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Municipal Finances
PLA 413 | B. Plan | VII Semester | 2020-2021
Ms. Arshi Parashar | Department of Architecture and Planning | MANIT Bhopal
Need for Municipal Finance

The percentage of urbanized population by country (2018 data).

Need for Municipal Finance
Growing population and rapid expansion of cities is leading to an increasing strain
on existing infrastructure. While the government is taking necessary steps
towards planning better quality services for citizens, the situation commands an
urgent need to study financial planning, as it forms the backbone of any initiative
for public interest.
According to World Bank data, the present scale of urbanisation in India is only
33%, whereas the size of the urban population is about 429 million – much larger
than that of many other countries. Although it is an indicator of positive
development, a host of challenges also accompanies rapid urbanisation. The
growing urban sprawl in India is leading to an increase in the use of private
vehicles, congested roads, increased pollution, public safety issues and increased
household spending. Along with this comes the added stress that an increasing
population puts on the existing infrastructure of our cities.
The infrastructure and services being grossly inadequate even for the existing
population, the city authorities in India are in a situation to sketch their action for
planned urbanization and peripheral expansion to accommodate migrants and
the local population growth.
Urban Local Government
An Urban Local Government or a municipality is
the layer of government which has the
responsibility of development of cities and towns.
The 74th Constitutional Amendment Act (CAA),
enacted in 1992, resulted in significant devolution
of funds, functions and functionaries to this tier of
government and hence functional autonomy of
local governments.
Following the passage of the 74th constitutional
amendment which gave constitutional status to
Urban Local Governments, various States created
enabling legislation to transfer responsibilities of
local infrastructure and service delivery to this tier
of government.
With the implementation of this Act, Urban Local
Governments have been classified into three types
of Municipal bodies:

Among the different types of Urban Local Governments mentioned above,

Municipal Corporations enjoy the maximum degree of fiscal autonomy and
functions although the specific fiscal and functional powers vary across the
states.
Functions of Municipalities
The Twelfth Schedule of the Constitution lists the various Functions of Municipalities. These are:

1.Urban planning including town planning.

2.Regulation of land-use and construction of buildings.
3.Planning for economic and social development.
4.Roads and bridges.
5.Water supply for domestic, industrial and commercial purposes.
6.Public health, sanitation conservancy and solid waste management.
7.Fire services.
8.Urban forestry, protection of the environment and promotion of ecological aspects.
9.Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.
10.Slum improvement and upgradation.
11.Urban poverty alleviation.
12.Provision of urban amenities and facilities such as parks, gardens, playgrounds.
13.Promotion of cultural, educational and aesthetic aspects.
14.Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.
15.Cattle pounds; prevention of cruelty to animals.
16.Vital statistics including registration of births and deaths.
17.Public amenities including street lighting, parking lots, bus stops and public conveniences.
18.Regulation of slaughter houses and tanneries.
Of these some functions are obligatory in nature and some others are discretionary. Further, there is a wide variance between
States in terms of the assignment of overall functions and within that, obligatory and discretionary functions, to the
municipalities.
Flow of Income to an Urban Local Body

The figure shows the flow of funds to ULBs from Government of

India, State Governments and citizens.
Sources of Income of Municipalities
As per the Constitution, the Government of India has been making allocations to local bodies through
five year plans and finance commissions (Central Finance Commissions, State Finance Commissions).
Beginning from the First Five Year Plan allocations have been made to Urban Local Governments for
various purposes.
As regards the Central Finance Commissions, which primarily make recommendations on the distribution
of tax revenues between the Union and the States, and also amongst the States, the Tenth Finance
Commission introduced exclusive grants for rural and urban local governments. Since then various
Finance Commissions have given concrete recommendations regarding municipal finances and the
criteria for devolution of funds to Urban Local Bodies.
Overview Of Municipal Finance In India
o 12th Finance Commission Report states that India has
3,723 ULBs, of which 109 are MCs, 1432 are
municipalities and 2182 are Nagar Panchayats.
3723
o The total revenue of the municipalities grew from
Rs.11,515 crore in 1998-99 to Rs.15,149 crore in 2001-02
ULBs
o The total expenditure increased from Rs 12,035 crore
to Rs 15,914 crore during the same period.

