Own Source Revenue (OSR) like rural business hubs, renewable energy projects, and commercial ventures.
Incentivize Local Revenue Collection: Implement policies to provide matching grants or incentives to panchayats that successfully raise their own funds.
Transparent Financial Management: Ensure accountability and transparency in financial matters to build community trust and support for local revenue initiatives.
Question for practice:
Examine the financial challenges and potential solutions for local government bodies in India.
