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Panel moots a share in union taxes
February, 26th 2010

The Thirteenth Finance Commission has has suggested a share in the union taxes for the local bodies, taking the process or 
decentralisation a step further, through an innovative direct transfer.

Over the five years beginning April 2010, as per the projections of the Commission, local bodies will receive Rs 87,000-crore grant from the Centre.

The Rs 87,000-crore grant recommended by the Commission to urban and rural local bodies will give a substantial boost to their financial position, said Sanjiv Misra, former expenditure secretary and member 13th Finance Commission.

The rapid urbanisation has brought the finances of local bodies under severe pressure, preventing them from providing basic amenities and infrastructure. The cash-strapped states have been unable to support local bodies. The Commission was not in a position to suggest a direct devolution to these local bodies, so it has hit upon an innovative method to transfer resources to them. The Constitution does not recognise direct devolution to local bodies. The Commission got around this problem by working out this new methodology. This will allow local bodies to become party to Centres revenue buoyancy. The grant will go to state budgets directly but will be earmarked for local bodies, said Mr Misra.

The methodology devised will basically link the quantum of the grant to the previous financial years devolution. For every year of the award period, the Commission has recommended a basic grant amounting to 1.5% of the size of the divisible pool in the preceding year. The grant will go to state budgets directly but will be earmarked for local bodies, ensuring that states are not able to direct these funds for meeting their revenue expenditure.

This approach will find favour with states as the move will make it easier for local bodies to fund provision of basic infrastructure in their areas. Moreover, these funds are over and above what states will get as part of the total devolution.

The Commission has linked part of the grants to achieving governance objectives such as setting up an independent local body Ombudsman, a property tax board, some basic accounting norms, and greater transparency. This will help spur reforms and improve accountability and ensure better delivery.

For 2011-12, the Commission has recommended a performance grant of 0.5% of the divisible pool of the preceding year and for subsequent years of the award period 1% of the divisible pool of preceding year.

It has recommended a special area performance grant of Rs 10 per capita for 2011-12 and Rs 20 per capita for subsequent years of the award period. However, these performance-linked grants are to be released by the Centre only on fulfilment of these conditions.

The Commission has also recommended a separate special area basic grant of Rs 20 per capita, carved out of the basic grant, for every year in the award period.

The Commission has recommended distribution of the grants between urban and rural areas and the inter-se distribution between the states.

It has also asked the State governments to incentivise revenue collection by local bodies.

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