writingonblog uncensored: Financial Devolution for Rural Local Bodies (Panchayats) in Tamil Nadu A Report on Status and Critique-June 2010

Sunday, October 14, 2012

Financial Devolution for Rural Local Bodies (Panchayats) in Tamil Nadu A Report on Status and Critique-June 2010

I. Constitution of India: 73^rd Amendment-1991- Decentralization of Powers

Art:243G. Powers, authority and responsibilities of Panchayats- subject to the provisions of this Constitution the Legislature of a State may by lay, endow the Panchayats with such powers and authority and may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Panchayats, at the appropriate level, subject to such conditions as may be specified therein with respect to---

a) the preparation of plans for economic development and social justice

b) the implementation of schemes for economic development and social justice as may be enshrined to them including those in relation to the matters listed in the Eleventh Schedule.

XIth Schedule:

The above Article 243 G of Constitution of India, seeks decentralization of powers vested with the state and central government in respect of “Preparation of plans” and “implementation of Schemes” for economic development and social justice. It is in relation to these specific roles that an indicative list (“including those in relation to the matters listed”) is included in the Eleventh Schedule of the constitution.

However, in the beginning of the article, it makes apparent that subject to the provisions of the Constitution, the powers and authority endowed under this article does not in any way subtract from the executive and legislative powers of the Union and State Governments conferred under Article 246. Hence, the Powers listed in Eleventh Schedule has to be read with Article 246 and its related Schedule (Union List/State List/Concurrent List). In essence, the Central and particularly the State Government continue to hold both legislative and executive powers in respect of the powers to be entrusted to the Local Self Government. Hence the State Government holds the complete executive powers in these matters and it is left to the State Legislature to decide on further devolution through its legislation and there by in effect no restriction placed on the powers of the Legislature in this regard.

Further, the provision also dilutes the essence of its power by its own statement saying that “ the Legislature of a State, may by law endow with the Panchayats such powers as may be necessary to make them function as units of self-government’. Taking advantage of the word “may” in the said article, the state governments consider that devolution of powers and authority is purely the discretion of the State Government and it is not a Constitutional Mandate.

In case of Tamil Nadu, further dilution has been done by the below mentioned provision of section 257 of Tamil Nadu Panchayat Act 1994.

“Section 257. Power, authority and responsibilities of Panchayats.- Save as otherwise provided in this Act, the Government may, by notification and subject to such conditions and restrictions as may be specified therein, entrust to a Panchayat or any other Committee constituted under this Act with such powers and responsibilities with respect to the preparation of plans for economic development and social justice and also with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in Schedule-IV.”

The above section saying “the Government may, by notification and subject to such conditions and restrictions as may be specified therein, entrust to a Panchayat or any other Committee constituted under this Act with such powers and responsibilities-----“ contradicts what is said in the Constitution.

II. What is done in Reality in Tamil Nadu

It is now almost 15 years since the Local Governance has came into existence in conformity with 73^rd Constitutional Amendment in Tamil Nadu. However, not even Notification* (as said in the 1994 TN Panchayat Act) has been issued on the devolution of powers and functions as per the above section. It has been claimed by the State through its Policy Notes that some powers has been given through executive orders, but these orders have not even been communicated to the three levels of Panchayats and the respective line department of the State properly.

In the year 1997, the State Planning Commission had come up with the recommendations on entrustment of powers, functions and functionaries to three tier Panchayat System. But no action taken on the said recommendations (where the planning commission detailed out various powers and authority to be delegated to three tier Panchayats) instead a High Power Committee headed by the Minister for Local Administration has been formed to study the recommendations of the State Planning Commission. Following the recommendation of this High Power Committee, the state government issued a series of executive orders to various departments for taking suggestions and some role of the Panchayats for the implementation of various state schemes and “NOT ENTRUSTED ANY POWER OR AUTHORITY TO THREE TIER PANCHAYATS”. In actual terms No powers have been given to panchayats in Tamil Nadu for management and control of delivery of social services and basic needs and development functions like education, health, PDS, Agriculture, Land improvement, etc.

Some executive orders have been issued at the Rural development department without Notification. The functions delegated through these orders to Panchayats are mostly related to assisting in identification of beneficiaries for the schemes of various departments, watch and advise etc,. By not notifying these orders the State has given an impression to the officials of State Government departments that they need not take them into account seriously. The State officials know the difference between notification and executive orders. A notification has to be published for the consumption of the Public through Gazette. But in case of Executive orders it is meant for only officials. Hence, no public scrutiny on the implementation of the said orders results in no care given even to see the Panchayats are devolved with some role on the execution of matters related to 29 subjects listed in the Eleventh Schedule of Constitution of India.

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*Notification; As per the analysis of senior retired Additional Director and Lawyer Mr. Vallinagayam, A notification will have more legal force and validity than an executive order issued by government. Section 257 of the Tami Nadu Panchayats Act requires the powers to be given by notification. The courts have held that a notification issued under the Act will have the same force as the Act. Under Section 262 of the Tamil Nadu Panchayats Act, all notifications issued under this Act have to be published in the Tamil Nadu Government Gazette and should be placed on the table of the Legislative Assembly. Hence the orders issued under this Act other than by way of notification will have no validity. The orders issued by the government giving powers to the Panchayats are not published in the Tamil Nadu Government Gazette. Hence the powers given to the Panchayats in Tamil Nadu by executive orders have no legal force.

The Supreme court in ITC Bhadrachalam Paper Board and another Vs Mandal Revenue Officer, AP and others ((1996) 6 SCC 634) has held that the statutory requirement of publication of rules/orders in the official gazette is mandatory. The object of the publication in the official gazette is not merely to give information to the public also but to give final official confirmation to the rules/orders.

Existing responsibilities of Three-Tier Panchayats as per TN Panchayats Act-1994

Village Panchayats are given onerous responsibilities without adequate human resources and they are listed as obligatory and discretionary functions in section 110 and 111 of Tamil Nadu Panchyats Act 1994. The obligatory functions of Village Panchayats are;

i. Construction, repair and maintenance of village roads.

ii. Construction, repair and maintenance of water works for supply of water for drinking, washing and bathing purposes.

iii. Light of public roads and public places in built up areas.

iv. Cleaning of streets and removal of rubbish.

v. Construction of disposal of drainage water and its maintenance

vi. Provision of public latrine and arrangements to clean public latrine whether public or private

vii. Opening and maintenance of burial and burning grounds.

viii. Opening and maintenance of Public Distribution System.

Apart from this, the following discretionary functions are given to Village Panchayats:

i. Planting and preservation of trees in the public roads.

ii. Lighting in public roads and public places in non-built up areas.

iii. Opening and maintenance of public market.

iv. Control of fairs and festivals.

v. Opening and maintenance of slaughter houses.

vi. Opening and maintenance of reading rooms.

vii. Establishment and maintenance of TV sets etc.

Block Panchayats

The obligatory and discretionary functions of Block Panchayats are listed in section 112 and 113 to 119 of Tamil Nadu Panchayats Act, 1994. The important obligatory functions are;

i. Construction, repair and maintenance of Panchayat Union roads.

ii. Establishment and maintenance of rural dispensaries and payment of subsidies to rural medical practitioner.

iii. Establishment and maintenance of maternity centres.

iv. Maintenace and Expansion of elementary school buildings.

v. Remedial measures considered with epidemic diseases.

vi. Control of fairs and festivals classified as Panchayat Union festivals.

vii. Veterinary relief.

viii. Opening and maintenance of chaultries.

ix. the opening and maintenance of public markets which are classified as Panchayat Union markets;

x. the maintenance of statistics relating to births and deaths;

xi. the establishment and maintenance of choultries;

xii. improvements or agriculture, agricultural stock and the holding of agricultural shows;

xiii. the promotion and encouragement of cottage industries; and

xiv. such other duties as the Government may, by notification, impose.

3. District Panchayat

The functions of the District Panchayat as enumerated in section 163 and 164 of the Tamil Nadu Panchayat Act are advisory in nature. They can only advise the government on all matters related to rural development.

III. Legal Provisions related to Financial Devolution for Panchayats

Constitution of State Finance Commission (SFC)

Article 243(I) and 243(Y) of the Constitution of India incorporated by 73^rd and 74^th Amendment Acts heralded a new era in the history of the Local Bodies by providing for the constitution of a State Finance Commission in all the States within one year from the commencement of the Constitution 73^rd Amendment Act, 1992 initially and thereafter at the expiry of every five years to recommend devolution of funds to the Local Bodies.

The Central Government also asked the Central Finance Commissions (CFC) commends the quantum of Central Government funds to be devolved to the local bodies from Tenth Central Finance Commission onwards.

