Sponsored by Ministry of Panchayati Raj (MoPR)

The present study attempts to address the issue of limited revenue generation (tax and non-tax) at the Gram Panchayat level. The Ministry of Panchayat Raj (MoPR) commissioned this study to investigate the financial landscape of Panchayats within the context of Panchayati Raj Acts, activity mapping at the District-, Block- and Gram Panchayat level, and the institutional capacity for raising Own Sources of Revenue (OSR) at the Gram Panchayat level. The ultimate goal is to prepare a viable financial model for the generation of OSR. The main objectives of this study are:

• To summarise the State Panchayati Raj Acts and map the OSR avenues and activity mapping of the PRIs (based on existing literature).
• Analyse the functional assignment and legal provisions of local bodies to raise revenues and provision of public services at the local body level, including mapping of taxes by each tier of Panchayats.
• Analyse the current financial landscape of Rural Local bodies in sample districts and present an overview of the present status, annual and one-time potential for additional revenue mobilization.
• A detailed implementable action plan cum road map (in terms of manpower, training requirement, financial implications and necessary changes in State Panchayati Raj Acts).
• Propose a practical and sustainable financial model to augment Panchayat Revenues.
• To suggest institutional reforms and capacity-building modules for higher mobilization of revenues at the Gram Panchayat level.

Literature Review on Panchayat Finances

Section 2 of the report reviews the existing literature on Panchayat finances, starting with the pivotal role of the 73rd Constitutional Amendment in decentralising governance. Key contributions such as NCAER (2022) highlighted disparities across 23 states in their OSR, primarily dominated by property tax and water charges, and recommended technological support, incentives, and community awareness to improve revenue potential. MoPR (2024) explored fiscal dependency and weak tax enforcement, proposing performance-linked grants and initiatives like SVAMITVA for optimising property tax systems. The Reserve Bank of India (2024) reiterated the financial limitations of PRIs, emphasized their importance, and called for standardized financial data and revenue generation incentives. Rao et al. (2011) criticized Gram Panchayats for under-exploiting their revenue-generating powers due to obsolete tax systems and weak administrative capabilities, underscoring the need for reforms. State-specific studies have revealed contrasts; while Kerala demonstrates strong PRI governance, Bihar faces significant enforcement challenges. There is a general consensus on the need for technology, standardized policies, and capacity-building. Finally, Inman (2009) introduced the concept of the flypaper effect, advocating for efficient OSR utilization to reduce grant dependency and promote fiscal autonomy, thereby fostering a self-reliant PRI framework.

Tax and Non-Tax Powers of Rural Local Bodies

Section 3 of the study examines the tax and non-tax powers of Rural Local Bodies through the lens of their corresponding State Panchayati Raj Acts. This section also discusses the 29 subjects entrusted to the three tiers of Panchayats at the Village, Block (Intermediate), and District levels. It provides a concise explanation of the Panchayati Raj Act and activity mapping, with detailed information available in the appendix. It outlines the various taxes and non-tax revenues that Panchayats across all three tiers are empowered to levy and assesses whether these powers are being effectively utilized in the selected states. The study team found the following taxes and user charges being levied at the Gram Panchayat Level.

Empowered Taxes for PRIs:

• House Tax/Property Tax/Land Tax: Includes tax on buildings (residential and non-residential), vacant land, and agricultural land, with varying levy methods across states.
• Tax on Circumstances and Property: Levied on commercial activities with annual income exceeding INR 20000, typically by Zilla Panchayats in states like Uttar Pradesh.
• Taxes in Factory Areas: Levied in some states on land and buildings owned by factories but used for ancillary purposes like sanitary arrangements or employee quarters, with rates agreed upon by Gram Panchayat and owner.
• Kolagram/Katarusum Tax: A tax on village produce sold by weight, measurement, or number, leviable by Gram Panchayats in some states.
• Latrine or Conservancy Tax/Tax for cleaning private latrines and drains: Paid by occupiers or owners of buildings for cleaning private sanitation facilities by the Panchayat.
• Scavenging Tax: For refuse removal and the construction or maintenance of public latrines.
• Water Tax: Charged for water supplied through public taps or stand posts.
• Special Water Tax: Imposed when water is supplied through individual water connections.
• Local Panchayat Tax: Levied on the entry of goods for consumption, use or sale in the notified area by Gram Panchayats in some states.

