Deciding on fiscal devolution

The report of the Fourth State Finance Commission (FSFC) of Karnataka is now in the public domain. There was a delay in delivering the award by three years, two years ‘under the extension of the Commission’ and one year ‘under silencing of the report’ without placing it in the public domain.

The Commission has designed a ‘scheme of fiscal devolution’ having four levels. The first level shares the non-loan net own revenue receipts (NLNORR) between the state and local governments in the ratio of 52:48. In the second level, BBMP gets 1% of NLNORR under the share of local government as additional devolution.

Sharing of funds among the Panchayat Raj institutions (PRIs) and urban local governments is made in the third level. The remaining per cent has been allotted among the three-tier panchayats and urban governments in the ratio of 75:25. The fourth level considers horizontal distribution of resources among the individual units of each tier of PRIs and each class of urban local governments.

The Commission has strongly recommended that grants from the Central Finance Commission should not be treated as part of NLNORR as it is not part of state’s net own revenue. The major recommendations may be classified into two categories, grants and measures to strengthen local governments. Under ‘grants’ there are four heads such as untied grants, performance grants, establishment grants and assigned grants.

The criteria for allocation of performance grants to PRIs are (i) 100% expenditure of the total receipts for zilla panchayats (ZPs) and taluk panchayats (TPs) and minimum 95% of the collection of tax revenue for GPs and (ii) submission of audited accounts. The criteria for urban local governments are (i) collection of tax revenue of minimum 95% and (ii) submission of audited accounts. As a one-time measure, establishment grants are recommended to the newly formed PRIs and urban local governments.

As part of state budget exercise, the Karnataka ‘link document’, a unique model for allocating funds to ZP and TP and is highly appreciated. The Commission recommends the extension of the ‘link document’ to gram panchayats (GPs) also. It opines that there is a need to assess the issue of taxation by an independent authority. It is suggested that the Karnataka Property Tax Board (KPTB) value properties separately for PRIs and ULBs.

The FSFC concurs that 50% of the revenue realised by lease/auction from the natural resource should be assigned to the concerned GPs/urban local governments. The Commission has requested the government to revisit the exemption given to private educational institutions and hospitals which are operating on commercial lines, from payment of taxes. There is a suggestion for introducing pollution tax, parking fees and congestion tax.

Installation of metering of individual households and commercial water connections are recommended for the supply of drinking water. The Commission recommends for a thorough examination of the pros and cons of installing of Reverse Osmosis plant in all the villages and towns.

The Commission favours rainwater harvesting, conservation of surface and groundwater and protection of water bodies. “Reduce, Reuse and Recycle” - the three ‘R’s are recommended by the Commission. The Commission also recommends compliance with the Minimum Wages Act at the local self-government level for casual workers.

Package of measures

It proposes a package of measures to ensure transparency and accountability in all the activities of the local government. In addition to the double-entry accounting system, the panel demands disclosure of budgets, audited annual accounts, details of civic works, capital expenditure on all works in the public domain.

The response of the state government to the recommendations of the Commission is not very encouraging. The major recommendations which have a direct bearing on financial implications have not been accepted by the state government.

The recommendation to share the NLNORR with the local governments has not been accepted fully. The suggestion to exclude the grants from the Central Finance Commission in the basket of NLNORR has been rejected by the government. Another major recommendation which was not accepted has wider implications in the context of GST regime. The Commission recommends that the GST compensation should be factored into the tax receipt of the state. However, it stands rejected.

Karnataka has a good record of decentralisation. Even before the constitutional amendments, Karnataka had provisions for the constitution of Finance Commission for ZPs. It was a trend setter for dealing with the state finance corporations (SFCs) in the Constitution. However, the record of the SFCs in Karnataka does not give a linear progression.

Moreover, it has a poor record in the constitution of mandatory number of SFCs, accepting the recommendations of the earlier SFCs and placing the action taken reports in the legislature. Karnataka, which had a status as a forerunner in the domain of decentralisation, may be reminded of the convention established at the national level of accepting the principal recommendations of the union finance commission without modification. Let us hope that the state government will take its cue from the central government.

(The writer is Professor, Institute for Social and Economic Change, Bengaluru)