In conformity with 73^rd Constitutional Amendment, Section 198 of Tamil Nadu Panchayat Act, makes the State to constitute Finance Commission in every five year to review the financial position of the panchayats and to make recommendations with the following principles to govern.-

(i) the distribution between the State and Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the Government which may be divided between them and allocation between the District Panchayats, Panchayat Union Councils and Village Panchayats of their respective shares of such proceeds;

(ii) the determination of the taxes, duties, tolls and fees which may be assigned to or appropriated by the Panchayats;

(iii) the grants-in-aid to the Panchayats , from the Consolidated Fund of the State;

(b) the measures needed to improve the financial position of the Panchayats;

(c) any other matter referred to the Finance Commission by the Governor in the interest of sound finance of the Panchayats.

Provisions related to Levy and collection of Tax/non-Tax

Historically since the Local Boards Act in 1882, the Local Bodies in Tamil Nadu were empowered to levy and collect House Tax, Profession Tax, and Tax on Agricultural Land. Chapter IX – section 167 to 197 of Tamil Nadu Panchayat Act 1994 deals with Taxation and Finance.

IV. Resource Base for Panchayats

The Resource base of Panchayats has been categorized as follows since its inception.

- Own

- Assigned

- Grants (SFC/CFC)

- State and Centrally sponsored Schemes

In which, panchyats are legally exercising their independent decision making powers related to own and assigned revenues, while the grants they receive from the State and Central Governments are tied ones with strict procedures and guidelines. Further the fourth category of State and centrally sponsored schemes, panchayats are considered as mere agencies to identify the beneficiaries and serves as support structure to the state departments for monitoring schemes at the ground level.

An Overview

The finance of Local Bodies even prior to 73^rd Constitutional Amendment is largely dependant on assigned revenues and the grants in aid from the State. While the village panchayats has some amount of own tax and non-tax revenue to meet their own needs, the panchayat unions and district panchayats are in complete dependence on the State. The below table shows how the major source of revenue comes from grants and assigned tax revenues like Local Cess, Local Cess Surcharge, Stamp Duty Surcharge. The village panchayats where there is location of industries, educational institutions, companies, government offices will get more income from the house tax and profession tax income.

This indicates that the financial position of Local Bodies are highly depend on the State in Tamil Nadu as almost all the functions and functionaries related to Development and Revenue are controlled by the State. Unless and until state devolves Powers, Functions and Functionaries for the subjects listed in 11^th Schedule of the Constitution of India, Panchayats cannot flourish as a System of Local Self Governance.

TABLE I

Resource Base of Rural Local Bodies
Sl. No	Name of Local Body	Grants and assigned revenue LC & LCS	Tax Revenue House.Tax, Proffesion. Tax, Adv.Tax	Non-Tax Revenue, D&O trade building fees, 2.C patta, fishery rent	Remarks
1	Village Panchayat	84.97%	11.42%	3.79%	Bulk of revenue expenditure is on maintenance of civic amenities and administration 45.10%. In last 5 years Non-Tax Revenue increased from Rs. 32.35 to Rs. 165.58 lakhs. .
2	Panchayat Union	99.54%	0	0.46%	Administrative and maintenance expenditure 76.82%
3	District Panchayat	100%			Advisory and Planning body Grant is the only revenue. SFC grant alone is Rs. 2998 Lakhs

Source: 12^th Finance Commission, 2004

Devolution of Finance from the State

In terms of Devolution of Finance from the State it is considered that the assigned revenue (taxes, non-tax levied and collected by the State for Panchayats) and the Share from State’s Own Revenue are the two major categories.

All three State Finance Commissions so far have followed a formula of Pool A and Pool B which comprise of Assigned revenues and share from the State Revenue resources respectively.

The below table shows, while pool B (share from state revenue) is substantially increasing, the pool A (assigned revenue) is unstable and almost not clear, while progressing further. This shows the changes in policy level decisions taken by the State Government in terms of devolving funds for Panchayats. Traditionally assigned revenues considered as an exclusive source of income for panchayats and hence they have enjoyed more powers in terms of taking decisions on the works to be undertaken. But gradually in the last 15 years, the state governments started reducing/abolishing/diverting the assigned revenue sources (which is explained in the separate title on Assigned Revenue below). Though it is said that the State compensate local bodies for the lose of this revenue, its not meant to be for independent utilization of these resources by panchayats as they enjoyed under assigned revenue. (for instance, the compensation under the exemption of entertainement tax for films in Tamil name has been credited as “8229 00 Development and Welfare Funds – 200 Other Development and Welfare Funds – AY Fund for priority schemes in Rural Areas (DPC 8229 00 200 AY 000 D) (Receipts)”- as per Government Order dated 05.08.2009.

However, all three State Finance Commissions have not made any recommendation towards the fundamental changes in terms of deciding on the withdrawal of assigned revenues or compensation for such withdrawals.

TABLE 2

Statement showing devolution of funds under pool A (Assigned Revenue) and pool B (Sharing from State Revenue- 8%)
	Year	Pool A	Pool B	Total
	1997-98	295.1	612.56	907.66
	1998-99	364.91	792.94	1157.9
	1999-2000(Actuals)	391.96	805.19	1197.2
	2000-01 (Budget Estimate)	298.09	1036.41	*1334.50
	2001-02	453.37	407.60 **	860.97
	2002—03	535.67***	1331.44	1867.11
	2003-04	502.80***	1269.67	1772.47
	2004-05	394.19***	1766.73	2160.92
	2005-06	NA	1715.09
	2006-07	NA	1224.6
	2007-08	NA	1,583.58
	2008-09	NA	1,716.44
	2009-10 (BE)	NA	1926.57

* This includes commitment of Government on Local Bodies pension Owing to resource crunch, a portion of the devolution has been adjusted in 2002-03) * Local Cess and Local Cess Surcharge Remission/No adjustment
(source State budget documents/SFC Reports)

Devolution from State’s own Revenue

Even though the First State Finance Commission has recommended for the increase in devolution percentage at 1% every year from 8% to 12% for the years 1997-98 to 2001-02 respectively, the Government have frozen the percentage at 8% for all the five years owing to resource crunch.

Further, 2^nd SFC has recommended for only 8% to all 5 years of the term. Hence, the 8% allocation was extended till 2006-2007. Only in 2007-2008, financial year 1% increase was made in the share of SFC grant as per the recommendation of third SFC.

For 2009-10, the allocation is at 9.5% of the State’s own tax revenues to the rural and urban Local Bodies. It is promised that the percentage of devolution will be progressively increased to 10% within the award period of the Third State Finance Commission (2007-08 to 2011-12). The ratio of the shares of rural and urban Local Bodies will be 58:42 as before. Since Village Panchayats are entrusted with most of the basic functions such as maintenance of village roads and streets, drinking water supply, street lights, sanitation and solid waste management and they are also the largest in number (12,620), the allocation for the rural Local Bodies is shared in the ratio 60:32:8 among Village Panchayats, Panchayat Union Councils and the District Panchayats from the year 2007-08 onwards.

Excerpts from 3^rd State Finance Commission Report (2006)

State's Own Tax Revenue

i) The State's Own Tax Revenue shows a trend growth rate ranging from 6% in 2001-02 to 21%, in 2004-05. Sales Tax and State Excise accounts for 67% and 13% respectively (2004-05) of Own Tax Revenue. Land Revenue decreased in 2002-03 and 2003- 04 owing to the drought and the resultant remission of Land Revenue. Receipts from State Excise show a remarkable growth of 54% in 2004-05 because of the new Excise policy involving TASMAC in the retail selling of liquor. Receipts under Stamps and Registration constitute 8% of State’s Own Tax Revenue. Despite the reduction in the rates of Stamp Duty and surcharge with effect from 21.11.2003, Stamp Duty fetched more revenue in 2004-05 owing to the revision of guideline value of properties. Transfer of Entertainment Tax has been made as 'Deduct Entries' in 2004-'05 as recommended by Second State Finance Commission. Agricultural Income Tax has been abolished with effect from 1.4.2004 taking into account the need to revive the plantation industry and also the precarious position in which the cost of collection exceeds the actual collections.

ii) The State’s Own Tax Revenue for the base year 2004-'05 accounted for 16.78% of the Total Receipts under Consolidated Fund (Revenue + Capital including loans, Contingency Fund and Public Account) and 68% of Revenue Receipts. State’s Own Tax Revenue as a percentage of GSDP for 2002-03 is 9.33 which was acknowledged to be the highest in the Country by the Twelfth Central Finance Commission. The tax-GSDP ratio for 2004-05 is 10.25. Despite the reduction in the rates of Stamp Duty, abolition of Agricultural Income Tax and changed pattern of Entertainment Tax, the Revised Budget Estimate for 2006-07 shows an increase of 16% over 2005-06 pre-actuals because of the higher level of buoyancy estimated under State's Own Tax Revenue, by the Government. Further, owing to the reduction in the percentage of share in Central taxes from 6.637 to 5.385 by the Eleventh Central Finance Commission, Tamil Nadu is reported to have suffered an overall loss of Rs.1293 crores. This major fiscal setback also added for the worrisome Revenue Deficit in the past years since 2000-01. However, this deteriorating Revenue Deficit had been revived to a tolerable level through various fiscal reform measures taken by the State Government. Pre-actuals 2005-06 show a surplus of Rs.309 crores under Revenue Account.