Empowered User Charges for PRIs:

• Fee for any license, sanction or permission: Examples include commercial license fees, cell tower license fees, and licenses for brokers, agents, private markets, slaughterhouses, cattle markets, and minor forest produce.
• Parivahan Shulk from Mining: Levied on transport drivers for moving mined material.
• Tender Deposit: Amount received from the successful tenderer.
• Tender Fee: Fee for filing a tender.
• Market Fees: For displaying goods or using market structures.
• Earnest Money Deposit: A non-refundable deposit (e.g., 10% of total work amount) by contractors.
• Maintenance Deposit: A deposit from contractors to ensure maintenance of completed work for a specific period.
• Rent and fee for the occupation or use of land or other property placed under its control: Includes shopping complex rent, building rent, guest house rent, rent from Gram Panchayat owned shops, Kalyana Mandapam rent, and fee for the use of communal land (e.g., Porambokes in Andhra Pradesh).
• Mortgage Fee: In Maharashtra, charged by Gram Panchayats for issuing documents to persons seeking bank loans.
• Mutation Fee: Charged for changing ownership details for a building/land.
• Labour Fund: 10% of the Building Plan Outlay Fee deposited as a Labour Fund.

Tables 3A and 3B (as referenced in the original report) report the empowered and levied taxes and user charges at all three tiers of rural governance. The number of empowered taxes for the Gram Panchayat varies across 17 States, from two in Bihar, Punjab and West Bengal to eight in Gujarat, Karnataka and Kerala. However, the study’s field visits to eight States revealed that Gram Panchayats levy very few taxes compared to the number they are empowered with, and collection is often negligible. For instance, Madhya Pradesh and Odisha levy only one tax, and Uttar Pradesh levies none out of six empowered taxes. Karnataka and Andhra Pradesh have provided more extensive guidelines to aid Gram Panchayats in assessment and levy, but technical capability, manpower, and political willingness remain significant challenges. A State-wise review of PRI Acts of the eight selected States and other states with respect to their own source revenue is given in Appendix 1 (as referenced in the original report).

Activity mapping has also been conducted for selected states, along with a frequency table showing devolved activities and their funding sources. This reveals disparities across tiers, noting that while Gram Panchayats possess the most significant revenue-raising powers, these are often underutilized due to resource and capacity limitations.

Although the 11th Schedule allocates 29 subject matters to Rural Local Bodies, the extent of devolution varies starkly across states. Uttar Pradesh (29), Maharashtra (24), and Gujarat (23) have significantly completed the mapping. Karnataka, notably, maintains a separate website for Gram Panchayat data, including tax demand, OSR collection, and asset surveys, along with employee information.

Table 3D (as referenced in the original report) reports the total number of activities devolved to the three-tiers for all eight states under study. Several states had not clearly undertaken mapping for each of the 29 themes, instead devolving activities department-wise, which can lead to themes being overlooked or duplication. Madhya Pradesh and Odisha showed the least number of sub-activities, indicating inefficient planning. Karnataka successfully unbundled and devolved activities efficiently, for example, 38 sub-activities under health and sanitation, and 25 under agriculture. Health and sanitation activities are prominent across states, while adult education, fisheries, libraries, fuel and fodder, and non-conventional energy sources have minimal or no mapping. Coastal states like Maharashtra and Odisha, despite having an advantage in marine life, lack mapped activities for fisheries. Andhra Pradesh has devolved activities for only 10 themes, followed by Gujarat (22), Maharashtra (24), Madhya Pradesh (24), Odisha (25), West Bengal (25), Karnataka (29), and Uttar Pradesh (29).

Shortlisting Criteria for Districts, Blocks and Gram Panchayats

Section 4 of the study summarises the shortlisting criteria for selecting the districts, blocks and Gram Panchayats in the selected eight states. Districts and blocks were shortlisted based on distance from headquarters and per capita incomes. For each selected Block, Gram Panchayats were chosen based on their per capita OSR generated, ensuring a sample with one GP having sufficient OSR collection and another with lower collection, using data shared by state officials. Profiling of the 64 GPs showed that around 56% of Gram Panchayats were within 0-5 km of a State or National highway, with only 11% located more than 25 km away. Almost all GPs (except West Bengal) had a significant share of employees funded from the GP Fund (OSR, Untied Grants), indicating self-sufficiency in daily operations. Despite an equal distribution of male and female Sarpanches, most female Sarpanches had only completed higher secondary education, while most male Sarpanches were graduates and above.

