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Taxing times: Urban bodies may be allowed to raise taxes to meet Rs 40 lakh cr infra needs

Prasanta Sahu
Urban bodies finances, NITI Aayog, municipal bond market, Smart City Mission, gst, Finance Commissions

As urban infrastructure services are estimated to need investments of Rs 40 lakh crore by FY31, the NITI Aayog is preparing a blueprint for the resource-scarce urban local bodies to live up to the task of raising these funds. The proposals under consideration include raising the taxes that have not been subsumed in the goods and services tax (GST) and earmarking a certain part of the GST proceeds for these organisations, the third administrative stratum, but the most proximate to the city dwellers.

According to official sources, these urban bodies may also be nudged to take steps to increase their own revenue by tapping other sources like trade licences, taxes on entertainment, mobile towers, solid waste user charges, water charges and parking fees, etc, without fail. Putting in place efficient water-metering systems for residences (which will reduce pilferage that is reckoned to be above 50% in majority of the cities/towns) is seen to be a revenue stream that holds great potential.
Sources said the think-tank has identified non-devolution of relevant taxation powers to the urban bodies by the state governments as a major problem, despite clear Constitutional mandate in this regard. Currently, roughly 60% of the revenue of municipal bodies in the country about 8,000 in number comes from devolution by the Centre and states.

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In FY15, the latest year for which data are available, the combined own revenue of urban bodies in the country was Rs 1.2 lakh crore/year, just 1% of the country s gross domestic product (FY15) in that year. The corresponding figures for comparable countries were much higher 6% in both Brazil and South Africa. According to a survey by Bengaluru-based Janaagraha in 2017, for several cities, their own revenues do not even cover staff salaries. Recently, the government think-tank held deliberations with economists to discuss issues hurting these bodies, how their spending could be more efficient and infrastructure improved.

NITI Aayog as well as recent Finance Commissions have been of the view that the municipal bodies should tap debt market to finance projects and the user charges collected from the projects should be used to service the debt. India s municipal bond market, however, remains shallow, with a total of about 35 municipal bond issuances to date by over a dozen urban local bodies, amounting to just Rs 2,000 crore. Moreover, over 60% of total Indian municipal bonds to date were issued before 2006.

More recently, activity has picked up following the central government s push. In 2018, Hyderabad raised Rs 395 crore in two tranches from the market while Indore raised Rs 140 crore. Following the Centre s Smart City Mission, more urban bodies have lined to tap the market, albeit, for smaller amounts (see chart). However, tapping the market would require addressing the problems plaguing the urban bodies including lack of proper book keeping. Most of these bodies don t even have the records on how the money received from the Centre and state governments for various programmes are spent. Such handicaps make it difficult for the urban bodies to raise funds from market, a NITI Aayog official said. While Finance Commission grants to urban local bodies have been growing over a period of time (from Rs 1,000 crore under 10th FC to Rs 87,144 crore in 14th), these are inadequate to meet even the operation and maintenance requirements of these bodies.