From the above analysis, though there is some initial fiscal pressure on the part of the State Government during late 90’s, its revenue account showing positive growth over the last 15 years. Hence, there is no logic in restricting the financial devolution towards panchayats. Further, through out the three terms panchayats are only made to take care of the maintenance of basic amenities and new constructions proposed in the State and centrally sponsored Schemes. There is no provision made both financially or legally to implement their own schemes and programmes evolved through gram sabha.

IVA. INCOME AND EXPENDITURE OF VILLAGE PANCHAYATS AND PANCHAYAT UNIONS.

Village Panchayats

Prior to SFC devolution (share from total tax revenue of the State Government), the major source of income derived by Village Panchayats was assigned revenue of surcharge on Stamp Duty, Entertainment Tax, etc which constituted 61% of the total income. Though there is not much difference between receipt and expenditure, Village Panchayats could not take up capital works (for instance, providing better infrastructure) since the major portion of the expenditure consumed on electricity charges and maintenance charges relating to street lights and water supply which constituted 65% of the total expenditure where as the capital expenditure is only around 12%. Below table shows the performance prior to SFC.

There is not much improvement even after SFC devolution passed on income as Grants to Village Panchayats, as maintenance expenditure has increased three fold due to increase in Electricity Charges and Water Charges due to TNEB and TWAD Board. Further there is deficit of -0.62 on an average per panchayat.

Table 3a

Source of Income and Expenditure details for 1996-97 (Pre-SFC Devolution Period)
	Income			Expenditure
Sl.No	Particular	Average amount per Panchayat (Rs. In Lakhs)	Percentage	Particulars	Average Amount per Panchayat (Rs. In lakhs)	Percentage
1	Tax and non-tax	0.27	21.8	General Administration	0.14	13.6
2	Assigned Revenue	0.75	60.5	Maintenance charge	0.69	64.14
3	Other Grants	0.14	11.2	Capital expenditure	0.12	11.5
4	Miscellaneous reciepts	0.08	6.5	Miscellaneous Expenditure	0.11	10.15
	Total	1.24		Total	1.06

Source; Computed

Table 3b

Break-up details for Post SFC Devolution Period (1999-2000)
	Income			Expenditure
Sl.No	Particulars	Average Amount per Panchayat (Rs. In lakhs)	Percentage	Particulars	Average amount per Panchayat (Rs. In lakhs)	Percentage
1	Own source including tax and non-ta	0.55	17.51	General Administration	0.55	15.14
2	Assigned revenue	0.82	27.17	Maintenance charge	2.08	57.29
3	Grants	1.48	48.88	Capital Expenditure	0.9	24.71
4	Miscellaneous receipt	0.91	6.43	Miscellaneous Expenditure	0.1	2.86
	Total	3.02		Total	3.64
				Gap	-0.62

Source: Computed

Further, below table shows that very few panchayats were able to meet their maintenance expenditure from their own sources. This shows that the own revenue of panchayats needs to be improved a lot until then it has to be depend on the state government.

TABLE 4

Financial Status of Village Panchayats
Percentage of Maintenance Expenditure from own source	No of Panchayats
Less than 30%	3910
30-50	3407
51 to 60	2628
61 to 70	1412
71 to 80	959
more than 80	302
	12618

Source: 2^nd State Finance Commission Report 2002

Further panchayats doesn’t have expertise or human resource for tax levy and collection. The houe tax matching grant provided during initial period was a great boost to panchayats to achieve the target and demand, but later it was omitted [u1] through an amendement of Tamil Nadu Act 30 of 1999[u2] [u3] . As a result the state departments and the politicians ruling the State have more control over the functioning of the panchayat system.

There has been a steep rise in the expenditure over the years since 2001 due to street lights and drinking water supply as well as increase in the establishment cost. The electricity board charged at the rate of Rs. 1.20 paise per KWH till march 2003 has increased the charges to Rs. 3.60 per unit. Later in 2008-2009 budget period it has been reduced to 3 per unit due to the great pressure created by the Elected Representatives of Panchayats to the State Government. This charge of Electricity for Panchyats is in Commercial Rate. It is a great injustice to charge commercially to the Village Panchayats who are rendering social and public obligations. Whatever minimum grant is given by the State has been adjusted for EB charges and Panchayats are left with meager sources to meet the basic needs of the People.

Further, orders related to purchase of Street Lights (as and when government issues) and other maintenance equipments are highly disturbing the autonomy of the Panchayats even deciding the basic resource needs of the people. Any violation on this has been considered as Audit Objection and Panchayat Presidents, who are also termed as Executive Authority of the Village Panchayat (as per TN Panchayat Act 1994) have to face serious interrogation by the government officials and finally they are being removed from the position at the Discretionary power of the District Collector who is the Inspector of Panchayat under Section 205 of the Panchayat Act. Removal of a representative elected by People in the hands of a Government Official is an act of mockery of Democracy.

PANCHAYAT UNIONS

The below tables indicate that out of the total income derived by the Panchayat Union, local cess surcharge, local cess surcharge matching grant, local education grant, local roads grant and land revenue assignment etc., constituted 88%. But in the post-SFC grant devolution period the financial assistance pattern has been changed and the income from all above sources are dispensed with and assistance is given only from State Finance Commission devolution to Panchayat Unions.

TABLE 5

PANCHAYAT UNION
Source of Income and Expenditure details for 1996-97 (Pre-SFC Devolution Period)
	Income			Expenditure
Sl.No	Particular	Average amount per Panchayat union (Rs. In Lakhs)	Percentage	Particulars	Average Amount per Panchayat Union (Rs. In lakhs)	Percentage
1	Local cess surcharge and non-tax items	24.26	88	General Administration	16.84	52
2	Assigned revenue	3.2	12	Maintenance expenditure	11.83	36.6
3	Miscellaneous receipt	-	-	Miscellaneous expenditure	-	-
	Total	27.55		Capital Expenditure	3.61	11.2
				Total	32.28
				GAP	-4.8

Source; Computed

Break-up details for Post SFC Devolution Period (1999-2000)
	Income			Expenditure
Sl.No	Particulars	Average Amount per Panchayat Union (Rs. In lakhs)	Percentage	Particulars	Average amount per Panchayat Union (Rs. In lakhs)	Percentage
1	Own source including tax and non-tax	6.52	11.99	General Administration	45.05	67.56
2	Assigned revenue	0.08	0.15	Maintenance charge	16.44	24.66
3	Grants	47.76	87.86	Capital Expenditure	5.19	7.78
4	Miscellaneous receipt	-	-	Miscellaneous Expenditure	-	-
	Total	54.36		Total	66.68
				Gap	-12.32

Even prior to the SFC devolution period, there was a deficit of Rs. 4.80 lakhs per Panchayat Union. This gap has widened to Rs. 12.32 lakhs per Panchayat Union in the post-SFC devolution scenario owing to the fact that the major portion of expenditure of 52% in the pre-devolution period and 68% of post – devolution period is incurred for General Administration. This is because the panchayat union in Tamil Nadu is the major establishment base with both human and infrastructural support for all rural development programmes of the state and centre along with the monitoring role it is playing for all village panchayats. Hence, there is not much scope for planning and executing programmes for the elected body-Panchayat Union Council in terms of economic development and social justice of its constituency.

IVB. DETAILS OF REVENUE OF PANCHAYATS

OWN REVENUE

The major own source of Income of the Village Panchayats are house tax, professional tax and advertisement tax and other non-tax revenues like building fee, fee on dangersous and offensive(D &O) trades, etc.

The vehicle tax originally levied by the Panchayat as per section 173 of the Tamil Nadu Panchayat Act, 1994 and the Local Roads grant as per section 182 and house tax matching grant provided as per section 183 of the Act were dispensed with. Now these incomes are supposed to be merged with State Finance commission devolution of funds except Land revenue assignment which is due to Panchayat Unions. In respect of the Panchayat Unions , the Act still provides for the payment of land revenue assignment grant as per section 170, but this has not been paid from 1997-98 onwards.

The Third State Finance Commission had recommended that all fee collecting institutions like Nursery, Matriculation Schools, Tutorial Colleges, self financed Engineering, Medical Colleges / Dental Colleges, Para Medical institutions Teacher Training institutions, Coaching centres etc shall be subjected to House tax. Further, in its ruling on the applicability of exemptions for the educational institutions from the levy of House tax, the Hon’ble Madras High Court in Sriram Educational Trust and 45 Others Vs. State of Tamil observed that the “Rule 15(c) is in an unqualified term. There are no words of restriction attached to the portion dealing with educational purposes.” The Government accepted the recommendation of the Third State Finance Commission that the properties belonging to self financing unaided educational institutions shall be subjected to levy of House tax by the local body and suitably amended rule 15 (c) of the Tamil Nadu Panchayats (Assessments and Collection of Taxes) Rules, 1999 vide G.O. Ms. No.38 RD & PR (PR.1) Department, dated 05.03.2008. Hence, the said rule is no longer in an unqualified term and the amended provision enables the Village Panchayats to levy and collect House Tax on the buildings used by Self financing educational institutions and also from the Government-aided institutions which are conducting self-financing unaided courses. However, not all the village panchayats have such institutions.

