Municipal Finances

1
Group 2

• Municipal Finances

2
Key Challenges

• Decide on key functions for which matching
  finances are required
• Identify new sources of finances for funding
  capital expenditure
• Local level revenue reforms that should be
  incentivised
• Hit the hard areas at the ARC level

3
Key changes required

• Rationalize functions of local bodies
• Integrate technology to improve service delivery
• Participative approach and disclosures
• Capacity building to professionalize

4
Key functions

• Water supply and sewerage
• Roads
• Solid waste management
• Land related
• Public health and environment (monitoring,
  preventive measures)

5
Existing sources to be devolved

• Motor Vehicle tax
• Professional tax
• Entertainment tax
• Entry tax
• And other locally relevant taxes

6
Key additional sources

• Surcharge on VAT
• Share of service tax

7
Transfers from State to local body

• New sources to be collected at State
• Each local body is entitled to the share
  collected in its region
• Bulk of the collection transferred to local
  bodies
• A smaller, but significant part, to be used for
  equalisation between local bodies
• Pick model SFC implementation and mandate them
  across States

8
Augment revenue generation at local level

• Decide taxation domain, and provide complete
  freedom for local bodies to implement taxation
  domain
• As envisaged under the model municipal law
• Municipal properties
• Provide a fast track mechanism to handle
  litigations in renewal, revisions
• Link valuations to the capital value system so
  that market value is realised by the local body
• Ensure recurrent revenue from properties, not one
  time sale

9
Property tax reforms

• Discretion free (unit area based)
• Self assessment
• Simple formula (capital value)
• Use technology (GIS, MIS)
• Eliminate exemptions
• Equivalent tax from Government properties
• Periodic revision must be statutorily enforced

10
User charges

• Use local fiscal responsibility act (the
  Karnataka Act) and let the local bodies determine
  the correct levels
• Provide freedom to the local bodies to implement
  user charge mechanism

11
Incentivise collection at local level

• Part of state transfers should be linked to
  collection performance at local level (Revenue
  incentive grant)

12
Municipal borrowings

• Today it is allowed
• Encourage local bodies to use this avenue
• A system for credit rating
• Guidelines for borrowing limits
• State level mechanism for handling defaults

13
All this on a sound financial management system

• Accrual based double entry accounting reforms
• Dont tolerate delays in this
• Audit
• Independent, internal and external audit.
• Statutory audit should be in parallel

14
Scale up PPP

• SPV for project implementation and maintenance
• Clarity on what will be vested with SPV and what
  will remain with local body
• Professional operations and management
• Oversight by local body (through board
  participation)
• Maximise PPP in key services
• Ensure universal service obligation
• Awareness raising to demolish myths about PPP
• A structured mechanism for PPP (including laws
  and regulation)

15
Summing up

• Existing sources
• New taxes
• Increasing collection at local level
• Providing strong financial management systems