Panchayats need to mop up more taxes

The Rural Development and Panchayat Raj Department (RDPR) has recently asked 6,024 Grama Panchayats (GPs) in Karnataka to revise property taxes in the light of findings from an internal review that only 24% of them have revised tax rates. This action by the RDPR is welcome, but this alone will not significantly step up tax collection as the mobilisation of taxes is influenced by several other factors.

In Karnataka, all 29 rural development-related functions have been assigned to panchayats as specified in Article 243G of the Eleventh Schedule following the 73rd Constitutional Amendment Act. Adequate finances to panchayats are necessary. They receive grants from the state and central governments but are also to mobilise their own revenue through tax and non-tax sources.

In Karnataka, only GPs are empowered to mobilise tax and non-tax revenues. Sections 199 and 202 of the Karnataka Panchayat Raj Act, 1993, give powers to GPs to levy taxes (on buildings, entertainment, vehicles, advertisement and hoardings, factories), user charges (on drinking water supplied to houses) and fees (on markets, cattle and pilgrims attending jatras, festivals, etc). The function of periodic revision of tax rates was also assigned to GPs.

Did these legislative provisions improve the performance of GPs in the collection of revenue? The total revenue from taxes and non-taxes collected by all GPs in the state increased from Rs 67 crore in 2002-03 to Rs 417 crore by 2013-14. Such an increase can be attributed to reforms of RDPR in the calculation of property tax and policy prescription (and regular monitoring) of listing of taxable properties in rural areas.

The growth in GPs’ own revenue seems impressive but what is the proportion of it to the expenditure incurred by them? Larger the proportion, the better it is for decentralised governance as that would indicate that the services provided by GPs are appropriate, people are participating and local government is accountable to citizens.

In 2013-14, the amount allocated to Zilla, Taluk and Grama Panchayats by the state and central government was Rs 22,546 crore, while the amount earmarked to GPs was Rs 1,930 crore, accounting for 8.5% of total allocation. The revenue collected by GPs was Rs 417 crore. The proportion of own revenue to the allocation to GPs was around 21%. In 67% of GPs, their own revenue was less than 10% of the total receipts. Such a low proportion indicates high dependence of panchayats on higher levels of government for finances, resulting in loss of expenditure autonomy.

The proportion of own revenue to total expenditure is low because most of the tax items assigned to GPs are inelastic, and do not have much scope for greater revenue mobilisation.

Where’s the slip?

GPs are not successful in the collection of taxes assigned to them because of the following reasons. First, the elected representatives to GPs adopt populist approaches and assign low priority to tax collection as they fear that aggressive tax collection would adversely affect their electoral prospects.

Second, willingness of citizens to pay taxes depends on the performance of GPs in the delivery of basic services such as drinking water, streetlights, roads, drainage and sanitation. In districts where GPs are more responsive in the provision of these services, citizens pay their dues to the local government.

For instance, the proportion of tax collection to total demand is usually high in Dakshina Kannada and Udupi districts because GPs are comparatively more successful in holding Grama Sabha meetings and providing services to citizens. When GPs do not perform well in these functions, the immediate response of citizens is to refuse to pay taxes.

Third, the poor tax administration at the local level hinders GPs from collecting taxes that they themselves have fixed or in the expansion of the tax base. In this regard, the following policy suggestions could be of help: listing of all houses in the jurisdiction of GP and bringing them under the house tax net; enabling the GPs to arrive at house tax on equity basis (fixation of tax on the basis of size and quality of the house); periodic revision of house tax and water user charges; incentives to motivate GPs to collect all the dues; diversification of sources of own revenue by constructing buildings for renting them out; and, improving service delivery as this is key to motivate citizens to pay taxes promptly.

RDPR minister Krishna Byre Gowda has rightly called for top priority to measures that enable GPs to raise their own resources. Incentives to GPs (such as giving weightage to own revenue collection in the transfer of finance) will do well in motivating them to improve tax or user charges base, collect all the cesses and water user charges that they themselves fix and periodically revise property tax and water user rates.

(The writers are Professor and Assistant Professor, respectively, Centre for Decentralisation and Development, Institute for Social and Economic Change, Bengaluru)