Hence the own tax income for village panchayats is only House Tax. As per the analysis of 2^nd state finance commission on an average collection of house tax by the village panchayat between 1996-2000 is about 70%. House Tax collection has considerably increased however, the withdrawal of house tax matching grant, which was provided by the State Government has affected the Village Panchayats substantially to carry out their own planned programmes.

2. ASSIGNED / SHARED REVENUE

At present, the following are the Assigned Revenue (Tax) are provided for Local Bodies through the effect of Tamil Nadu Panchayat Act 1994:

1. Local Cess/Local Cess Surcharge

2. Surcharge on Stamp Duty

3. Entertainment Tax

In addition to the above, the following are the Shared Revenue (Non-tax)

1. Mines and Minerals

2. Social Forestry Receipts

3. Fishery Rental

4. 2 C Patta trees

These taxes and levies are usually collected by the Government and assigned to local bodies. The third State Finance Commission has observed that this assigned revenue is a part of the resource base of the local bodies and needs to be kept intact. But time and again, the resource base has been eroded by Government thereby depriving the local bodies their legitimate dues. The following are some of the instances:

Reduction in Surcharge on Stamp Duty because of the Memorandum of Understanding signed with Ministry of Urban Development.
Reduction in Entertainment Tax owing to change from compounding pattern to collection on admission basis.
Amendment to section 46 by Tamil Nadu Act of 41, 2008 inserting section 46. the president shall (d) execute or implement all schemes, programmes or activities as may be entrusted to village panchayat from time to time. Thereby makes the local government in the lowest tier be the agent of the State instead of empowering their own planning and decision making process.
Amendment made in Tamil Nadu Panchayat Act for abolishing Local Cess Surcharge matching grant in the year 1999(section 180).
Amendment made to Section 187 for removing 20% allocation of Local cess for Panchayat Union Education Fund. Instead, the allocation of resources Panchayat Union Schools has been decided at the State level.
Non-implementation of increase in Local Cess/Local Cess Surcharge as suggested by Second State Finance Commission and ordered by the Government.

CURRENT POSITION ON DISBURSEMENT OF ASSIGNED TAX REVENUES TO PANCHAYATS

Based on the interim discussions of the Third High Level Committee, the Government apportioning the Assigned Revenues by issuing orders in G.O.Ms.No.168 Rural Development and Panchayat Raj (C4) Department dated 04.10.07 by which the Assigned Revenues (other than lease amounts and seigniorage fees on mines and minerals and proceeds from social forestry auctions) are pooled at the State level and apportioned to three tiers of rural local bodies. Previously it was collected at the Block level and apportioned to the Village Panchayats in that particular Block.

Accordingly, Government allocated Rs.270 Crores for Pooled Assigned Revenue for the year 2007-08. Out of this amount, Rs. 180 Crores had been released to all the Village Panchayats, Panchayat Unions and District Panchayats on population basis and Rs. 90 Crores released to districts for priority schemes. Priority schemes has been defined according to the need assessed by the State Rural Development Department and not the Panchayats. A recent G.O No. 130 dated 26/11/2009 issued to utilize the above funds for:

“Purchase of all movable items except equipments for Panchayat Raj Institutions and Vehicles for Panchayat Union Chairpersons, Block Development Officers, Executive Engineers (Rural Development), and Assistant Executive Engineers (Rural Development) for supervision and monitoring of works of Panchayat Raj Institutions”

There is a specific amendment made in the Tamil Nadu Panchayat Act 1994 in section 169 related to assigned revenue in the year 2008. The below highlighted provision of the Act, clearly shows how the State Government is creating space for diverting the Resources legally to be devolved to the Panchayats for its own Schemes and Grants.

Old provision in 1994 Tamil Nadu Panchayat Act

New Amendment: Substituted by Tamil Nadu Act 11 of 2008 w.e.f. 21^st February 2008.

Section 169:"Rules regarding collection of Local Cess, Local Cess Surcharge and Surcharge on the Duty on transfers of property.- The Government may make rules not inconsistent with this Act,

(a) for regulating the collection of Local Cess under Section 167, Local Cess Surcharge under Section 168 and surcharge on the Duty on transfers of property under Section 175;

(b) for fixing the proportions in which the proceeds of Local Cess, Local Cess Surcharge and Surcharge on the Duty on transfers of property shall be distributed among Village Panchayats, Panchayat Union Councils and District Panchayats; and

(c) for deduction of the expenses incurred by the Government in the collection of Local Cess, Local Cess Surcharge and Surcharge on the Duty on transfers of property".

[169. Orders regarding collection of Local Cess, Local Cess Surcharge and Surcharge on the Duty on transfers of property.- The Government may, by notification,-

(a) regulate the collection of Local Cess under Section 167, Local Cess Surcharge under Section 168 and Surcharge on the Duty on transfers of property under Section 175;

(b) fix the proportions in which the proceeds of Local Cess, Local Cess Surcharge and Surcharge on the Duty on transfers of property shall be distributed among Village Panchayats, Panchayat Union Councils and District Panchayats and grant any amount from the said proceeds for the execution of specific scheme, project, programme or plan in any Village Panchayat, Panchayat Union Council or District Panchayat; and

(c) deduct the expenses incurred by the Government in the collection of Local Cess, Local Cess Surcharge and Surcharge on the Duty on transfers of property.]

Fund Flow : Pool A- Assigned Revenue

(Rupees in crores)

Sl. No	Year	Surcharge on Stamp Duty	Entertainment Tax	Local Cess	Local Cess surcharge
1	2000-01	302.19	67.38	6.21	31.05
2	2001-02	382.55	34.06	6.2	30.56
3	2002-03	454.32	81.35	Remission – no adjustment	Remission - no adjustment
4	2003-04	444.52	58.28	Remission - no	Remission - no adjustment
5	2004-05	350.04	44.15	Figures not available	Figures not available

Source: 3^rd SFC Report – Sep 2006

The above analysis will show that while the income to the Village Panchayats has sharply declined due to reduction in the surcharge on stamp duty which is a major source of income and also due to non-adjustment of receipts legally due to the Panchayats,

a. Local Cess and Local Cess Surcharge:

Revenue Department collects the Local Cess and Local Cess Surcharge along with the Land Revenue under the same head of account, i.e. Land Revenue. Section 167 of the Tamil Nadu Panchayats Act, 1994 provides for the levy of local cess at the rate of Re.1 on every rupee of land revenue realized in the State. The total amount realized from this source is distributed entirely to Village Panchayats. Similarly, Section 168 of the Act, provides for the levy of local cess surcharge at such rate which may be considered suitable but not less than Rs.5/- on every rupee of land revenue.

The Second State Finance Commission which went into the issue has recommended for enhancement of Local Cess from Rs.5/- to Rs.7/-. While amendment to Tamil Nadu Panchayats Act, 1994 is necessary for Local Cess revision, there is no need for any Act Amendment for revision of Local Cess Surcharge as it empowers levy upto a maximum of Rs.10/-. The Government while tabling the Action Taken Report in the Assembly have accepted the recommendation for revision of Local Cess/Local Cess Surcharge and issued orders in G.O. Ms. No.284, Fin (FCIV) Department, dated 12.08.2002.

No follow up action was taken by Rural Development and Panchayat Raj Department to give effect to the recommendation.

Instead of adhering to the promise made in the assembly on the action taken report, the recent budget presentation for 09-10, the finance minister announced “the abolition of Local Cess and Local Cess Surcharge” for the benefit of Farmers. This legal source of income for Panchayats has been abolished by the State Government even without consulting the Elected Local Government Representatives. The ruling party in the State claims this as major achievement they have done for the welfare of farmers during the Parliamentary Election in May 2009.

Budget 09-10 Announcement – Abolition of Local Cess and Local Cess Surcharge:

Under the existing system of land revenue collection, which has been in vogue for a long period, Local Cess, Local Cess Surcharge and Water Cess are being collected along with the land revenue. As this tax serves as proof of possession of farmers over their land holdings, hereafter only a nominal sum shall be levied as ‘Land Revenue’.. By simplifying the present cumbersome system, land revenue of Rs.2 per acre of dry land as against an average levy of Rs.15 per acre at present and Rs.5 per acre of wet land as against an average levy of Rs.50 per acre at present, shall be levied from the coming fasli year. Farmers shall not be burdened with any other levy such as Local Cess and Local Cess Surcharge. About 50 lakh farmers will benefit from this measure.

