Revenue efforts of panchayats: evidence from Four states

SPECIAL ARTICLEEconomic & Political Weekly EPW july 26, 2008125Revenue Efforts of Panchayats: Evidence from Four StatesPratap Ranjan Jena, Manish GuptaThere is no standing national database on panchayat finances in India, which limits any meaningful analysis of the revenue effort of panchayats. Based on a field survey in the four states of Chhattisgarh, Madhya Pradesh, Rajasthan and Orissa, this paper studies the own revenue effort of rural local bodies within their statutorily defined revenue rights. The study finds that the assigned tax rights are not fully utilised by the panchayats and non-tax revenue is the dominant source of their own revenue. A comparison of own revenues of the panchayati raj institutions for 2005-06, based on the survey results with those reported by the Twelfth Finance Commission for 2002-03, shows a huge difference between the two sets in the case of per capita own tax in Madhya Pradesh and per capita own non-tax in Chhattisgarh. The authors are grateful to Indira Rajaraman for her valuable comments and suggestions on an earlier version of the paper. However, the authors alone are responsible for any errors. Pratap Ranjan Jena (jena@nipfp.org.in) and Manish Gupta (manish@nipfp.org.in) are with the National Institute of Public Finance and Policy, New Delhi.While recent studies on panchayati raj institutions (PRIs) in India have focused on issues relating to the role of panchayats in poverty alleviation and employment generation programmes, resource allocation favouring disadvantaged groups and improved participation of women in decision-making process,1 the own revenue effort of panchayats has received little attention.2 There is no standing national database on panchayat finances in India, which limits any meaningful analysis of revenue effort of panchayats. Reports of the central finance commissions serve as the only source of information. Central finance commissions collect data on own revenue of panchayats from the state govern-ments. The Eleventh Finance Commission (EFC) Report pro-vides data on own revenue of the PRIs for the period 1990-91 to 1997-98, which was further extended by the Twelfth Finance Commission (TFC) Report up to 2002-03. However, the data reported by the successive Central Finance Commissions are not comparable. Provision of services responding to local needs and prefer-ences in a decentralised government system depends to a large extent upon the willingness and ability of the local govern-ments to raise revenue from their own sources. The constitu-tional amendment in India assigned the state governments with exclusive legislative authority to empower the PRIs to levy taxes. The major objective of devolving revenue raising powers to the PRIs is to enable them to function as effective institutions of self-government at local level by improving their autonomy in planning and decision-making. The present paper analyses the own revenue effort of PRIs based on a survey conducted in the four states of Chhattisgarh, Madhya Pradesh, Orissa and Rajasthan for the fiscal year 2005-06. It examines the extent to which the PRIs have exploited their statutorily designated revenue rights. The paper also examines the various sources of own revenues comprising own tax and own non-tax revenues. It provides a comparative picture of own revenues of the PRIs based on the survey results and those provided by the TFC for the year 2002-03. Finally the paper looks at the willingness of the panchayats to collect resources through participatory approach in response to the revealed local needs. The paper is organised as follows. Section 1 discusses the sur-vey design and data collection methodology while Section 2 pro-vides the background to the revenue rights of panchayats. The survey findings are analysed in Section 3 and the final Section 4 provides concluding remarks and suggestions.

Madhya Pradesh and Chhattisgarh classify some of the taxes assigned to PRIs as obligatory, while in Orissa and Rajasthan all taxes remain optional. The assignment of tax rights to the three tiers of panchayats in the four states is shown in Table 3 (p 128). Both in obligatory and optional taxes the tax rate and the base is decided by the state government while in the case of optional taxes the statutes stipulate that these can only be levied with the prior permission of the state government. The relevant state statutes or the executive orders issued by the state government lay down the tax rates, tax base and exemptions for the taxes assigned to PRIs. The tax rates in the four states are prescribed most usually as absolute rates or maximum rates.

The house and building tax, which is the core element in the PRI fiscal domain, is assigned to panchayats in most states, but not in Orissa despite recommendation by successive state finance commissions. Even in the other three states, where this tax is assigned to the panchayats, it is specified as a specific absolute levy slabbed at best with respect to the floor area.