o But total revenue of the municipal sector accounts for

about 0.75 per cent of GDP of the country.

o Municipal revenue forms a little more than 2 per cent

of combined revenue of State and Central
Governments.
109 1432 2182
o In terms of total expenditure, the municipal sector Municipal Municipalities Nagar
accounts for about 0.79 per cent of the GDP of the
country and a little over 2 per cent of the combined
Corporations Panchayats
expenditure of State and Central Governments.
Municipal Revenue
Sources of Income of an Urban
Local Body
The main sources of municipal
revenues can be boxed under the
following categories:

1.Tax revenues
2.Non-tax revenues
3.Assigned (shared) revenue
4.Grants-in-aid
5.Loans
6.Other receipts.
Municipal Revenue
Municipal Expenditure
Expenditure of an Urban Local Body

Municipal governments in India are vested with a range of

functions through the state legislature and other administrative
orders.

They are however, constrained in discharging their obligatory

functions due to a limited resource base.

The low per capita receipts of municipal governments do not

enable them to meet the minimum standards of services.

On the whole, the status of municipal finance in India suggests

that the present revenues are insufficient to meet the growing
expenditure needs of urban areas.
Municipal Expenditure
Expenditure of an Urban Local Body

Municipal governments are legally required to have a balanced budget. The municipal
expenditures are thus conditioned by the level of resources available. In the states, where
the municipal receipts are very low, the municipal expenditures are also low. These low
expenditures have a crucial impact on the quality and nature of services provided by the
municipality. Often, the repairs and maintenance of services is poor and the expenditure
on capital works is postponed.

The expenditure incurred by the MCs can be broadly categorised into:

a) Revenue expenditure
b) Capital expenditure

Revenue Capital
expenditure expenditure
Municipal Expenditure
Expenditure of an Urban Local Body
Municipal Expenditure
Expenditure of an Urban Local Body

Revenue Capital
expenditure expenditure

I) Establishment Expenditure;
I) Expenditure On Capital Formation;
Ii) Administrative Expenditure;
Ii) Principal Repayment.
Iii) Operations And Maintenance Expenditure;
Iv) Interest Payments On Loans.
Municipal Expenditure
Expenditure of an Urban Local Body
Significance of Municipal Expenditure
Municipal expenditure holds key to municipal development. However, due to abysmally low generation of resources,
the municipal expenditure fall short of the required level in order to promote development of urban areas. The
municipal expenditure, constitute less than one percent of GDP and less than three percent of total expenditure.
Tax Revenue
Non-Tax Revenue
Grants-in-aid
Assigned (Shared) Revenue

Profession Tax
Surcharge on Stamp Duty
Entertainment Tax
Motor Vehicle Tax
Other Receipts
Sundry receipts
Law charges costs recovered
Lapsed deposits
Fees, fines & forfeitures
Rent on tools & plants
Miscellaneous sales
New Areas For Improving Municipal Resources
A. Municipal Asset Management
• Municipal Corporations usually have limited sources of revenue generation, moreover, most of the sources remain unexplored
or under explored.
• Just for instance, not all the properties are assessed for property tax.
• There is undervaluation of properties and there are many trades which are not assessed for trade tax, license fees and
municipal properties encroached etc.
• At the same time they lack proper mechanisms for expenditure management and linking of budgets and accounting systems.
• These two together lower creditworthiness of the Corporation as they first limit the Corporation’s capacity for efficient service
delivery and second limits its capability to raise funds from capital market, pooled funds, and special schemes like JNNURM etc.
• ULBs generally hold a significant amount of fixed assets in real estate.
• But very few local bodies have exploited the commercial potential of these properties to generate non-tax revenues. Most ULBs
do not have a proper inventory of assets nor do they update them regularly.
• Often villages on the periphery are brought into municipal limits as the city expands. Panchayat land then comes under
municipal ownership.