To implement the above policy decision, Sections 167, 168, 169, 176, 186 (b) and 188 (d) of Tamil Nadu Panchayats Act, 1994 were amended vide Tamil Nadu Act No. 12 of 2009, and the levy of Local Cess and Local Cess Surcharge was dispensed with.

No announcement made on the loss of income or compensation to be provided for Panchyats due to this policy pronouncement.

b. Surcharge on Stamp duty on transfer of property

Under Section 175 of the Act, provision is made for crediting the proceeds under surcharge on Stamp duty to Village Panchayats. Stamp duty and surcharge on stamp duty on transfer of property is collected by the Registration Department and adjusted directly to the Local Bodies by the District Collectors on quarterly basis. A sum of Rs.63.87 crores has been adjusted during 2005-06.

An amendment has been made in Tamil Nadu Panchayat Act , to pool the revenue collection under stamp duty surcharge at the State level and share between all three tier Panchayats. Previously the amount was collected in the Panchayat Village in the Panchayat Development Block as surcharge on the Duty on transfers of property pooled every year for the entire block and distributed among all the Village Panchayats in the block in proportion to the land revenue of the Panchayat Village.

The surcharge on stamp duty, which is the main and a substantial source of income to Village Panchayats has been drastically reduced from 5% to 2% in the year 2003 and 1% in respect of mortgage of immovable property resulting in more than 60% loss of income to the Panchayats from this source alone.

The third State Finance Commission said that the Government should get the concurrence of the local bodies before effecting the reduction in rates of Surcharge on Stamp Duty as the quantum is assumed based on the present rates. If at all reduction is effected, the loss in income should be compensated based on the level of flow of transfer prior to reduction.

But no action taken on the above recommendation by the State Government so far.

c. Entertainment Tax

90% of the entertainment tax collected in rural areas is assigned to rural local bodies since 1997. This is shared between the Panchayat Unions and Village Panchayats in the ratio of 30:70.

Based on the recommendation of the First State Finance Commission, the Government have issued orders for transfer of 90% tax proceeds to Local Bodies, as indicated in the action taken report to the Legislative Assembly in April 1997. But during interaction with officials by the Second State Finance Commission it was revealed that the transfer of 90% of the tax proceeds is not effected as per the Government order but restricted to 65% or in certain cases no adjustment is made by citing the non-amendment of Financial Code rules.

Even after the completion of second SFC period (2006), this amount was not adjusted orders issued for the same in 2002. Besides dues from 1997-2002, the third Finance Commission has identified this flaw and condemned the state for non-adjustment.it has also identified the non-adjustment of Rs. 34 crores from the period of 2002-03 to 2004-05.

Third State Finance Commission (2006) observed that this as a single largest source of assigned revenue for the local bodies. The Commission strongly feels that the local bodies should get their legitimate dues and on time.

TABLE 6

(In Rupees)

Sl. No.	Local Body	Tax Entitlement	Tax proceeds transferred	Difference
1	Municipal Corporations	162,12,84,974	162,12,82,974	Nil
2	Municipalities	116,83,14,882	116,37,41,428	45,73,454
3	Town Panchayats	45,81,69,762	45,80,07,545	1,62,217
4	Village Panchayats	22,45,93,870	22,37,38,446	8,55,424
5	Panchayat Unions	28,18,708	28,18,708	Nil

Source: Commercial Taxes Department

No action taken by the State Government in this regard till this recent financial year.

Reduction in Entertainment Tax rates

The Government has switched over from compounding pattern to collection on gross admission with effect from 4.10.2004. This has resulted in substantial fall in income under Entertainment Tax during 2004-05 and 2005-06, as could be seen from the figures furnished below:

2004-05 - Rs.54.23 crores

2005-06 (RE) - Rs.38.50 crores

2006-07 (RBE) - Rs.3.82 crores

Meanwhile the below announcement of the State without consulting the Local Bodies resulted in severe impact on the income source of all Local Bodies (both urban and rural). Within three years the income has steeply reduced from 54.23 crores to 3.82 crores.

Policy Note- Rural Development Department, 06-07

With a view to encouraging Film Industry and promotion of Tamil Language full exemption from Entertainment Tax has been given with effect from 22.7.2006 to new films if the title is in Tamil.

The compensation amount has been calculated as Rs. 3 crores as per the last demand in 2006-07 and now this amount is credited to rural development department account below:

*“8229-00 Development and Welfare funds – 200 other Development and Welfare Funds – AY Fund for Priority Schemes in Rural Areas” (DPC 8229 00 200 AY 000 D) (Receipts)”

(G.O. (Ms) No. 31, RD Dept dated 31.03.2010)

In this way the due share to local government has been swindled away through the state administrative process.

The Twelfth Central Finance Commission has also suggested that whenever any reduction in assigned revenue is contemplated, the local bodies should be consulted. The suggestion may be considered for adoption by the State Government. In case of decline in revenue to the local bodies due to change in the policy of the Government, local bodies should be compensated.

Also on the introduction of cable TV the income from Entertainment Tax has been reduced to a considerable extent. Originally the tax on exhibition of cable TV was levied by Village Panchayats, but showing the reason that the inadequacy in staff at village panchayat, the state government taken over the levy and collection of Cable TV charges. But no compensation has been provided by the state government after taking over the levy of tax on cable TV services.

NON-TAX REVENUE

A) Water Charges

In Village Panchayats, water supply is almost through public taps. Wherever house connections are given, deposit amount of Rs.1000/- is taken and the user charges (i.e. water charge) at the rate of Rs.30/- p.m. is collected. The above system is based on a G.O. issued in 1999. As the water charge is a fixed sum, the Panchayats could not meet the Operation and Maintenance costs. Under the Combined Water Supply Scheme, Tamil Nadu Water Supply and Drainage Board is charging Rs.3/- per kilo litre for Village Panchayats and most of the consumption are not recovered. In fact, Twelfth Central Finance Commission has recommended at least 50% recovery of the recurring costs in the form of user charges in respect of water supply. The income derived from Non-Tax including Water charges during 2002-03 to 2004-05 are as below:

Year (Rs. in crores)

2002-2003 3.04

2003-2004 4.32

2004-2005 7.87

This includes other levies like D & O licence, fees, fines, lease rentals etc.

B) D & O Licence fees

50) Section 159 of Tamil Nadu Panchayats Act, 1994 empowers Village Panchayats to issue licence for D&O trade. The rates under D&O licence fee have not been revised. The First State Finance Commission identified 73 trades and suggested revised fee structure. But this has not been given effect resulting in loss of income.

C) Fishery Rental

The Second State Finance Commission recommended for constitution of a committee consisting of President of Village Panchayat, Revenue Inspector and Inspector of Fisheries Department for the conduct of lease sale and to curb the practice of forming syndicate to under pitch the auction value. Besides, it has recommended that fishery rental in respect of M.I. tanks of Panchayat Union may be shared on 50:50 basis between Panchayat Unions and Panchayats. It also recommended that the proceeds of Fisheries in PWD Tanks should also be shared between or among all Panchayats covered in the tank area. The Government at the Secretaries' level meeting have accepted the recommendation in respect of Panchayat Union tanks among Panchayat Unions and Village Panchayats and also for 100% utilisation of the proceeds relating to fishery rental relating to Village Panchayats but did not accept the recommendation relating to fishery rental in respect of PWD Tanks. However, no formal orders have been issued.

D) 2C Patta Trees

The usufructs of avenue trees which are leased to Panchayats by Highways are availed by Village Panchayats by auctioning them. The Second State Finance Commission which went into the issue of wind fallen trees has recommended for constitution of a committee consisting of Village Panchayat representatives, Panchayat Union Commissioner and Revenue official. Besides, it has recommended for conferring powers to Village Panchayats in respect of removal of dead trees. The Government have also issued orders. But no follow up action has been taken for constituting a committee and for conferring powers to Village Panchayats for removal of trees. Hence, the Third State Finance Commission reiterates the recommendation of Second State Finance Commission that

i. the Constitution of a committee may be notified by the Inspector of Panchayats for auctioning of wind fallen trees in Village Panchayat area.

ii. powers may be conferred on Village Panchayats for removal and auctioning of dead trees for ensuring quick disposal of the trees and also to realize sizeable revenue to Village Panchayats.

E) Social Forestry Receipts

There was no statutory obligation for sharing the Social Forestry Receipts till 1992 but the 73rd Constitutional Amendment Act, had assigned the Social Forestry and Farm Forestry to Rural local bodies under Schedule-XI of the Constitution of India. Even before that the Government have realised that there is need to share the Social Forestry Receipts with the Panchayats on the ground that the trees and plantations are grown in local body land and hence issued orders in G.O. Ms. No.592, Environment and Forests Department, dated 16.8.89.