Trends in Collection of Own Source Revenue

Section 5 analyses the trends in OSR collection in selected states. At the district and block level, limited authority to impose taxes resulted in insignificant OSR generation. At the GP-level, OSR varied widely, with house tax forming the major share of tax revenue in most states (except Odisha and Uttar Pradesh). OSR (as a share of total receipts) of Gram Panchayats showed substantial disparities, ranging from 1% (Uttar Pradesh) to 40% (Andhra Pradesh). Receipts from OSR also displayed a negative correlation with both Central and State grants. Besides house tax, GPs are empowered to levy other taxes and user charges like pilgrim tax, water tax, drainage tax, license fees, rent from GP-owned buildings, and mobile tower rents. Four GPs in Gujarat, two in Karnataka, and five in Maharashtra derived 50% or more of total tax revenues from other taxes. Wadi Ratnagiri (Maharashtra) had significant pilgrimage tax, surpassing property tax. Other GPs collected the maximum share of tax revenue from water tax/user charges. In a significant number of GPs, user charges comprised 30-50% of their OSR, and in nine Gram Panchayats, user charges made up over 90% of their OSR.

Furthermore, this section analysed property tax projections for all states, using Karnataka as a reference due to its efficiency in property tax collection. Among the three cases discussed, property tax collections in each state were projected to increase significantly, with Madhya Pradesh benefiting most.

Determinants of Own Source Revenue at the Gram Panchayat Level

Section 6 investigates the determinants of OSR at the Gram Panchayat Level using a multiple regression framework, in addition to the statutory empowerment of Gram Panchayats to levy taxes and user charges. The Report establishes a positive relationship between the income of the population in the GP and OSR generation. The study also estimated the income of the GP (using a combination of income and expenditure methods) to understand its potential tax-paying capacity. The top ten Gram Panchayats with the highest per capita income were primarily from Karnataka (3), Andhra Pradesh (4), Maharashtra (1), and Gujarat (1).

The collection of total OSR is found to be positively driven by the population of the GP and the number of commercial establishments, and negatively associated with poverty in the village. GPs in Southern states performed better, followed by those in Western and Eastern districts (taking Northern districts as the baseline).

Higher per capita grants from higher tiers of government and the estimated potential income of the GP also positively impact property tax collection per pucca house. Additionally, a greater distance of the Gram Panchayat from the nearest Block Panchayat office negatively impacts its property tax collections. A coastal dummy was found to be positive and statistically significant for Gram Panchayats with a coast.

The collection of user charges is positively and statistically significantly associated with the potential income or tax-paying capacity of the GPs, distance from the bank, and average house tax collections (per pucca house). GPs in Eastern and Southern India perform significantly better in user charge collection than their Northern counterparts.

Issues Influencing Own Source Revenue Generation

Section 7 lists some of the issues that influence Own Source Revenue Generation. This section discusses the statutory, administrative, and capacity-building issues that inhibit the mobilisation of Gram Panchayats’ own sources of revenue. Proper decentralisation requires the devolution of functions, functionaries, and finances. Statutory issues pertain to the rules and regulations governing the administration and implementation of tax and non-tax revenue measures. Property tax is one of the main taxes that GPs are empowered to levy and commonly implement. However, systemic issues in its administration and collection need to be addressed through clarificatory orders. The collection of other taxes, such as water tax, entertainment tax, and taxes on mobile towers and commercial establishments, may benefit from clarificatory orders, as assessment methods are often unclear. While GPs have the authority to levy these taxes, field observations indicate that, in practice, they are often not collected. Ambiguities also exist in raising non-tax revenues from common property resources, as ownership often overlaps with other line departments, and revenues generated are not shared with Gram Panchayats.

The functioning of GPs is further constrained by human resource and capacity-building challenges. Persistent staff shortages and overburdened officials undermine efficiency in service delivery. Staff members are often inadequately compensated and lack the specialised skills necessary for administering complex tasks. This skill gap critically impacts the financial sustainability of Panchayats, particularly in assessing and collecting taxes and user charges.

Additionally, Gram Panchayats remain heavily dependent on state and central government grants, which limits their financial autonomy and weakens their capacity to generate independent revenue streams. Section 8 (as referenced in the original report) draws state-specific conclusions and recommendations.

Recommendations and Road Map for OSR Generation

Section 9 provides recommendations and a road map based on the issues and findings highlighted in the report. The recommendations address issues classified under three major headings: Panchayati Raj Acts and activity mapping, determinants of own source revenue, and human resource and other administrative issues. These include issues related to the mismatch between assigned and practiced activities, low revenues with insufficient technical skills, inadequate revenue mobilisation, and dependence of Gram Panchayats on grants. Given the findings and issues highlighted in the study, the following recommendations are put forth:

Recommendations on PRI Acts and Activity Mapping:

