Sources of local finance, Public finance | Public Finance - B Com PDF Download

Introduction

Public finance is a specialized subject concerning public policy wherein principle of finance, policy and economics are often applied with respect to the finances of governments- primarily central (or federal) and provincial (or state) governments given the importance of these two tiers of governments, in terms of both power and finances, the enquiry of public finance has primarily confined to finance of these governments and interflows together with institutional aspect and so is the research on theory and practice. Local government finance, a sub stream of public finance pertains to the finances of local government in both rural and urban areas in relation to the upper tiers of governments i.e. federal and state governments (Nallathiga, 2008).

The finances of urban local bodies (ULBs) have been assuming much greater importance with the urban areas increasingly becoming important in terms of not only population share but also economic growth. With the municipalities/ Municipal Corporations acting as centres of government of urban areas, urban local government finance is also referred to, sometimes, as municipal finance in India. However, the performance (both physical and financial) of urban local government may vary between the municipalities (of cities) and Municipal Corporation of larger urban agglomerations as well as amongst themselves (Nallathiga, 2008).

Thus, municipal finance is about the revenue and expenditure decision of municipal governments. It covers the sources of revenue that are used by municipal government such as taxes (property, income, sales, and excise taxes), user fees and intergovernmental transfers. It includes ways of financing infrastructure through the use of operating revenues and borrowing as well as charges on developers and public private partnership. Municipal finance also addresses issues around expenditure at the local level and accountability for expenditure and revenue decisions including the municipal budgetary process and financial management (UN Habitat, 2009).

Finances of ULBs or urban public finance broadly relates to the evolution and structure of finance of local governments, and the array of fiscal relations of local governments. However, given the existence of ULBs in the tiered structure of government and there interface with the citizens, the inquiry of urban public finance also includes the dimensions like institutional arrangement and decision making and fiscal management, reform and accountability, transparency and gap financing. The state of ULBs in India is slightly better as a whole compared to the Panchayti Raj institutions (PRIs). Here too, there is a great deal of heterogeneity with some doing rather well (specially the municipal corporation) whilst other smaller municipal councils increasing their dependency on the higher government even to deliver the local public goods and services. This is explained by the fact the the Indian economic growth in recent times has been driven by urban areas and with reforms some of the ULBs have been able to help themselves improve their situation (Pethe, Mishra and Rakhi, 2004).

The constitution of India ordains that India is a federation of states and union territories, with residual legislative powers vesting in the central government. The constitution, in its 7^th schedule, assigns the powers and functions of the centre and states. The schedule specifies the exclusives powers of the centre in the union list,exclusive powers of the states in the state list, and those falling under the joint jurisdiction in the concurrent lists. The constitutional assignment of the tax powers in India follows the principal of separation i.e.; the tax handles are exclusively assigned either to the centre or to the states. Most of the broad based and the productive tax handles have been assigned to the centre, including income taxes, wealth taxes from non agriculture sources, corporation tax, taxes on production (excluding those on alcoholic liquor, opium, hemp and other narcotics) and custom duties. States taxes include taxes on agriculture income and wealth, taxes on the transfer of properties (Stamp duties and registration fees) Taxes on motor vehicles, taxes on the transportation of goods and passengers, sales tax on goods, excises on alcoholic beverages, entertainment tax, taxes on professions, trades, callings and employment, properties tax and taxes on the entry of goods in to a local area for consumption, use or sale (Octroi). The centre has also been assigned all residual powers of taxation (Venkatachalam, 2007).

The constitution of India specifies the taxes to be divided between the central and state governments but it does not specifies the revenue base for ULBs. Further the constitutional amendment act (CAA) is not specific about the types of taxes that ULBs should have but on the other hand the power for determining the revenue base of ULBs typically consists of their own resources (Tax and non tax revenues), shared revenues, state grants and loans from state governments and market borrowing. In spite of the variation in the figures compiled by different agencies, for want of a uniform accounting and reporting framework, it is evident that municipal revenues has generally had limited buoyancy (Vaidya, 2009).