Citing how the rollout of Goods and Service Tax (GST) has hit finances of municipalities and made them more dependent on states for grants, a think-tank in its latest study for 15th Finance Commission has suggested that the government may have to amend the Constitution to improve the financial health of local bodies. Under the current regime, the proceeds from GST is split equally only between the Centre and states and local governments don’t get any share, the report prepared by Indian Council for Research on International Economic Relations (ICRIER) said. It has also pointed out how this is in contrast with many countries that have provided their urban local governments’ access to the GST base.
“GST may be a more efficient and buoyant tax but its introduction has taken away critical sources of tax revenue such as octroi, local body tax, entry tax and advertisement tax for urban local governments without providing any compensation,” it said. It said, “The long term solution to correct the structural fiscal ‘imbalance’ following the introduction of GST is for the Constitution to be amended again to provide sharing of the revenues from GST among all three levels of government. However, until that happens, the role of transfers from state government and the central government becomes very important.” Sources said the housing and urban affairs ministry recently pointed out at a ministers’ meeting how weak municipal finances have become a major concern in urban governance.
While revenue from own resources in the case of several municipalities reduced from 37.2% to 29.2% between 2007-08 and 2017-18, their dependence on other sources, mostly grants, increased from 44.3% to 51.4% during this period. Financial details of municipal bodies are available till 2017-18. After going through a presentation on the dwindling finances of municipalities, Prime Minister Narendra Modi has called for a “fuller assessment” of the economic potential of local bodies to reduce their dependence on funds from states. ICRIER in its report, released in June, said it could get data for 37 municipal corporations from the 53 urban agglomerations and cities having population above one million. It found that municipal corporations’ share of own revenue declined from 67.3% in 2012-13 to 51.6% in 2017-18. Hence, their dependence on the respective state government or other grants has increased. Officials admitted that municipalities were unable to tide over the financial crisis and that had a direct bearing on their performance and capital investment for infrastructure development and other services.