As it is a non-tax revenue, it has not been shared regularly with the Village Panchayats. In the District hearing, officials and elected representatives have pleaded for timely adjustment and also their lawful involvement. In fact the Social Forestry Receipts as on 2005 have been adjusted only upto 1995-1996. Towards the end of the year, after the issue was taken by Third State Finance Commission with the Principal Chief Conservator of Forests, the proceeds from 1997-98 to 1999-2000 have been ordered for transfer. Even while ordering the transfer, the Forest department has directed to reserve 20% for Forest Development.

The Second State Finance Commission which went into the issue has recommended for formation of a Committee with Village Panchayat President as member for conducting auction, sharing of proceeds after deducting the working expenses at 70:30 for Village Panchayats and Forests Department respectively and for monitoring the adjustment at State level. But the Government while issuing orders on the recommendations in G.O. Ms. No.158, Rural Development Department, dated 14.10.2004 has not accepted for including Village Panchayat President as member in the auction committee and also for monitoring the transfer of proceeds at State level. However the Government have accepted and modified the sharing of proceeds at 50:50 on gross basis.

c) This was contested by Principal Chief Conservator of Forests on the ground that Social Forestry plantations are sold every year on a 10 year rotation and the extent of plantations is gradually coming down. Moreover his department has been incurring Rs.3.5 crores annually towards payment of wages to Social Forestry workers / plot watchers. He has also expatiated that some of them are being absorbed in the regular vacancies of Forest Department and it may take some more years to re-deploy all of them. Also some of them have got direction for payment of minimum wages and the issue is under Government scrutiny. Hence, the department pleaded for implementation of Second State Finance Commission recommendation on sharing.

In the above back ground, the Third State Finance Commission recommends the following:

i There should be a separate detailed head for apportioning the Social Forestry Receipts to Local Bodies.

ii There should be budget provision in each year's budget of the Forest Department for apportionment so that the department may adjust the amount within the financial year itself and any dues in the year which are left out shall be adjusted in the next financial year.

iii Social Forestry Receipts from 2000-2006 shall be adjusted in 2007-08 as per the formula recommended by State Finance Commission and ordered by Government in para 53 (b) above.

iv For the award period of Third State Finance Commission the sharing of Social Forestry Receipts shall be 50:50 on the basis of gross proceeds as already agreed to by the Government. The Social Forestry Receipts from 2007 onwards shall be adjusted within the financial year itself and for any failure the department has to pay interest for the sharable revenue.

v As contemplated in the Constitution of India, the functions relating to Social Forestry and Farm Forestry may be transferred to local bodies to involve the elected local representatives in the development of the Social Forestry Scheme.

D) Income from Mines and Minerals

The Mines and Minerals Act, 1957 is a Central Act and the State Government is framing rules for its enforcement. The quarry lease income from minor minerals derived from the above Act and Rules is shared with the local bodies. Previously it was with Revenue Department but subsequently it was entrusted to a separate department called Geology and Mining. The government also has the mandate to apportion the lease amount on Mines and Minerals to Village Panchayats and Panchayat Unions on 50:50 basis. In the year 1998, the state government had passed a specific government order for control and management of quarrying of minor minerals by Village Panchayats, but later it was withdrawan due to the objection raised at the Industries Department level through a court case. 2^nd state finance commission also strongly recommended for implementation of this Government Orders. However, later, the government have taken over the mines and the quarrying of sand directly through the change in Policy decision. But no orders for disbursing the dues to the Local Bodies so far.

The Government in its Action taken report placed before the legislature in April 1997 had accepted the recommendation for direct remittance to the Village Panchayats account of the local body share on minerals and also share from black granite but subsequently Government in Rural Development Department of the Secretariat have rejected this recommendation.

From 2.10.2003, the PWD is operating the sand quarries and the income has gone to Government Account. However, only the Seignorage fees have been apportioned to local bodies There also huge amount of pending due to the Village Panchayats and Panchayat Unions in settling the income the government raised through mines and minerals for the last more than 20 years. As of May 1997, the pending amount due for Panchayats is 125 crores for the previous five years. All three Finance Commissions constituted in the last 14 years have condemned this and insisted for disbursement of the pending amount, despite of it no transparency shown on the part of the government in settling the pending disbursals to Village Panchayats and Panchayat Unions.

Assigned Revenue has become absorbed revenue by the State

The assigned revenue is the legitimate share of Local Government Bodies as these revenue has been levied and collected from the common people, who belong to that particular constituency of Local Body. These revenues are from their own agricultural land, income from land purchase and entertainment establishments, etc. since the State has got both technical and human resources for levy and collection of these income along with its own share it was dealt by the bureaucracy at the District level.

But during the third term period of Local Bodies recently in the name of Normalisation the State has slowly and steadily absorbed the entire revenue of the Panchayats in its own hand. Further to gain their own political mileage the ruling party announced exemptions of these tax and non-tax revenues of Panchayats. By doing so the ruling government have gained double benefit of one hand getting the popular support from farmers and film industry on the other hand in the name of compensation it is strengthening the hands of its own Rural Development Department to have more control over the Local Government System. The direct beneficiaries of this process are the ruling party and the bureaucracy, not the people or the elected local governance system.

3. STATE FINANCE COMMISSION GRANT

This is a grant that state government shares from its own revenue as per the accepted recommendations of the State Finance Commission. This grant is supposed to be untied grant and Panchayats has their own right to decide on the matters of expenses as per the decisions of their elected body and Gram Sabha.

Orders of State Government : GRANTS FROM STATE TAX REVENUE EXCLUDING ENTERTAINMENT TAX – AS STATE FINANCE COMMISSION (SFC) GRANT

1^ST SFC GRANT

2^ND SFC GRANT

3^RD SFC GRANT

1997-98 TO 2001-2002

2002-2003 TO 2006-2007

2007-2008 TO 2011-2012

8% of the total tax revenue of the State excluding entertainment tax shared with Local bodies.

15% of the above 8% revenue reserved for Eqaualisation and Incentive grant. The share between rural and urban local bodies is 60:40

Remaining 85% shared as 55:45 between urban and rural local bodies.

Between three tier panchayats 10:45:45 ratio with District Panchayats, panchayat Unions and Village Panchayats.

Income from stone quarries will be shared with local bodies.

House tax matching grant provided 3 times for the collected amount for the Village Panchayats.

90% entertainment tax shared with Local bodies from 1997-98.

2002-03 to 2006-07- excluding Entertainment tax, the share of State Tax revenue to Local bodies will be 8%.

87% of the above share will be divided between urban and rural local bodies on the basis of 58:42 respectively.

Remaining 13% will be equalization and incentive fund as done in 1^st SFC period.
47:45:8 is the ratio of share between village panchayat, panchayat union and district panchayat respectively.
20% of SFC grant to be utilized for Capital purpose in all Village panchayats.

Weightages for Horizontal distribution

- Total population: 40%

- Total Female Population: 40%

- SC/ST population and people living in hutment areas: 20% (as per 2001 census)

Remaining 13% of state tax revenue sharring: 2:6:5 is the ratio of sharing between Reserve, Equalisation fund and Incentive funds.

Reserve Fund 2%

- Collector development fund (50%)

- Rainwater harvesting (50%) (collector will decide nature of rainwater harvesting work)

Equalization Fund (6%)

- Village Panchayats - 55 %(to meet debt/non-debt dues including electricity charges- panchayats will be decided by DRDA)

- Panchayat Unions- 45 %(for general administration and maintenance of roads, bridges, etc- unions will be decided by DRDA at state level)

Incentive Funds (5%)

-Village Panchayats -5%

Incentive funds will be released as matching grant for house tax on the basis of below formula

- Collection 49% and below - 50% matching grant

- Collection 50-74% - 75% of matching grant

- Collection 75-90% - 100% matching grant.

- Collection 91% and above – 125% of matching grant.

Transfer of 90% of Entertainment tax to Local bodies will continue

Stamp duty surcharge sharing formula weightage is based population basis 50% and collection basis 50%.

- Collection charges will be retained by government 5% for urban and 3% for rural.

the

devolution of funds from State’s Own Tax Revenue for the year 2007-08 will be

at 9%. The devolution of funds for the remaining years of the award period will be

issued during the years to follow.

the existing

vertical sharing ratio of 58 : 42 between rural and urban local bodies shall be

followed during the award period.

The 58% share of rural local bodies in the devolution grant shall be distributed to

Village Panchayats, Panchayat Unions and District Panchayats in the ratio of

60:32:8 respectively as recommended by the Third State Finance Commission.

Village Panchayat’s share of 60% of the Devolution grant allocated

For payment

of electricity charges

to TNEB and water

charges to TWAD

Board.

The Government shall reserve 5% from out of 60% share of the Village

Panchayats from State Finance Commission devolution towards infrastructure gap

filling fund.

From out of the infrastructure gap filling fund, 50% shall be allocated towards

Anaithu Grama Anna Marumalarchi Thittam and out of the balance 50% of the

fund, a part of the amount shall be allocated to the Director of Rural Development for

providing basic amenities in the Districts and the rest shall be allocated to the

Districts based on population and the District Collectors shall utilise the funds for the

same purpose.