• Clear-cut guidelines on assessing the base, particularly in property tax, should be issued to Gram Panchayats, potentially drawing from the Karnataka model.
• An alternative, simple assessment method for property tax based on a per square foot rate should be implemented in states where property tax is not levied or empowered.
• Until capacity building and strengthening of manpower at PRIs, particularly at the GP level, clear executive orders should guide GPs in levying taxes and user charges.
• Similar guidelines and training should be provided to GPs to assess the base and rate of tax or user charges in sectors like Drinking water supply and commercial establishments.
• Raising revenue from common property resources requires clear activity mapping and inter-departmental coordination. A roadmap is provided in Section 3 and Table 3D (as referenced in the original report).
• Local service provision should be completely devolved to PRIs rather than line departments. For example, Public Health Engineering departments and Rural Water Supply departments currently maintaining water supply in GPs and collecting revenue should transfer these functions. Similarly, fish ponds, trees on government land, forest areas, and minor irrigation projects within GPs should be exclusively under GP control, requiring necessary amendments to Acts and activity mapping.
• Ambiguity in laws related to ownership rights and development charges, which hinder OSR collection, should be clarified through government circulars.
• In states like Uttar Pradesh and Odisha, where State PR Acts do not provide for property tax levy by Gram Panchayats or other PRI institutions, provisions should be introduced.
• License fees for commercial establishments, currently collected by District Panchayats in Uttar Pradesh (a domain of Gram Panchayats in other states), should be revised in the State PR Act to boost OSR in states like UP, Bihar, and Odisha.
• States such as Odisha, Madhya Pradesh, Gujarat, and Maharashtra should expand and standardize legal frameworks by creating clear and robust guidelines for trade license fees through new rules and regulations. Uniform frameworks across states will reduce discrepancies and provide a systematic approach.
• To ensure uniformity, the rate structure and tariff rates for trade licenses should be standardized across jurisdictions. States like West Bengal and Andhra Pradesh, with clearly defined rates based on trade type and business location, can serve as models. A progressive trade license structure, tied to business size, should be implemented.
• States with effective urban licensing systems, such as Maharashtra and Gujarat, should integrate and adapt these models to suit rural contexts, ensuring better revenue generation and financial independence for rural local bodies.
• Other states should adopt best practices from leading states like Andhra Pradesh, Karnataka, and West Bengal in terms of detailed provisions, clear guidelines, and enforcement mechanisms to enhance the revenue base and operational sustainability of local bodies.
• Establish monitoring and evaluation mechanisms to track the collection of trade license fees and their impact on Gram Panchayat revenue, informing future improvements and reforms.
• Common property resource maintenance should be completely assigned to GPs rather than respective line departments. Activity mapping under 29 subjects should clearly define common property resources to enable GPs to raise additional one-time revenues.

Recommendations for Human Resources:

• Increase Staffing and Appoint Specialised Personnel: Appoint a secretary in every Gram Panchayat and specialised personnel for key functions like tax collection, technical services, and revenue mobilization.
• Train Staff: Provide training in tax laws, assessment methods, and enforcement.
• Introduce Performance-Based Incentives and Career Progression: Implement these to enhance efficiency and accountability.
• Promote Specialisation and Continuous Professional Development: Offer special training programs to Panchayat functionaries in financial management, Revenue Mobilisation, Interpretation of the Act regarding empowered taxes and user charges, waste management, and project execution. Provide refresher courses and peer learning for skill upgradation.

Recommendations for Other Issues:

• Encourage Local Revenue Generation and Financial Independence: Introduce incentive mechanisms to encourage tax compliance and resource mobilization, ensuring Panchayats have financial autonomy to fund local development.
• Coordination across all Tiers of PRIs: Clearly define the financial powers of Gram Panchayats to prevent conflicts and leakages in taxation and resource usage. Facilitate regular interactions between Panchayat leadership and higher officials to harmonize priorities and exchange best practices.
• Develop Infrastructure Maintenance Systems: Water supply systems, sanitation, and road networks, which are critical infrastructure, should be maintained. Encourage communities to undertake maintenance activities to reduce costs and ensure long-term sustainability. Encourage revenue-generating asset creation through development grants.
• Enhance Citizen Engagement and Transparency: Institutionalize routine public consultations and community-based monitoring mechanisms in Panchayats to ensure transparency and increase citizens’ trust. Implement social audits and participatory budgeting to inject citizen engagement and ownership of local government.

Thus, the focus should be on capacity building, human resource empowerment, and financial autonomy in order to enhance the Own Source Revenue and overall functioning of the Gram Panchayat.

Recommendations of Viable Financial Model:

Based on the results in building a viable financial model, a simple spreadsheet can be generated to guide Gram Panchayats in determining the tax base and estimating the potential revenue that can be generated.

¹ Assisted By Aashish Raj, Mayurakshi Mitra, Nikhil Rahangdale, Rambahadur Singh Parihar, Seema Maurya, Smriti Banati and Rohit Dutt