Jharkhand Urban Local Bodies Journey of Financial Sustainability: Nirbhar to Atmanirbhar
“15th FC requires that increase in Property tax collection of cities over previous year shall be in tandem with the State Gross State Domestic Product”1
Urban Local Bodies, considered as engines of growth, are one of the most important pillars of our national economy and they need to be financially smart to play catalyst role in development of economy. However, due to its existence as government bodies, financial viability is often considered secondary, by putting forward its claim of fulfillment of social responsibility through better service delivery. However, this cannot be allowed to go on forever and local bodies need to generate enough funds to sustain their operations. Hence, it is time that these urban local bodies play important role in development of State and eventually to the Nation. Recently, Government of India guidelines like Smart City/AMRUT/National financial ranking and various Finance Commissions (FC) have advocated the robustness of urban local bodies own revenue.
Strong municipal finances and urban infrastructure could be catalytic in unlocking growth and employment potential in public service sectors like transportation, healthcare, education, and others and will provide access to capital market through Muni Bonds. Healthy finances of ULBs are vital for provisioning of basic infrastructure to the citizens and for improving the quality of these services2. This article has been written to highlight the importance of self-generated revenue for cities with innovative interventions initiated by Government of Jharkhand to make its urban local bodies financially smart and sustainable.
Introduction
Robust finances of urban local bodies (ULBs) are crucial for realizing the vision of ULBs as a viable third tier of Government and capitalising on the potential that cities represent for growth and development. Currently, ULBs in India are highly dependent on inter-governmental transfers, municipal revenues are <1% of the Gross Domestic Product and own revenues accounting for <50% of the total revenue of ULBs. This is reflected in the chronic deficits that ULBs run and, also among other things, in their inability to fund infrastructural demand or even meet the Operation and Maintenance (O&M) requirements.
Atma Nirbhar — The Conceptual Framework
ULBs in India are mandated to undertake certain basic civic functions such as water supply, roads, drains, street lighting and sanitation as per 74th Constitutional Amendment Act (CAA). However, to discharge these expected 18 functions mandated by 74th CAA, ULBs need robust governance backed up by strong financial base.
Even though the State and Central government support in provision of capital funding for the urban infrastructure, the onus of operations and maintenance and debt servicing is on the local government. The financial health of the city is determined by its ability to generate sufficient revenues to meet its ongoing expenses and have surplus to fund the future projects. Hence, to sustain and finance the urban services, it is important for the local governments to have reliable sources and plan to enhance own revenue income as fiscal sustainability is contingent on resource generation from own sources of revenue.
“Atmanirbhar, as the phrase depicts, is the capability to produce money, i.e., the ability to generate enough surplus to survive.”
Atmanirbhartha objective in this context measures not the maximum surplus the ULB can produce but the ‘minimum’ is the rate of revenue required to meet its revenue expenses.
Need of augmented Self-Generated Revenue in National Policies
Several reports have appeared over the past few years drawing attention to the persisting fragility of the municipal system and made important suggestions for its revamping, like:
- The Thirteenth Finance Commission (FC) (December 2009): Emphasizes on the need to refurbish property taxation as a key step to strengthening municipal finance and suggests, as a part of its many recommendations, the establishment of state-level Property Tax Boards to impart uniformity in the system of property assessment.
- 14th FC (December 2014): For gram panchayats, the ratio between the unconditional basic and conditional performance grant was 90:10 and for municipalities the ratio was 80:20. To be eligible for performance grants, the local governments would have to show an increase in own source of revenue and submit audited annual accounts.
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15th FC (October 2021) Tied Grants: Mandated Ministry of Housing and Urban Affairs (MoHUA) to develop city-wise and year-wise targets, in consultation with the State Governments, for 2020-25 and recommend disbursal of grants. Accordingly, this marking scheme has been prepared:
Sl No. Marking Parameter Criteria 1 Increase in Property tax collection over previous year in tandem with the State GSDP Yes/No 2 Increase in property tax collection over previous year (in %) Percentage Metric 3 Increase in GSDP over previous year (in %) Percentage Metric - The High-Powered Expert Committee on Indian Urban Infrastructure and Services (HPEC, March 2011): On estimating urban infrastructure investment requirements, set out standard expenditure norms for municipal infrastructure and services, estimated financial requirements, and proposed a pattern of financing them with a pivotal role for municipalities.