The Guntur Municipal Corporation regularised all the subleased municipal shops by collecting 30 percent of land and
shop construction value. The Vishakhpatnam Municipal Corporation leased out the aquarium and marriage halls by
fixing daily rents for them. Through this measure, corporation collected Rs. 80 lakh and was free from the related
liability and expense of maintaining these properties.
New Areas For Improving Municipal Resources
B. User Fees and Charges
• This is an area which needs to be focused for greater resource mobilization and linkage between tax payment and service
delivery.
• User charges promote efficiency by providing information on demand to the public service providers and ensure that what the
public sector supplies are valued (at the margin) by citizens.
• They have the advantage of tying the mobilised revenues to the costs of services being provided.
• Institutional financing of projects becomes feasible if loans raised by ULBs are paid back through project revenues.
• User charges may be designed based on the users pay/beneficiaries pay principle.
• Services provided by a public organisation are grouped as
i) Public-goods and
ii) Merit goods or non-public goods, or private goods.
• The latter is fit for application of principle of exclusion.
• The consumers are identifiable and the quantum of services consumed is possible to be measured.
• In case the consumers do not pay for the services consumed, the service can be disconnected.
• User fees can also increase municipal revenues.
• User charges levied by ULBs include fees for water, sewerage, solid waste management, parks, parking, birth and death
certificates, business licenses, streetlights, ad space, and cable TV.
New Areas For Improving Municipal Resources
1. Sewerage Charges:
• Most cities in India do not levy fees for sewerage and also are unable to provide the service.

• Several small ULBs in Tamil Nadu structured an innovative mechanism to finance construction of underground
• drainage systems.
• Beneficiaries contribute connection fees that share in the capital costs, reducing the debt required.
• The Alandur Municipality built 120 kilometres of underground drainage and a 24 million-litre per day sewage treatment plan
using these deposits.
• The municipality charged a one-time deposit of Rs. 5000 or Rs. 10000 per connection for domestic and nondomestic users
respectively.
• The municipality also fixed monthly sewerage maintenance charges of Rs. 150 per household connection, Rs. 450 per commercial
connection and Rs. 750 per industrial connection.

• The ULBs conducted awareness campaigns to obtain people’s support.

• These programmes were supported by the ULB’s elected and administrative officials, as well as by state officials.

• The Amravati Municipal Corporation in Maharashtra built a sewerage scheme by levying sewerage charges of Rs. 2019 per year
per household.
• They also used the revenue for debt servicing and operation and maintenance of the scheme.
New Areas For Improving Municipal Resources
2. State Guidelines for Setting Water Charges:
• Municipal water charges are generally very low and not revised for very long
periods.
• The Government of Karnataka issued a government order for ULBs to set
water charges in line with actual costs.
• It requires them to levy minimum water charges that would cover expenditures
for operation and maintenance and debt servicing.

3. Parking Fees:
• The BMP implemented a pay and park scheme in the central business district.
• Parking fees are based on the duration of parking.

4. Eco Fee:
• The BMP council resolved to levy an “eco fee” on the persons using the
municipal garden.
• The city collects this fee at the entrance of the garden but regulars can obtain
a monthly pass.
• Children and senior citizens are exempted.
New Areas For Improving Municipal Resources
5. Charges for Collecting Solid Waste:
• Various ULBs levy solid waste charges for the use of public places based on the amount of
waste generated.
• The ULBs decided that organizers of private functions in the city’s marriage halls should pay a
fee for waste collection.
• Similarly, some ULBs levy lifting charges to remove debris from construction sites.