SPECIAL ARTICLEEconomic & Political Weekly EPW july 26, 2008127the state governments the non-tax revenues accrue to the state. The properties built by the panchayats such as sewerage, drains, public roads and buildings are also panchayat properties and some of these do generate non-tax revenues. Table 1 gives data on per capita equivalents of revenues of the PRIs as reported by the EFC for the period 1990-91 to 1997-98 and TFC for the period 1998-99 to 2002-03. From the table we see that the per capita own tax revenue of the PRIs in Madhya Pradesh which varied between Re 0.5 and Rs 2 during the period 1990-91 and 1997-98 has shown a sudden rise to Rs 28.30 in 1998-99 and in 2002-03 it was Rs 33.89. Prima facie such a jump in per capita own tax revenue of the PRIs in 1998-99 is implausible. The second state finance commission of Madhya Pradesh, which submitted its report in 2003 recommending state transfers to PRIs for the period 2001 to 2006, has analysed the finances of PRIs till 1997-98 taking the data provided by the EFC. So we do not have any other source to verify the authenticity of post-1997-98 spurt in own tax revenues of PRIs in Madhya Pradesh. A comparison of own revenue effort of the PRIs based on the field survey results for 2005-06 reported in the next section with those provided by the TFC for 2002-03 shows huge differences between the two in Madhya Pradesh and Chhattisgarh.3 Survey FindingsThe number and type of own taxes collected by the GPs in the surveyed backward and comparator district are shown in Table 2. Such an aggregation within the two sets of sample districts is statistically feasible and meaningful because the selection of lower tiers of panchayats, namely the JP and the GP within each set of districts was done through simple random sampling with replacement. Since the districts were selected purposively, the results hold only for the sample set of districts and cannot be generalised to the state as a whole. Table 2 shows that in the backward districts 70.28 per cent of GPs do not levy any of the assigned taxes and in the selected comparator districts the percentage is even higher at 80.25. The remaining 24 per cent of theGPs in backward districts and 15 per cent in comparator districts, collect from only one source. That leaves very fewGPs collecting more than one source of tax revenue. A larger percentage ofGPs in the backward districts seems to be exploiting their statutorily defined tax rights as compared to those in the comparator districts, though there are variations across the states (not shown in the table). In Madhya Pradesh, for instance, 77.2 per cent of the GPs in the comparator and 49.6 percent in the backward districts do not levy taxes, while in Orissa 93 per cent in the comparator and 92.4 per cent in back-ward districts and in Rajasthan 94.9 per cent on comparator and 81.2 per cent in backward districts do not levy any taxes. Only in Chhattisgarh, a larger per cent ofGPs in the backward districts (71.7 per cent) as compared to those in the comparator districts (40.5 per cent) did not levy any taxes at all. At the middle tier, only 35.48 per cent of the JPs, confined to Madhya Pradesh and Rajasthan, levy some taxes (not shown in the table). In Madhya Pradesh the JPs levy business tax and entertainment tax while in Rajasthan they levy panchayat samiti tax (tax on fairs), vikas tax and education cess. In the case of ZPs, none of them collect any taxes at all.The mapping between assigned tax sources and the survey re-sults is shown in Table 3. The table merely shows the taxes that have been collected by at least one of the surveyedGPs and not the number of GPs collecting such taxes. For example, if in Chhattisgarh only one GP collects animal tax then the table would show that animal tax is being collected by the GPs in the state. In Madhya Pradesh and Chhattisgarh the assigned tax rights seem to have been exploited by at least one panchayat, but the conservancy tax and profession tax, although designated as obligatory are not levied by any GP. In Rajasthan only house tax, water rates and fees on markets are exploited. The education cess imposed by the JPs in Rajasthan piggybacks on the state taxes Table 2: Matrix of GPs by Number and Type of Own Taxes House Lighting Animal Water Other Misc Total No % Tax Tax Tax Tax of Gps By Source Comparator districts 0 source 0 0 0 0 0 256 80.25One source 9 3 8 3 254815.05 More than one source 4 8 8 6 10 15 4.70 Total 13 11 16 9 35 319 100.00 (4.08)(3.45)(5.02)(2.82)(10.97) Backward districts 0 source 0 0 0 0 0 324 70.28 Onesource 26 1 23 24 35 109 23.64 More than one source 17 10 7 20 11 28 6.07 Total 43 11 30 44 46 461100.00 (9.33)(2.39)(6.51)(9.54)(9.98) (1) Figures in parenthesis refer to per cent of GPs to total number of GPs. (2) Percentages in the bottom row do not add up to 100. Taxes from miscellaneous sources such as markets and fairs, commercial property and water charges that varyconsiderably across the states are included in the “other” category.Source: Author’s calculations. Table 1: Per Capita Revenue of the PRIs (Rs)Year Own Tax Total Own Share of Own Own Tax Total Own Share of Own Revenue Revenue Revenue in Revenue Revenue Revenue in Total Revenue Total Revenue (%) (%) Chhattisgarh Madhya Pradesh1990-91 0.582.375.121991-92 0.703.006.541992-93 0.912.934.791993-94 1.193.155.221994-95 1.724.768.541995-96 1.935.386.151996-97 2.04 5.584.451997-98 2.045.591.801998-99 1.94 33.23 16.03 28.30 29.32 26.411999-2000 1.95 33.44 15.73 28.18 29.79 26.922000-01 1.95 34.58 17.30 28.64 32.29 27.892001-02 1.97 33.76 20.6027.8131.7325.382002-03 2.00 33.98 20.6033.8938.1636.53 OrissaRajasthan1990-91 1.30 2.16 3.31 7.23 3.221991-92 2.62 3.07 4.84 6.78 3.491992-93 1.37 2.32 3.11 5.91 2.961993-94 1.45 2.48 1.96 6.53 2.791994-95 1.65 2.79 2.02 6.90 2.361995-96 1.61 2.47 1.37 6.95 2.041996-97 1.52 2.42 1.16 8.24 2.211997-98 1.54 2.34 1.09 7.72 2.021998-99 0.16 3.05 5.41 0.75 7.80 2.091999-2000 0.15 2.82 3.97 1.12 8.76 2.182000-01 0.15 2.91 7.81 1.11 8.60 2.252001-02 0.15 2.80 6.49 1.09 8.46 2.062002-03 0.07 1.73 2.94 1.08 8.38 2.08(1) Per capita figures are derived using mid-year rural population. (2) Total own revenue consists of own tax and own non-tax revenue. (3) Total revenue consists of total internal revenue, grants-in-aid and devolution and assignment from the state government.Source: Calculated from the data on revenue of PRIs (all tiers), Report of the EFC (2000-05) and TFC (2005-10), Government of India.