A minimum grant of Rs.3 lakhs to each Village Panchayat shall be provided as a

measure of equalization, from out of the Village Panchayats’ share of 55%.

The

balance amount shall be distributed based on population.

Allocation of 135 crores from the SFC grant share to Panchayat Unions and District Panchayats for Panchayat Union School Renovation Programme. Management and Maintenance of Panchayat Schools are the responsibility of Panchayat Unions.

The devolution grant shall be distributed within each tier of rural and urban local

bodies based on 2001 population.

The Government Orders on the basis to be adopted for distribution of funds among

various Local Bodies would be issued separately by the respective departments in

consultation with Finance Department.

The 5% infrastructure gap filling fund for rural local bodies and 3%

infrastructure gap filling fund and 2% Operation and Maintenance gap filling

fund for urban local bodies shall be deducted from the devolution share of

concerned tier of rural / urban local bodies.

The balance devolution grant shall

be released in 10 monthly instalments (from April to January) as per the existing

procedure based on Budget Estimate provisions and the balance based on Revised

Estimate provisions for State’s Own Tax Revenue.

Necessary funds shall be made

available in the Budget of Director of Rural Development /Commissioner of Municipal

Administration/Director of Town Panchayats. The orders relating to this would be

issued by Rural Development and Panchayat Raj Department, Municipal

Administration and Water Supply Department in consultation with Finance

Department. Based on Accounts, if any adjustments have to be made, the same

would be adjusted in the first quarter of the following next year.

Further, the arrears in devolution due to Urban Local Bodies shall be released in

3 annual instalments and the excess devolution made to Rural Local Bodies

shall also be deducted in 3 instalments as on 1.4.2007.

The pension commitment of local body pensioners shall be deducted from the

devolution meant for the respective local bodies instead of respective tiers.

Source:

i) GO (Ms) 225, Finance (Revenue Resources) Department dated 02.05.1997,

ii) GO (Ms) 284 Finance (Finance Commission/IV) Department dated 12.08.2002,

iii) GO No. 199, Finance (Finance Commission/IV) Department dated 25.05.2007

From the above table it is clear that over the years, particularly during the Third Finance commission period, the Government has come up with the more stringent measures by not allowing the Panchayats to utilize their legitimate share of State Revenue as per the decisions of their Elected body. Instead, the State Government through its Rural Development Department and the District Collectorate retain the Power of taking Decisions regarding expenses on SFC Grant, which solely the resource of Panchayats.

- During the first(1996-2001) and second SFC(2001-2006) period, the equalization and incentive, Reserve funds of only 15% and 13% respectively out of total 8% share were retained with the State and the decision on utilization of these funds decided at the Rural Development Department level. But in the Third SFC, no such grant was reserved. But instead the whole of share to the Village Panchayats (60%) have been taken under the Control of State in the name of Infrastructure Gap Filling Fund (5%- out of which 50% for Anna Marumalarchi Scheme- State scheme, 50% for the discretion of State DRDA and District Collector),

- Remaining 55% has been ordered to be paid for payment of electricity charges to TNEB and water charges to TWAD Board.

- The pension commitment of local body pensioners shall be deducted from the Devolution meant for the respective local bodies instead of respective tiers. This arrangement is affecting the financial wealth of Village Panchayats as there is no provision of government salaried employee deputed for Village Panchayats.

In this way, the State has taken over complete control over the share of resources for Village Panchayats.

It is also further ordered Allocation of 135 crores from the SFC grant share to Panchayat Unions and District Panchayats for Panchayat Union School Renovation Programme. Management and Maintenance of Panchayat Schools are the responsibility of Panchayat Unions. But here the State has taken unanimous control over the decision uniformly for using the SFC grant without consulting with the respective Panchayat Union Council.

Constitution of Fourth State Finance Commission

The Government have, vide G.O.Ms.No.549, Finance (Finance Commission-IV) Department, dated 01.12.2009, constituted Fourth State Finance Commission to review the financial position of the rural and urban local bodies.

In reviewing the financial position of the local bodies, the Commission has been directed to assess the financial position of the local bodies as on 31^st March,2010. and submit its report by 31st May, 2011 covering the period of five years commencing on 1st April 2012.

4. CENTRAL FINANCE COMMISSION GRANT

CFC fund sharing pattern

(2006-07 first half year)

Village Panchayats : 80%

Panchayat Unions : 20%

All Central Finance Grants are tied. The panchayats are given with strict instruction on the purpose of the grant like grants for capital work or maintenance. On the basis of the recommendations of the Twelfth Finance Commission (TFC), the Government of India allotted a sum of Rs. 870 crores for the period from 2005-06 to 2009-10.

The guidelines issued by the Government of India stipulate that the TFC Grant should be used for improving the service delivery in respect of water supply and sanitation. The grant can also be utilized for repairs, rejuvenation and also operation and maintenance costs incurred for water supply and sanitation. The grant was shared between the Village Panchayats and Panchayat Unions in the ratio of 80:20. A sum of Rs.174 crores was released for the year 2006-07.

As the Village Panchayats have the responsibility of maintenance of street lights and sanitation, the Government decided that the entire 12th Finance Commission grants may be given to the Village Panchayats instead of giving to the Village Panchayats and Panchayat Unions.

From second half year of 2006-07, 100 % TFC allocation is given to Panchayats in the ratio of 80:20. The allocation to the Village Panchayats will be made on the basis of population. The 12th Finance Commission grants given should be utilized by the Village Panchayats entirely for the operation and maintenance costs of water supply, street lights and sanitation. Accordingly Government issued orders in G.O.Ms.No.19, Rural Development and Panchayat Raj (C2) Department, dated 26.02.07. An amount of Rs.174 crores was released for the year 2007-08. 2009-10 also the same 174 cores has been released.

5) ACCOUNTING SYSTEM

A. VILLAGE PANCHAYATS

Intially during the first term in 1996, Village Panchayats were maintaining the following three Accounts

1) Village Panchayat Fund Account

2) Village Panchayat Earmarked Fund Account

3) Village Panchayat Scheme Fund Account

Later in 1997 as per the orders issued in the Government Order (Ms) No.260, Rural Development Department, dated 9.12.1998. a fourth account in respect of deposits for water connection charges was ordered to be opened and, as such, 4 accounts are presently being operated in each Village Panchayat. In district, where the National Rural Employment Guarantee Scheme (NREGS) is in operation, a fifth account for the scheme has been opened in each Village Panchayat:

In the Third term of Panchayat Governance, the state government has issued an order No.146, RD (C4) department dated 17.08.2007 towards Rationalization of Village Panchayat accounts and the procedure for operation of the accounts

As per the above order there shall be the following 3 Accounts in each Village Panchayat

1) Village Panchayat Fund Account

The Village Panchayat Water Supply Account presently maintained as Account No. IV shall be closed and the balance amount available in the account will be taken to Village Panchayat Fund Account.

2) Village Panchayat Payments To TNEB and / Or TWAD Board Account ;(later in 1.12.2008 this account name was changed as Village Panchayat Payments To TNEB and / Or TWAD Board Account and/ or district collector Account, through an order No: 180 RD (PR.I) Department.

3) Village Panchayat Scheme Fund Account

In Village Panchayats where NREGS is being implemented, a fourth Account, Village Panchayats NREFS Account, will also be operated.

(1) Village Panchayat Fund Account

The receipts, which shall be credited to, the types of expenditure that can be incurred out of and the mode of operation of Village Panchayat Fund Account are described as under.

(A) Receipts

1. Revenue from all the Components as mentioned in section 188 (1) of Tamil Nadu Panchayats Act 1994. (own tax, non-tax, assigned revenues from the state)

2. State Finance Commission Grant other than the portion released to the Village Panchayat Account No.2

3. Deposits received for drinking water Supply house service connections

4. Water Charges and any other receipts related to drinking water supply including public contribution.

(B) Expenditure

All the day-to-day as well as urgent operations of the Village Panchayats are to be carried out through the funds taken out of the Village Panchayat Fund Account.