6. Fees for “Tatkal” (Hindi for “Quick”) Delivery of Services:

• Issuing birth and death certificates and building permits are ULB responsibilities.
• To simplify the process some ULBs in Tamil Nadu decided to mail birth certificates to applicants.
• These ULBs levy a service charge of Rs. 5 per certificate for postal expenses.
• Some municipalities in Tamil Nadu and West Bengal charge extra for the delivery of this certificate
on a priority basis.
• The Guntur Municipal Corporation streamlined issuance of building plans by providing that any
applicant paying a 25 percent additional fee with an affidavit from a licensed surveyor gets
approval across the counter.
• Many appreciate these convenient procedures and choose the quick delivery of service.
New Areas For Improving Municipal Resources
7. Advertisement Tax:
• BMP’s revenue from the advertisement tax rose from Rs. 2.43 crore in 1999-2000 to Rs. 4.01 crore
in 2000-01 due to increased space available from construction of bus shelters and public toilets
and other administrative measures.
• The MCH’s advertisement income increased with its aggressive auctioning of space on billboards,
bus shelters, road arches, and footpath railings.

8. Cable Charges: :
• The Government of Tamil Nadu allowed ULBs to charge cable TV operators for the use of public
property.
• Gobichettipalayam, the first to implement this order, charges cable operators Rs.5.5 per year per
• kilometre of cable.
• In addition, the council collects from the cable operators a monthly fee of Rs. 15 per connection.
• The total revenue generated from these measures was about Rs.4.19 lakh in 2000-01.

9. Street Tax:
• The Pune Municipal Corporation in Maharashtra levies a street tax to help finance a plan to improve
traffic and public transportation.
• The fee is collected with the property tax and is five percent of annual rateable value.
New Areas For Improving Municipal Resources
C. Using Land as Resource
• The installation of infrastructure (e.g., roads, water, sewer, and electricity) increases the value of the
land in the vicinity of the infrastructure investment.
• Unused land owned by local governments or state government has a market value that can be put
to use to accomplish development objectives highlighted in a city development plan (CDP).
• Converting land values into resources needed to pay for infrastructure is an important alternative
to using debt financing and is being used in rapidly growing cities like Bangalore, Mumbai,
• and Pune.

D. Internal and External Development Charges:

• These charges include costs of off-site and on-site infrastructure such as water source development,
laying of water, sewer and power lines, development of freeways/roads, parks, etc.
• The development charges could be collected at the time of giving approvals to layouts and buildings.
• These charges, which cover costs towards the following range of infrastructure amenities, provide
• an excellent example of cost recovery:
Water supply; Sewerage; Storm water drainage; Roads; Electrification including 26.5 per cent operation and maintenance and
supervision charges; Street lighting; Community buildings; Municipal Finance in India Diversion of high tension (HT) lines;
Horticulture including first five years maintenance; Conservancy; Nominal maintenance of roads Resurfacing of roads;
Maintenance of Public Health Services for first five years Maintenance of street lights for first five years; Maintenance of street
lights beyond five years and up to 10 years; Horticulture after 5 to 10 years; Beautification of entry points, junction
improvements and levelling; Development of recreational and communication zones; and Protection works, etc .
Mechanisms to Improve Municipal Revenue
Faced with growing demand for urban services, urban local
bodies (ULBs) in India are challenged to generate more
revenue. The devolved sources of revenue do not match a
wide range of functions required to be performed by them.
This has led to increasing dependence of ULBs on higher
levels of government.
Broadly, they can increase revenues from their own internal
sources, seek external funding from outside agencies, and
reduce expenses. An increasing demand on local services,
abolition of Octroi, loss of buoyancy and elasticity of annual
rental value (ARV) based Property Tax(PT) and the
consequent fiscal stress of ULBs in India have become
compelling reasons to innovate new sources of revenue.
Some of the mechanisms, the ULBs can develop for
enhancing their credit worthiness are follows.
1. Refurbishing Major Taxes
2. Property Tax Innovations
3. Effective Tax Administration
a) Self-Assessment System (SAS)

b) Improved Information Base

c) Collection Drives

d) Outsourcing Bill Distribution

e) Tax Collection Centres

f) Tax “Adalats”(Tax courts)

Thank You