Introduction

The resource base of the rural local bodies in addition to their Own Tax/Non-Tax revenues consists of the following:  

1.     Devolution of funds by the State Government based on the recommendations of the State Finance Commissions
2.     Assigned/Shared Revenues
3.     Funds provided based on the recommendations of the Central Finance Commissions

Rural Local Bodies have the duties of providing basic amenities and civic services to around 3.6 Crore rural population. The Rural Local bodies are empowered to collect taxes to raise their own resources to perform their duties. However, the funds collected through their own revenues do not suffice. Therefore, the Government (Central and State) devolves part of their own tax revenues to the rural local bodies to meet their needs. 

Article 243(I) and 243(Y) of the Constitution of India incorporated by 73^rd and 74^th Amendment Acts heralded a new era in the history of the Local Bodies by providing for the constitution of a State Finance Commission in all the States within one year from the commencement of the Constitution 73^rd Amendment Act, 1992 initially and thereafter at the expiry of every five years to recommend devolution of funds to the Local Bodies.

The Central Government also asked the Central Finance Commissions to recommend the quantum of Central Government funds to be devolved to the local bodies from Tenth Central Finance Commission onwards.

The Assigned/Shared revenues are one which are collected by State Government but transferred/shared to/with local bodies. The major sources of assigned/shared revenues to the rural local bodies are Local Cess, Local Cess Surcharge, Surcharge on Stamp duty, Entertainment tax, seigniorage fees and lease amount of mines and minerals, and sale proceeds of Social Forestry plantations.

1. State Finance Commisssion

1.1 First State Finance Commission:

In Tamil Nadu, the First State Finance Commission was constituted in April, 1994.  It gave its report in November 1996 covering the period from April, 1997 to March 2002.

 Government vide G.O (Ms) No.225, Finance (Resources) Dept., dt: 2.5.1997, accepted the following  recommendations of the First State Finance Commission:

·        Devolution of 8% of State’s own tax revenue (except Entertainment Tax) to rural and urban local bodies. 

·          Out of 8%, 85% to be released as devolution grant and 15% as equalization and incentive grant.

·        The 85% devolution grant to be shared between rural and urban local bodies in the ratio of 55:45 respectively.  The 15% equalization and incentive grant was apportioned to rural and urban local bodies in the ratio of 60:40 respectively.

·         The 55% devolution grant to rural local bodies was distributed to Village Panchayats, Panchayat Unions and District Panchayats in the ratio of 45: 45: 10 respectively.  The devolution grant was released based on 1991 population giving weightage to 2/3^rd general population and 1/3^rd  SC/ST population.   The equalization grant was released to Village Panchayats and Panchayat Unions towards drinking water supply, settlement of current consumption charges and to fill up the gaps in the provision of basic amenities and infrastructure facilities.  The incentive grant was released to Village Panchayats to levy and improve the house tax collections.

Table 1

1.2 Second State Finance Commission:

The Second State Finance Commission was constituted on    1.12.1999, for the award period from 2002 - 03 to 2006 - 07 and it gave its report in May 2001.

Government vide G.O.Ms.No.284, Finance (FCIV) Department, dt:12.8.2002, accepted the following recommendations of the  Second State Finance Commission:

·          8% of State’s own tax revenue (except Entertainment Tax) was apportioned as devolution grant and reserve equalization and incentive fund in the ratio of 87:13 respectively.

·         87% allocation was apportioned   to rural local bodies and urban local bodies in the ratio of 58:42 respectively.

·         Devolution grant of 58% was shared between Village Panchayats, Panchayat Unions and District Panchayats in the ratio of 47:45:8 respectively.  The devolution grant was apportioned based on 2001 census population giving weightage to total population 40%, women population 40% and SC/ST population 20%.  The 13% grant was apportioned as Reserve Fund, Equalization Fund, and Incentive fund in the ratio of 2:6:5 respectively.

Table 2

1.3 Third State Finance Commission:

The Third State Finance Commission was constituted on 2.12.2004, for the award period of 2007- 08 to 2011-12.  It gave its report on 30.9.2006.

The Government vide G.O.Ms.No.199, Finance (FC IV) Dept., dt: 25.5.2007 accepted the following  recommendations of the Third State Finance Commission:

·         To increase the  devolution grant from existing 8% to 9% of the  State’s own tax revenue in 2007-08.  The devolution grant is to be shared between the rural and urban local bodies in the ratio of 58:42.

·         The 58% devolution grant to rural local bodies to be distributed among the Village Panchayats, Panchayat Unions and District Panchayats in the ratio of 60:32:8 from the year 2007-08.

·         The allocation of State Finance Commission funds to the Village Panchayats based on the criteria adopted in the earlier years was not sufficient for many Panchayats to meet the minimum payment of electricity charges to TNEB and water charges to TWAD Board. Hence, the Government have ordered that the Village Panchayat’s share will be raised to 60% of the Devolution grant allocated for Panchayat Raj Institutions to enable them to discharge their onerous duties of provision and maintenance of basic amenities such as drinking water supply, sanitation, roads and street lights.

·         Out of 60% share of Village Panchayats, 5%  reserved  for Infrastructure Gap Filling  Fund.  From out of the Village Panchayats share of 55%, a minimum grant of Rs.3.00 lakhs per annum to each Village Panchayat is to be provided as a measure of equalization.  The balance amount is to be released based on population.

Table 3

2. Assigned Revenues

a. Local Cess and Local Cess Surcharge:

Section 167 of the Tamil Nadu Panchayats Act, 1994 provides for the levy of local cess at the rate of Re.1 on every rupee of land revenue realized in the State. The total amount realized from this source was distributed entirely to Village Panchayats. Similarly, Section 168 of the Act provides for the levy of local cess surcharge at such rate which may be considered suitable but not less than Rs.5 on every rupee of land revenue.  The levy, collection and adjustment to Village Panchayats and Panchayat Unions is done by Revenue Department in the districts.

Table 4

Assigned Revenues: Local Cess and Local Cess Surcharge*

(Rs. in crores)

* Source: Second and Third State Finance Commission Reports
$ Source: District Collectors Reports  

 b. Surcharge on Stamp duty on transfer of property  

Under Section 175 of the Act, provision is made for crediting the proceeds under surcharge on Stamp duty to Village Panchayats. This is adjusted in quarterly installments by the Registration Department in the districts.  

                                              Table 5                                             

Assigned Revenues: Surcharge on Stamp Duty *

 * Source : Second and Third State Finance Commissions Reports
@ Source: District Collectors Report

c. Entertainment Tax

  90% of the Entertainment Tax collected in rural areas is assigned to rural local bodies. This is distributed between the Panchayat Unions and Village Panchayats in the ratio of 30:70 respectively by the Commercial Tax department in the districts.