SPECIAL ARTICLEjuly 26, 2008 EPW Economic & Political Weekly128and in no way reflects their revenue effort. In Orissa, with the exception of market fees none of the assigned taxes are collected. The spread ofGPs collecting non-tax revenue is large as com-pared to those collecting taxes both in terms of total number of GPs and number of sources. Table 4 shows that around 70 per cent ofGPs in backward districts and 77 per cent in comparator districts do raise non-tax revenues from one or more sources. Incomes from physical properties vested with the panchayats are the major source of non-tax revenue for GPs as around 40 per cent of them reported having received income from these sources. This category includes renting out panchayat properties, auction-ing of ferry ghats, orchards, trees and leasing out properties for public use. A large number, 35 per cent in backward and 44 per cent in comparator districts, also receive interest from the bank deposits of funds received by them under various central and state schemes. However, this source of income depends upon the amount of unspent funds under different schemes remaining with the banks and is not based on any revenue effort of the GPs. Royalty from minor minerals and income from forest products accrue to relatively fewer GPs, depending upon the endowment of such prop-erties. Other sources mainly include fees for issuing various certifi-cates and for use of shops and buildings in markets and fairs, user charges on services provided by theGPs, sale of scrap and fines. Table 5 (p 129) shows shares by source of own revenue of GPs by district. Non-tax revenues are the dominant sources of own revenues of GPs everywhere except Khargone, a backward district in Madhya Pradesh, where large number of GPs collect water tax. Among the non-tax sources the important ones are the income from lease and auctions of ponds, mar-kets and orchards and rent from panchayat properties. In addition to these sources interest receipts form an important source of non-tax revenues of the GPs in Orissa, while in Rajasthan income from fees and fines is high as is evident from the table. Tax rights are more effectively exercised in Madhya Pradesh and Chhattisgarh, which are the two states designating certain taxes as obligatory.A similar analysis of own revenue composition by source and district atJP level (not tabulated) reveals that almost the entire own revenue of the JPs in Chhattisgarh and Orissa is derived from non-tax sources. Among the non-tax sources of JPs in the four states the important ones are income from lease and auction and interest receipts. In Rajasthan in-come from rent is another important source of non-tax revenue of the JPs.ZPs do not raise any tax revenue in any of the four states. This is due to the non-assignment of tax pow-ers to this tier except in Rajasthan, where theZPs do not exploit their tax rights. Thus the own revenues of ZPs are collected principally from non-tax sources. Among the non-tax sources income from lease and auction, rent from panchayat properties are the important reve-nue sources in Madhya Pradesh, Chhattisgarh and Rajasthan. TheZPs in Orissa do not raise any non-tax revenues. The per capita own revenue raised at the three tiers averaged over comparator and backward districts is given in Table 6 (p 129). For GPs across the district clusters, per capita total revenue varies between Rs 7 and Rs 9.5 in Madhya Pradesh, Rs 5 and Rs 11 in Chhattisgarh, Rs 5 and Rs 6 in Orissa and is lowest in Rajasthan varying