GST Bill and the funding for our cities

Earlier this year, the employees of East Delhi Municipal Corporation (EDMC) went on a strike due to non-payment of salaries. The streets were clogged with mounting garbage that lay uncollected for more than a week. The EDMC gets only one fifth of its budgeted revenue from property taxes, a bulk of the remaining funds come as grants from the Government of the National Capital Territory of Delhi (NCTD). The EDMC accused the government of NCTD of withholding funds and making its fiscal situation worse. The latter rebutted, and accused EDMC of mismanagement of funds due to corruption. Meanwhile possibly because of distress due to delay in getting his salary, one of the employees of EDMC committed suicide. Matters landed up in court, even as another municipality also delayed paying salaries to its employees.

There are many angles to this political football between the State government and municipal governments in Delhi. But for the current purpose, let us focus on the aspect of fiscal autonomy of city governments, and all local bodies across India. This aspect has become important in light of the passage of the constitutional amendment in Parliament, which enables the rollout of the Goods and Services Tax (GST) across the country. It is rightly being welcomed as a landmark reform, which will take us closer to the vision of one country, one market, and one tax.

The friction caused by the myriad of state level and inter-state taxes will go away, improving the ease of doing business. Just entry taxes alone are responsible for the fact that inter-state movement of trucks is slow, because 60 per cent of the time they are at standstill at check posts. In addition there is the cost of any corruption or harassment by tax officials. GST is a grand bargain between the Centre and States. They both gave up their respective excise, service and sales taxes, which will be replaced by a hopefully much larger GST pie. This was a pure centre-state dialogue, and local governments did not play a role. Individual states are supposed to support their local bodies through further devolution of taxes as dictated by respective State Finance Commissions. But many States do not even have such commissions, and in States that do, their recommendations have often been ignored. The SFCs don’t have judicial teeth to enforce their recommendations.

The larger cities do have an independent source of revenue through property taxes, but as in case of East Delhi, it barely meets one fifth of the total requirement. The taxing autonomy of cities is severely constrained, and they have to necessarily depend on the largesse of their State secretariats.

THE 73rd and 74th amendments to the Constitution in 1993 empowered the third tier of governments, which are closest to the people. Real empowerment calls for funds, functions and functionaries to be transferred to local governments. This is far from the reality in many States. The inertia could be for legitimate reasons of inadequate administrative capacity, or could be due to entrenched political interests.

The city with the largest budget of around Rs 36,000 crore is Mumbai. It gets almost one fourth of its revenue from octroi, an archaic entry tax on all goods entering the city. Octroi is inefficient and is prone to corruption, but is quite buoyant. It also is completely under the control of the local government. This tax source will go away once GST is in place. To compensate for octroi, in Maharashtra and elsewhere there is a mechanism of earmarking a share of State sales tax collection VAT) to cities. But since city governments have to depend on States to release the VAT funds, there could be delays, aggravated by political considerations. The case of East Delhi is a recent example. It is not clear whether under GST a similar earmarking will continue.

Successive Finance Commissions at the Centre have wrestled with this challenge of how to fund local bodies, without crossing constitutional autonomy of States. In fact, the 14th Finance Commission, which vastly increased allocation to the States, also introduced a way to directly allocate funds to local bodies, from the national (central) pool of divisible funds. This has created a precedent, and future Finance Commissions might increase this direct devolution to the third tier of government.

The 73rd and 74th amendments to the Constitution in 1993 empowered the third tier of governments, which are closest to the people. Real empowerment calls for funds, functions and functionaries to be transferred to local governments. This is far from the reality in many States. The inertia could be for legitimate reasons of inadequate administrative capacity, or could be due to entrenched political interests.

India is rapidly urbanising. Most of the public services that people expect are to be delivered by local city governments, be it garbage collection, pothole free roads, better public health, education or transportation. All this requires a steady source of (tax) funds with some degree of autonomy. It might also call for governance changes like a directly elected and empowered mayor. Cities are also places that enjoy higher economic growth, more innovation and lower poverty rates (than rural areas). That also means they need substantially more infrastructure spending.

In case of Mumbai and its potential for being a global financial centre, it was able to get some Central funds, as it is of national importance. The Urban Renewal Mission is also a mechanism to direct central funds to cities, conditional on certain reforms. However, all these need to be supplemented with genuine and autonomous sources involving a tax base. For instance, giving cities more control on escalating their property tax rates or hiking user charges in traffic and transportation.

The rollout of GST is being hailed as a great example of cooperative federalism. In this euphoria, let us not ignore the challenge of meeting the fiscal needs of cities with adequate funding autonomy to local governments. Only then will the success of GST be wholesome.

The author is a senior economist based in Mumbai.

(Syndicate: The Billion Press)

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