Over the years, those studying the pitiable state of municipal finances in India have consistently pointed out the dire need to shore up the fiscal health of municipal bodies. These entreaties have not had positive results, as the situation of urban local bodies (ULBs) has gone from bad to worse. While inter-governmental transfers to ULBs as a proportion of national GDP were always low (around 1 percent in the 1960s), this has been declining progressively with the passing decades, now standing at around 0.45 percent. We, therefore, have a situation where on the one hand, the contribution of cities to the national economy has been steadily rising, and on the other, the central and state contribution to the ULBs has been progressively declining. This is in sharp contrast to the United States (US), Brazil, South Africa and Russia, that share 15, 8, 6.9, and 6.5 percent of the national GDP with city governments. In the last decade, two new pieces of central legislation dealt a killing blow to the ULBs. First was the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR). The RFCTLARR, as the Act itself stated, was enacted to ensure “the least disturbance to the owners of the land…and provide just and fair compensation to the affected families whose land has been acquired…and make adequate provisions for such affected persons for their rehabilitation and resettlement and for ensuring that…affected persons become partners in development”. While the Act turned out to be overly kind to the land owners, it resulted in excessive callousness towards the ULBs. Municipalities had to pay twice the annual ready reckoner rate to land owners for any land that the cities acquired. At one stroke, most of the land acquisition was rendered beyond the means of ULBs. This essentially meant that city development plans would lie unimplemented; gardens, roads, schools, hospitals and a host of other municipal facilities would not be created in the public sector and almost all social infrastructure would henceforth happen in the private sector, beyond the reach of the urban poor. This one Act dug a deep hole in the concept of ‘quality of life’ in cities, backed privatisation of the social infrastructure of cities and accentuated anti-poverty urban development.

Municipalities had to pay twice the annual ready reckoner rate to land owners for any land that the cities acquired.

As if the RFCTLARR had not done enough damage to ULB finances, the Goods and Services Tax (GST), implemented on 1 July 2017, has been the latest to apply the ‘coup de grace’ to municipal finances. It has subsumed municipal revenue sources such as the octroi, the entry tax and advertisement tax. This has left the ULBs more cash-strapped than before. The Union Ministry of Urban Development had highlighted these concerns way back, in 2015, when GST was being formulated. It had suggested that rules be laid down for sharing of GST revenue between states and local bodies at a level that would fairly compensate the latter for the financial loss they would suffer in the unified tax regime. GST could have surely been converted into an opportunity to empower local bodies. Instead, ULBs have been left in the lurch by dividing up all of the GST proceeds between the Centre and the states. Consequently, the entire objective of the Constitution (74^th) Amendment Act for the empowerment of local bodies has been put into reverse gear. Representing the ULBs before the latest Union Finance Commission, the Ministry of Housing and Urban Affairs, Government of India (GoI), requested a substantial increase in grants for municipal resources, with an increase of devolution to municipalities by at least 400 percent. Vijay Kelkar, the former Chairman of the 13^th Finance Commission, highlighted the vertical imbalance in India’s federalist structure and advocated for a greater share of GST resources for the third tier (municipal corporations) by allocating a sixth of this to the third tier. Many scholars have argued for including a separate list of revenue sources for local governments in the Constitution. While the 74^th Constitutional Amendment Act suggested a list of functions for urban local governments in the 12^th Schedule, it did not provide a municipal resource list to match these functions. Surprisingly, while the Amendment Act spoke of empowering the urban local bodies, it did nothing regarding a provision of the Indian Constitution that got carried forward from the imperial past. Article 285 of the Indian Constitution talks about the exemption of properties of the Union of India from ULB taxation. It states, “(1) The property of the Union shall save in so far as the Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State. (2) Nothing in clause (1) shall, until the Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.

The Supreme Court ruled that the Union of India and its departments will pay service charges but will not pay property tax. The service charges will be paid at 75, 50, and 33.33 percent respectively of the property tax levied on private owners.

In the light of this constitutional provision, the ULBs are disabled from collecting property tax from all properties belonging to the central government. However, GoI properties were not willing to pay even service charges. This stand was challenged by the municipal corporations of Rajkot, Ahmedabad, Jamnagar and Vadodara. It finally took a judgment by the Supreme Court to settle the matter in 2009. The Supreme Court ruled that the Union of India and its departments will pay service charges but will not pay property tax. The service charges will be paid at 75, 50, and 33.33 percent respectively of the property tax levied on private owners. The different rates will apply based on the degree of services utilised by GoI departments. These charges, however, under no circumstances, will be more than what was paid by the state government properties. Further, ULBs shall not resort to any coercive methods such as stoppage of service or revenue recovery proceedings against the GOI properties for non-payment of charges. All disputes related to the issue of service charges will be resolved through a dispute redressal mechanism. The properties of the state government, which control and supervise the ULBs, were not to be left behind. The same dispensation of exemption from property tax is practiced by their properties. And just as for the GoI properties, state properties also enjoy highly subsidised service charges. This obviously, heavily dents the only substantial tax that ULBs have after the onset of the GST. GoI and state properties located in the cities are substantial in number. This is natural since cities are the centres where the national economy is concentrated. For example, Mumbai has more than 4,000 properties belonging to GoI and the state. Each of these properties, on average, has about 500 units. If these were assessed like normal private properties, the total property tax demand would form a sizeable chunk of the total current city demand of INR 6,000 crore. In the light of the negative impact that the provisions of Art 285 of the Indian Constitution have on the country’s ULBs, the Article needs to go. Cities cannot and should not be expected to subsidise higher echelons of government. Just as municipalities are required to pay all central and state taxes, the Union of India and state properties ought to pay local taxes. Till such time that the constitutional embargo persists, in the spirit of even-handedness, nothing prevents the central and state governments to pass on an amount equivalent to the property tax to ULBs as service charge. The country has to wake up to the fact that it is not fair to ask cities to shoulder unfunded mandates and deliver a desired quality of life. In the state that these cities are, citizens could expect a progressive fall in the level of services.

• Urbanisation
• India
• GDP
• GST
• Land acquisition
• municipal finances
• RFCTLARR
• Supreme Court
• Transparency

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