- World Bank Study on India (October 2011): Developing a Regulatory Framework for Municipal Borrowing examines supply-side constraints to municipal borrowing and emphasizes simplification of local government frameworks and elimination of ambiguities in regulations that govern municipal borrowing.
- Smart City Guidelines (MoHUA, 2015): Requires ULBs’ own resources from collection of user fees, beneficiary charges and impact fees, land monetization, debt, loans etc. to contribute not only in meeting Smart City Capex but also its operation and maintenance (O&M).
- AMRUT Guidelines (MoHUA, 2015): In Reforms Milestones and Timelines section for AMRUT Cities, requires Municipal tax and fees improvement and Improvement in levy and collection of user charges as precondition for claiming reform incentive.
Thus, it is evident from various reports that financial robustness of own revenue of ULB is the need of the hour.
Self-Generated Revenue
Self-generated revenue implies revenue generated by ULB from its own sources from taxes, user charges and fees, interest etc. either directly or through shared revenue from State Government in the form of assigned revenue.
In common parlance, Own Source Revenue (OSR) indicates that revenue which has been generated by ULBs without depending on external aids. It is also known as Internally Generated Revenue (IGR) or Self-Generated Revenue (SGR). As per National Municipal Accounting Manual (NMAM), Own Revenue covers items as listed below, alongside grants from Government, Finance Commissions, and schemes:
| Code No. | Particulars |
|---|---|
| 1-10 | Tax Revenue |
| 1-20 | Assigned Revenue & Compensation |
| 1-30 | Rental Income from Municipal Properties |
| 1-40 | Fees & User Charges |
| 1-50 | Sales & Hire Charges |
| 1-70 | Income From Investments |
| 1-71 | Interest Earned |
| 1-80 | Other Income self-generated by ULBs |
| A | Total - Own Source Revenue |
Constitutional Foundation: Entry 243X of Constitution of India
The Legislature of a State may, by law—
- Authorise a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits;
- Assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government;
- Provide for making such grants-in-aid to the Municipalities from the Consolidated Fund of the State.
In the above backdrop, Section 151 of Jharkhand Municipal Act, 2011 provides power to local bodies to collect revenue from taxes, fees and user charges as self-generated revenue. To become Atmanirbhar, ULBs need to augment above sources primarily collection from property tax which is part of tax revenue as it accounts for more than 50% of own revenue of any ULB, followed by rental income from municipal properties and fees & user charges. One of the preconditions for grants, put in by both 15th FC and AMRUT, is that collection from Property Tax shall be more than State GDP and State shall migrate to Capital value / Guidance value so that there is auto increase in property tax demand annually.
Genesis of Reforms in Jharkhand: Pre-Reform
Cities of Jharkhand were feeling the heat of archaic governance, lack of skilled manpower, absence of digital records, low coverage, low collection of property tax (Rs 23 Cr in 2013-14). This problem got aggravated leading to the 3U’s problem: Large number of Unassessed, Underassessed and Unpaid properties. Deficiencies in the existing system of property taxation did not allow for full exploitation of the revenue generation. To make ULBs financially empowered, urgent need for financial reform was felt:
- a) Archaic Governance: Tax rates were very low and have not been changed for many years. Further, for many taxes, user charges and fees, rules and regulations required for executing the collection of Taxes and Fees were missing.
- b) Limited Manpower: To collect taxes, user charges and fees from more than potential 8,50,000 Households (HH) of Jharkhand, more than 400–500 Tax Collectors were required in ULBs of Jharkhand but present strength till 31 March 2016 was on an average 100 tax collectors, which is 70%–80% less than expected strength.
- c) Absence of IT tools and Technology in collection: Collection of taxes, user charges and fees were done by ULBs manually which led to cases of incomplete Demand, Collection and Balance (DCB) register, short deposit of cash due to instances of collusion among household and tax collector, and lack of timely MIS reports led to delay in taking preventive actions.
About the reform
Government of Jharkhand (GoJ) did pilot testing of Public Private Partnership (PPP) based revenue sharing model in capital city, Ranchi in 2013-14. Jharkhand armed its cities with power of governance by implementation of Property Tax Rules as per Municipal Act. State of Jharkhand has introduced the scheme of Web based Self-Assessment of Property Tax through Self-Assessment form under ‘Trust and Verify’ which leads to involvement of people. The objective behind the introduction of Self-Assessment scheme is to ensure complete transparency and openness in the levy and collection of Property Tax and to enable citizens/taxpayers to understand the basis of taxation so as to calculate the tax by themselves.
