Today's Editorial

Having Panchayats as self-governing institutions

Relevance: GS Paper II

Why in News?

“Panchayats earn only 1% of the revenue through taxes”, with the rest being raised as grants from the State and Centre was highlighted in a ‘Datapoint’ (Opinion page, The Hindu).

Status of Revenue generation:

• Three decades have passed since the 73rd and 74th Constitutional Amendments Acts in India aimed to strengthen rural local governments.
• The Ministry of Panchayati Raj was constituted in 2004 to strengthen these institutions.
• However, the revenue generated by panchayats is meagre, with only 1% of the revenue coming from taxes, with the rest being raised as grants from the State and Centre.
• Specifically, 80% of the revenue is from the Centre and 15% from the States.

Avenues for own source of revenue:

• The expert committee's report, constituted by the Ministry of Panchayati Raj on own source of revenue (OSR) of rural local bodies, elaborates on the details of State Acts that have incorporated tax and non-tax revenue that can be collected and utilised by panchayats.
• Property tax, cess on land revenue, surcharge on additional stamp duty, tolls, tax on profession, advertisement, user charges for water and sanitation and lighting are the major OSRs where panchayats can earn maximum income.
• Non-tax revenue includes fees, rent, investment sales income, hire charges, and receipts.
• There are also innovative projects that can generate OSR.
• This covers income from rural business hubs, innovative commercial ventures, renewable energy projects, carbon credits, Corporate Social Responsibility (CSR) funds, and donations.

The role of Gram Sabhas:

• Local resource utilisation: Gram sabhas play a significant role in fostering self-sufficiency and sustainable development at the grass-roots level by leveraging local resources for revenue generation.
• Participatory decision-making: They are engaged in planning, decision-making, and implementing revenue-generating initiatives, imposing taxes, fees, and levies, and directing funds towards local development projects, public services, and social welfare programs.
• Financial autonomy: Through transparent financial management and inclusive participation, gram sabhas ensure accountability and foster community trust, ultimately empowering villages to become economically independent and resilient.

Challenges and Aversion towards Own Income Generation:

• Lack of tax authority: In several States, gram panchayats lack the authority to collect taxes, while in numerous others, intermediate and district panchayats are not delegated the responsibility of tax collection.
• Imbalance in tax collection: Gram panchayats collect 89% of their own taxes, the intermediate panchayats collect 7% and the district panchayats a nominal amount of 5%.
• Dependency on grants: Panchayats once competed to raise OSR for their commitment to fulfilling basic needs. This has now given place to dependency on grants allocated through central and State finance commissions.
• With the increase in Central Finance Commission (CFC) grant allocation, panchayats are evincing less interest in collecting OSR. 
• Failure of incentivisation policies: Some States have policies of incentivisation by providing matching grants that were sparingly implemented, thus not effectively motivating panchayats to generate their own income.
• Lack of Enforcement: Panchayats also do not feel the need to penalise defaulters as they believe that OSR has not been regarded as an income linked with panchayat finance.
• Freebie culture: Another important factor behind the general aversion towards generating own income is the 'freebie culture' rampant in society, which causes antipathy toward paying taxes.

Way forward - Overcoming the dependency syndrome

• Establishing Conducive Tax Environment: Panchayats are expected to establish a conducive environment for taxation by implementing appropriate financial regulations, making decisions regarding tax and non-tax bases, determining their rates, establishing provisions for periodic revisions, defining exemption areas, and enacting effective tax management and enforcement laws for collection.
• Demarcation of Own Source Revenue (OSR): There is a need to demarcate OSR for the entire three-tier panchayats to ensure equitable sharing.
• Promoting Entrepreneurship and Partnerships: Gram sabhas need to promote entrepreneurship and foster partnerships with external stakeholders to enhance the effectiveness of revenue generation efforts.
• Education and Awareness: To overcome this dependency syndrome, elected representatives and the public must be educated on the significance of raising revenue to develop panchayats as self-governing institutions.
• Decentralisation of powers: The state governments should decentralize their powers and authority to make Panchayati Raj institutions an effective local governance mechanism at the grassroots level.

Related News: Panchayats earn only 1% of their revenue through taxes, Finances of Panchayati Raj Institutions

Mains PYQ

Q. To what extent, in your opinion, has the decentralisation of power in India changed the governance landscape at the grassroots? (UPSC 2022)

Q. The strength and sustenance of local institutions in India has shifted from their formative phase of ‘Functions, Functionaries and Funds’ to the contemporary stage of ‘Functionality’. Highlight the critical challenges faced by local institutions in terms of their functionality in recent times. (UPSC 2020)

Q. Assess the importance of the Panchayat system in India as a part of local government. Apart from government grants, what sources the Panchayats can look out for financing developmental projects? (UPSC 2018)