Urban Local Bodies (ULBs), responsible for governing municipal areas, are financially constrained. They don’t have a sufficient source of revenue and are dependent on their respective state governments for funding. Although the 74th Constitutional amendment mandated the devolution of powers to ULBs, it didn’t make a significant difference to their financial capacity or tax-raising powers. According to the amendment, state finance commissions determine the distribution of taxes, duties, and other fees between the state government and municipalities. Despite the recommendation of the Urban Affairs & Housing ministry, the 2014 GST bill further failed to recognize urban local bodies as a governance unit to share financial resources with them.
Unless there is devolution of powers to ULBs through a Constitutional amendment, the only short term mechanism for states to strengthen the financial capacity of ULBs is by reforming the property tax collection mechanism. This blog delves into how this can be done.
Currently, the sources of revenue for ULBs are either through local taxation of property tax or through service charges and duties. They lack tax diversity and are dependent on just property tax. Municipalities have the potential of raising revenues significantly without any fundamental change in the system of property valuation or the redesign of the tax rate structure. Haryana has started making progress towards implementing such a reform. However, the current challenge is not policy but the implementation of a robust tax collection mechanism.
This can be changed through a two-step process:
- Property registration: ULBs don't maintain a digitized version of all property details in the state. The first step would be to geotag every property in the municipal area. The outcome of such an exercise will be the creation of a master database with each property having a unique property number, with details like area, information about owner/s, tax rates along with the category of property such as commercial, residential and industrial . Post this, the state should support each ULB to set up a property tax cell to monitor tax collection and ensure that new properties continue to be added to this master database.
- Strengthening tax collection: There are two aspects to this:
--The medium of payment: Creating a tech-enabled payment mechanism will make the payment process seamless and faster. Ideally, citizens should be able to pay their property tax by just entering the unique property number assigned to their property. Currently, property owners have to fill in a lot of details such as an address, owner details, ward details and then pay using limited online payments options.
--Collection campaign: To ensure compliance, it is necessary for ULBs to communicate with citizens actively and nudge them towards tax payment on time. This can be done by sending them regular SMSs with reminders about upcoming payment deadlines, announcing incentives for on-time payment and penalties for delayed payment. Such measures can go a long way in mitigating information asymmetry and improving tax collection.
Although many ULBs across the country have initiated property tax collection reforms, these are corporations for bigger cities which can generate sufficient financial resources on their own. The fundamental challenges are with ULBs which cater to small towns and cities. In the long term, the solution to improve ULB finances is by devolving powers and financial independence. In the interim, a state-wide reform across all ULBs irrespective of their size will enable them to improve their revenues to deliver better municipal services like clean water, better roads, waste management etc.