Key Reform Measures Undertaken:
a) Governance / Statutory Reform
Replaced old provisions of Bihar Orissa Municipal Act 1922 with the Jharkhand Municipal Act 2011 and Holding Tax Rules 2013. In line with 15th FC and AMRUT 2.0 guidelines, amendments were made for implementing the capital value method. Water User Charges Rules were notified allowing metered volumetric tariff. A policy on maintenance of Municipal Parks was notified whereby ULBs can outsource park maintenance on PPP mode or under CSR.
Under ARV, no periodic rate increase was possible and equity was absent. Under capital value:
- Periodic increase in property tax in line with growth of State GDP.
- Balance of equity among all sections of society via differentiated tax rates.
- Additional rebate of 5% to owners of residential households (Women, Senior Citizens, Armed Forces officers, Divyang, Transgender).
- Complete exemption for households having built-up area up to 350 sq. ft. (benefiting poor needy people and PMAY beneficiaries).
- Allows citizens to claim total rebate up to 15% (including 5% early bird rebate and 5% online payment rebate).
b) Financial Management Reform
ULBs of Jharkhand prepare annual financial statements on time as required by 15th FC, on an accrual based double entry system as per Jharkhand Municipal Accounting Manual (based on NMAM). Every ULB has a full-fledged accountant to carry out day-to-day accounting and internal pre-audit of transactions.
c) Administrative Reforms: Privatization via PPP Backed by Professional PMU
- Tax Collection Agencies (TCAs): Three agencies selected via open tender currently operate across all 49 ULBs of Jharkhand.
- Project Management Unit (PMU - Revenue Augmentation): Monitors TCAs and ULBs, formulates rules and policies, applies ABC analysis to target high-demand properties and reduce unpaid balances, issues default notices, and acts as a operational bridge between TCAs, ULBs, and the State Government.
Key Benefits of PPP Model:
- Digital records made readily available;
- Property Tax Management System (PTMS) custom developed;
- Real-time Property tax demand notice generated using PoS machines for transparency;
- Army of trained Tax collectors deployed in all cities;
- Doorstep tax collection introduced with on-the-spot digital payment facility;
- Jan Suvidha Kendras (JSK) established across all cities as citizen collection centers;
- Wide array of digital payment gateways enabled with a 5% special rebate. Presently, more than 20% property tax is collected online.
d) Use of IT Tools and Technology
A comprehensive Property Tax Management System was deployed to generate Demands and 15-digit Unique Property IDs for individual surveyed houses, which is mandatory for all property registrations in Jharkhand. Functionalities include:
- IT-enabled Property Tax Calculator on Self-Assessment Form (SAF) based on category, construction year, zone, and built-up area;
- e-Payment facilities with digital rebate;
- Automated SMS reminders for pending dues;
- e-Generation of legal notices to defaulters under Sections 184 and 187 of Jharkhand Municipal Act, 2011;
- Web-based tax inquiry and “Know Your Tax Collector” portal;
- Online system operating with an accuracy up to 99.97%.
e) Cross Mapping Technique
To resolve the 3U’s issue, property tax records were cross-mapped with building bye-laws, Water User Charges, Solid Waste User Charges, and Municipal Trade Licenses. Property Tax ID was made mandatory for property registration.
f) Increased IEC Activities
Deployed extensive awareness drives: public camps, miking, nukkad nataks, cinema hall slides, cable TV, pamphlets, wall writings, school classroom sessions, and catchy rhymes to appeal directly to taxpayers.
Figure 1: Success Story : Jharkhand Revenue Augmentation
Increased from 4.37 Lakh (2016-17) to 8.48 Lakh (31 Mar 2022).
Unassessed Households decreased by 35%.
Decrease in arrears by 20% and non-responsive demand deactivated.
100% digitization of legacy records and web-based application rollout.
Citizens pay via portal with 5% online rebate; >20% collected digitally.
PT collection accuracy reached unprecedented 99.97%.
Coverage and collection exceed 90% (AMRUT and JnNURM benchmark).
Recognized as one of the best practices in self-sustainability in 15th FC Report.
Jharkhand became the 1st State to initiate Capital Value based property tax in line with 15th FC.
Government of Jharkhand is committed to continue this reform journey to make its cities engines of growth, Atmanirbhar and financially sustainable.