All the administrative expenditure, capital works, maintenance expenditure, other essential items and other duties of Village Panchayats which enable the Village Panchayats to function autonomously are to be carried out of the Village Panchayat Fund Account. Hence, the types of the expenditure that can be incurred out of Village Panchayat Fund Account are as follows :

(a). Administrative Expenditure

(i). Sitting fee for elected representatives

(ii). Travelling allowance for elected representatives

CCOUNTS AND AUDIT

(iii) Pay and Allowances for Village Panchayat Employees

(iv) Pension contribution for Village Panchayat Employees

(v) Purchase of Stationery

(vi) Purchase of Forms and Registers

(vii) Building Rent

(viii) Expenditure towards Village Panchayat funds and Festivals

(ix) Contingency expenditure

(x) Interest on Loans

(xi) Any other Administrative Expenditure Allowed from time to time

(b) Capital Expenditure

(i) Construction of Building

(ii) Formation of Roads

(iii) Construction of Bridges and Culverts

(iv) W ater Supply and Sanitation works

(v) Other Capital Expenditure allowed form time to time

(c) Maintenance Expenditure

(i) Maintenance of Street lights

(ii) Maintenance of Hand pumps and power pumps

(iii) Maintenance of Village Panchayat Roads

(iv) Maintenance of Sports Centres

(v) Maintenance of Library

(vi) Maintenance of burial and burning grounds

(vii) Sanitation works

(viii) Any other Maintenance expenditure allowed from time to time

(d) Miscellaneous Expenditure

(i) Repayment of Loan

(ii) Refund of Deposits

(iii) Advances repaid

(iv) Any other expenditure as permitted under section 191 of Tamil Nadu Panchayats Act 1994

(v) Funeral Grants as permitted by the Government.

Administrative sanction for the items of expenditure of this Account shall be accorded based on the norms and conditions specified in G.O. (Ms) No.286, Dated:31.12.1999.

20. ACCOUNTS AND AUDIT

( C) Mode of Operation :-

The Village Panchayat Fund Account shall be jointly operated by the President and the Vice-President. In exceptional cases, where there is adversarial relationship between the President and the Vice-President, the Village Panchayat, may by a resolution authorize any member other than the Vice-President to operate the account along with the President, provided that the prior approval of the Inspector of Village Panchayats (District Collector) will be obtained for this.

2.Village Panchayat Payments of TNEB and / or TWAD Board Account : The existing Village Panchayat “Earmarked Grants Account: shall be renamed as “Village Panchayat Payments to TNEB and / or TWAD Board Payments Account”.

A. Receipts :

The details of receipts to be credited to the Village Panchayat payments to TNEB and / or TWAD Board Payments Account shall be;

1. Central Finance Commission Grants

2. State Finance Commission minimum grant of Rs.3 lakhs (or such other amount as may be prescribed by Government from time to time) for each Village Panchayats.

3. A part of State Finance Commission Grant (Other than the minimum grant) that may be released to those Village Panchayats where items No. 1 and 2 above are not sufficient to cover the payments to TNEB / TWAD Board.

(B) Expenditure

(i) Payment of electricity charges towards (a) street lights, (b) water supply systems maintained by the Village Panchayats, (c) buildings owned and maintained by the Village Panchayats and (d) other items of electricity consumption as billed to the Village Panchayats.

(ii) Service charges payable to the TWAD Board for Combined Water Supply Schemes if any.

(C) Mode of Operation

The account shall have to be operated only for the payment of electricity consumption charges to TNEB or the service charges payable to TWAD Board for the Comprehensive Water Supply Schemes if any( inserted in 2008 vide order No. 180: or for payment of surplus amount, if any, to the District Collector for redistribution of this amount to Village Panchayat Fund Account of the Village Panchayat concerned).. So all cheques from out of the above account will only be pertaining to payment to TNEB and / or TWAD Board (and/or the District Collector). No self drawal will be permitted. Collectors should instruct all the concerned bank branches in writing to make suitable ledger / computer entries to ensure that payments only to TNEB / TWAD Board are honoured for cheques pertaining to this account and no self -cheques or drawals based upon withdrawl forms are permitted for this account.

The worlds “for payments to TNEB and / or TWAD Board (and/or District Collector) only” should be printed / stamped on each cheque leaf of the cheque books issued for this account.

3. Village Panchayat Schemes Fund Account:

(A) Receipts:

1. Funds received under Centrally Sponsored Schemes (other than the funds received under NREGS).

2. Funds received under State Funded Schemes.

3. Funds received from any other Department / Agency / Board / Corporation for implementation of the schemes as may be prescribed.

(B) Expenditure:

The funds credited into the Village Panchayat Schemes Fund Account will be spent for payment of the works pertaining to the Central Schemes / State funded and other schemes as prescribed.

20. ACCOUNTS AND AUDIT

(C) Mode of Operation:

The above account shall be operated by the President and Vice President of the Village Panchayats concerned. However, Collectors should instruct the concerned bank branches in writing to make suitable ledger / computer entries to honour the cheques signed by the President and Vice-President only if they are accompanied by the released orders in the form of proceedings of the B.D.O. (Village Panchayats) for the payment of works from the Village Panchayat Scheme Funds concerned. The cheque leaves should also be stamped with "To be paid only if accompanied by proceedings of the B.D.O. (Village Panchayats)" and no self-cheques or drawals based upon withdrawal forms are to be permitted for this account.

4. Village Panchayat NREGS Account

This account will be operated only in districts implementing NREG Scheme in Tamil Nadu. The receipts which shall be credited to, the types of expenditure that can be incurred out of and the mode of operation of Village Panchayat NREGS Account are described as under:

(A) Receipts:

The receipts to be credited to the Village Panchayat NREGS Account shall be the funds received under NREG Scheme.

(B) Expenditure:

The funds credited into the Village Panchayat NREGS Account will be spent for payment of the works pertaining to the NREG Scheme as prescribed.

(C) Mode of Operation:

The above account shall be operated jointly by the President and Vice-President of the Village Panchayats as is done for the Village Panchayat Funds Account concerned. However, Collectors should instruct the concerned bank branches in writing to honour the cheques signed by the President and Vice-President of the Village Panchayats only if they are accompanied by the release order in the form of proceedings of the B.D.O. (Village Panchayats) for the payment of works from the Village Panchayat NREGS Account concerned. The cheque leaves should also be stamped with “To be paid only if accompanied by proceedings of the Block Development Officer (Village Panchayats)” and no self-cheques or drawals based upon withdrawal form are to be permitted for this account.

4. All District Collectors are requested to communicate the changes introduced by this Government Order to all banks / Block Development Officer (Village Panchayats) and Village Panchayats in their District.

B) Panchayat Unions are maintaining the following Accounts:

The Commissioner of Panchayat Union (BDO) is the account holder of all accounts of Panchayat Union.

1) Local Fund Deposit No.I (General Fund Account)

2) Local Fund Deposit No. II (Village Panchayat Consolidated Fund Account)

3) Local Fund Deposit No. III (Education Fund Account)

4) Local Fund Deposit No. IV (Self Sufficiency Scheme)

5) Local Fund Deposit No. V (Nutritious Meal Fund Account)

6) Local Fund Deposit No. X (NABARD (10%) Account)

The Accounts formats now maintained by the Panchayat Unions and the one prescribed by the Comptroller and Auditor General are on cash basis similar to the formats followed by all States uniformly.

The Panchayat Unions are run with meagre own resources an the major portion of receipts is by way of grants. The income from own sources in Panchayat Unions (rent, lease, toll collection, hire charges, income from sandai markets, revenue from rest houses, swimming pools etc.) is less that 10% of the total receipts of the Panchayat Unions.

The Panchayat Unions are not vested with powers to levy taxes. Most of the Panchayat Union Councils depend on Government grant only.

The state government vide GO No 435, dated 4.11.2003 RD Dept decided that the accrual system of accounting need not be introduced till additional functions are entrusted to Panchayat Unions making them asset based institutions of their own. At present the Panchayat Unions do not have adequate assets of their own.

C) District Panchayats are maintaining General Fund Accounts and Scheme Accounts. Chief Executive Officer of District Panchayats is the account holder of all accounts in District Panchayats.

V. Conclusion

The state government in Tamil Nadu through its policies (irrespective of which party rules) in the last 14 years have communicated that Panchayats are the implementing bodies of the State Programmes and Plans and not Institutions of Self-Government as per the spirit of Constitution.

The state government consistently violated and contradicted with the recommendations of all three State Finance Commissions in terms of devolution of financial resources due to the Panchayats. Further, Panchayats are facing more and more pressure and burden to meet the basic requirements of the people on the ground. Simultaneously the corruption process unleash in the State Politics also has major reflection in the Politics of Local Governance.

The Rural Development Department of the State is made as the ultimate authority on the functions of Panchayats (especially Village Panchayats) and the autonomy of Elected System has not provided with any empowering process of decision making. Gram Sabha has become a ritual as most of the Powers related to Land, Common Resources, education, health, PDS, Agriculture, irrigation, etc are vested with the State and whatever grievance raised by the people before the elected representatives, who have no control, authority, or management role in these functions have to petition the concerned line department.

Hence, it is extremely important to engage in Policy level discussion on Devolution of Powers, Functions and the required Financial Devolution from the State and Centre constitutionally.

Prepared by

Kalpana

Advisor, Tamil Nadu Federation of Women Panchayat Presidents (TANFeb)

Independent Researcher & Human Rights Activist

Chennai

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Sunday, October 14, 2012

Financial Devolution for Rural Local Bodies (Panchayats) in Tamil Nadu A Report on Status and Critique-June 2010

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