A three-decade evaluation of panchayat governance and revenue generation in India

Dipak Kurmi

(The writer can be reached at dipaknewslive@gmail.com)

It has been thirty years since the implementation of the 73rd and 74th Constitutional Amendments Acts, aiming to establish local bodies in India as effective institutions of local self-government. Subsequently, the Ministry of Panchayati Raj was established in 2004 with the goal of enhancing the functioning of rural local governments.

Examining the state of devolution reveals a clear disparity, with certain states making significant strides while others trail behind. The dedication of state governments to decentralisation has played a crucial role in transforming panchayati raj institutions into efficient mechanisms for local governance at the grassroots level.

The constitutional amendment has outlined precise guidelines for fiscal devolution, encompassing the generation of independent revenues. Derived from the Central Act, diverse State Panchayati Raj Acts have incorporated provisions for taxation and collection. Panchayats, in accordance with these acts, have endeavoured to maximise the generation of their own resources. The Ministry’s interventions have culminated in participatory planning and budgeting as the ultimate outcomes of these efforts.

The recent ‘Datapoint’ article on the Opinion page of The Hindu, dated February 5, 2024, emphasised that only 1% of the revenue earned by panchayats comes from taxes, while the remaining funds are obtained through grants from the state and Centre. Specifically, 80% of the revenue is sourced from the Centre and 15% from the States. This revelation serves as a wakeup call for advocates of decentralisation, underscoring the fact that despite three decades of devolution initiatives, the revenue generated by panchayats remains remarkably low.

The expert committee, appointed by the Ministry of Panchayati Raj to explore avenues for the own source of revenue (OSR) for rural local bodies, has provided comprehensive insights into state acts that integrate both tax and non-tax revenue options available for collection and utilisation by panchayats. Major sources of OSR include property tax, land revenue cess, additional stamp duty surcharge, tolls, professional tax, advertising revenue, and user charges for water, sanitation, and lighting. Panchayats are encouraged to create a favorable environment for taxation by implementing suitable financial regulations. This involves decision-making on tax and non-tax bases, setting rates, establishing provisions for periodic revisions, defining exemption areas, and enacting effective tax management and enforcement laws for collection.

Generating non-tax revenue encompasses a vast potential, encompassing various sources such as fees, rent, investment income, sales and hire charges, and receipts. Beyond the conventional streams, there exist inventive projects capable of yielding Other State Revenue (OSR). This comprises income derived from rural business hubs, pioneering commercial initiatives, renewable energy projects, carbon credits, Corporate Social Responsibility (CSR) funds, and charitable donations.

Gram Sabhas play a crucial role in nurturing self-sufficiency and sustainable development at the grassroots level by effectively utilising local resources to generate revenue. These assemblies are actively involved in the planning, decision-making, and execution of income-generating initiatives spanning agriculture, tourism, and small-scale industries. Empowered with the authority to impose taxes, fees, and levies, they channel these funds towards local development projects, public services, and social welfare programs. By prioritizing transparent financial management and inclusive participation, gram sabhas ensure accountability, build community trust, and empower villages to achieve economic independence and resilience. Consequently, these assemblies should champion entrepreneurship, establishing collaborations with external stakeholders to amplify the impact of their revenue-generation endeavours.

Across various states, a disparity exists in the delegation of tax collection authority among gram panchayats. Some lack the power to collect taxes, while others witness a similar gap at the intermediate and district panchayat levels. Notably, when it comes to own tax collection, gram panchayats contribute a substantial 89%, whereas intermediate panchayats account for 7%, and district panchayats manage a nominal 5%. To establish fairness in resource distribution, there is a necessity to clearly define Other State Revenue (OSR) allocation for the entire three-tier panchayat system.

Several factors contribute to the prevailing reluctance to generate independent income. The surge in Central Finance Commission (CFC) grants has diminished the enthusiasm of panchayats for Other State Revenue (OSR) collection. Notably, the allocation for rural local bodies witnessed a substantial increase from 4,380 crore in the 10th and 8,000 crore in the 11th CFC to a significant 2,00,202 crore in the 14th and 2,80,733 crore in the 15th CFC. Despite this, the tax collected decreased from 3,12,075 lakh in 2018-19 to 2,71,386 lakh in 2021-2022. Similarly, non-tax collections also witnessed a decline from 2,33,863 lakh to 2,09,864 lakh during the same period.

In the past, there was a competitive spirit among panchayats to raise OSR for fulfilling basic needs, but this has now shifted towards dependency on grants from central and state finance commissions. Although some states have incentivization policies with matching grants, their implementation has been sporadic. Panchayats, seemingly detached from penalizing defaulters, perceive OSR not as income intricately linked with their financial well-being.

Despite the conducive conditions for revenue generation, panchayats encounter multiple obstacles in mobilising resources, primarily stemming from the prevalent ‘freebie culture’ that fosters reluctance in tax payment. Elected representatives fear that imposing taxes could adversely impact their popularity. The solution is evident—a concerted effort is required to educate both elected representatives and the public about the significance of revenue generation for fostering the development of panchayats as autonomous governing bodies. Ultimately, breaking free from the dependency on grants is essential, and with sustained efforts at all governance levels, including the state and central levels, panchayats can progressively become self-sustainable institutions.