between Rs 2 and Rs 2.7. Of this total, the contribution of own taxes is less than Re 1 per capita with two exceptions of the backward district cluster in Madhya Pradesh and the comparator district cluster in Chhattisgarh. Across tiers GPs collect more per capita taxes as compared to the middle and district tier panchayats as the tax rights are mostly vested at this level, the exception being Rajasthan, where the per capita own tax is higher in JPs, in part because of the education cess. A comparison of these figures for the survey year 2005-06 with Table 3: Taxes Assigned and Collected by the PRIsTaxes ChhattisgarhMadhyaPradeshOrissaRajasthan Assigned Collected Assigned CollectedAssigned Collected AssignedCollectedGram panchayats House tax √ (O) √ √ (O) √ √ √ Vehicle tax √ √ √ √ Latrine tax √ (O)* √ (O)* √ Water rate √ √ √ √ √ √ √ Lighting rate √ (O) √ √ (O) √ √ Drainagetax √ Tax on works of public utility √ √ √ √ Market fees √ (O) √ √ (O) √ √ √ √ √ Fee on registration of cattle √ (O) √ √ (O) √ Profession tax √ (O) √ (O) Animal tax √ √ √ √ Pilgrimtax √ Taxoncommercialcrops √ Others (ferry service tax) √ √ √ Janpad panchayat Tax on theatrical performances √ (O) √ (O) √ Development tax on agri land Professiontax √ Tax on use of agri land √ Educationcess √ √Tax onfairs √ √Zilla panchayat Licence fee for fairs √ Waterrates √ Surcharge onstamp duty √ (1) ‘O’ refers to obligatory tax and rest of the taxes are as optional; (2) house tax includes property tax on lands and/or buildings; (3) the latrine tax includes tax for construction or maintenance of public latrine and scavenging and tax on private latrines if cleaned by the GP; (4) *: the tax on private latrine is obligatory in Chhattisgarh and Madhya Pradesh; and (5) lighting rates and water rates are charged if such services are provided by the GP.Source: Relevant state panchayati raj acts and field survey results.Table 4: Matrix of GPs by Number and Type of Own Non-Tax Revenues Property Interest Royalty Income Others Total No % Rental and Receipt from Minor from of GPs by LeaseMineralsForestSource IncomeProducts Comparator districts 0 source 0 0 0 0 0 7423.20 One source 33 51 1 0 29 114 35.74 Two sources 51 51 9 1 60 86 26.96 More than two sources 43 39 9 16 44 45 14.10 Total 127 141 19 17 133 319 100.00 (39.81) (44.20) (5.96) (5.33) (41.69) Backward districts 0 source 0 0 0 0 0 137 29.72 Onesource 48 47 4 1 49 149 32.32 Two sources 79 54 6 2 67 104 22.56 More than two sources 69 60 16 18 68 71 15.40Total 196 161 26 21184 461 100.00 (42.52) (34.92) (5.64)(4.56) (39.91) Figures in parenthesis refer to per cent of GPs to total number of GPs. Percentages in the bottom row do not add up to 100.Source: Author’s calculations.

governments. The tax rates are specific and are not periodically reviewed and revised. For instance, in Orissa, the vehicle tax rates prescribed in 1975 continue to exist. For many taxes there is an absence of floor rate as only an upper limit is prescribed. This adversely affects revenue mobilisation. However, in some cases the statute prescribes a range, i e, minimum and maximum rates. For example, in Chhattisgarh and Madhya Pradesh the statute prescribes a range for tax on land and buildings, profession tax and en

tertainment tax.

The recommendations of state finance commissions to expand the tax domain of panchayats have not been heeded by the state

The absence of a floor rate has the potential of adversely affecting the revenue mobilisation as the panchayats may fix the tax rate at a very low level.