The 16th Finance Commission is likely to refine performance-based grants to local bodies by linking a portion of the funds to progress in property-tax reforms and measures to improve air quality, senior government officials have told Moneycontrol.
The move is aimed at encouraging civic bodies to be financially more self-reliant and nudge states into taking greater ownership of local governance by strengthening the revenue-raising powers of municipalities.
“There is a thinking that local bodies, particularly municipal corporations, need to be strengthened and made more autonomous in managing their finances,” one of the officials cited above said.
“The 16th Finance Commission is likely to stress this point, urging urban local bodies to generate more revenues on their own rather than depending entirely on devolution from the Centre or the states.”
There is a growing view within the government that fiscal self-reliance of local bodies should be a priority over increased tax devolution from the Centre.
The commission, whose recommendations will cover five years beginning April 1, 2026, is likely to include this recommendation in its upcoming report, which is due November 30 after the original October deadline was extended.
The present commission largely operated during the pandemic and therefore, placed more stress on health.
Its successor is likely to align grants with steps focussed on sustainability, service delivery and the broader Viksit Bharat vision, a second official said.
Money pie
States are constitutionally mandated to empower local bodies with functions and revenue-raising capacity. It is not the Centre’s job to bridge the gap, states need to understand that, the official said.
Earlier finance commissions have stressed the need for local bodies, especially the urban ones, to strengthen their revenue base.
“The 15th Finance Commission, in particular, recommended that municipal corporations should step up property tax collection, user charges and other local revenues,” the first official said. The idea is to make these bodies self-reliant and reduce dependence on transfers from higher levels of government.
The commission recommended grants of up to Rs 4.36 lakh crore for the 2021-26 period, of which, rural local bodies got Rs 2.37 lakh crore and their urban counterparts Rs 1.21 lakh crore.
These grants, too, came with conditions. A portion was tied to encourage local governments to improve service delivery and fiscal responsibility, and to prompt states to establish minimum property tax rates.
The 16th Finance Commission is unlikely to tinker with the formula for devolution of taxes to states, the second official said.
“The devolution formula is likely to remain the same this time as well. Things are largely settled on that front,” the official said.
At present, 41 percent of the divisible tax pool of the Centre is transferred to states in 14 annual instalments, covering the five-year period of 2021-22 to 2025-26.
The 14th Finance Commission dramatically increased the states’ share in the divisible pool from 32 percent to 42 percent — the largest-ever jump — for the April 2015-March 31, 2020, period.
While states account for about 60 percent of overall government expenditure, their discretion is limited when it comes to raising revenue and planning expenditure.
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