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@SB: Good start!

Look at this USAID (India) report for some insight. 

Here is the link to the PDF. 

Take your time to read to understand the intricacies involved. Covers, among many other things, how SFCs evolved and performed (generally poor), how devolution of powers and functions to ULBs are undermined by local unwillingness to pay for services, and ULB fiscal powers &  fund transfer criterion.

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Page #5 of ARC's recommendations on Local Government has a lot of items that have been accepted by the union government, but not implemented yet at the state level.

e. The Action Taken Report on the recommendations of the SFC must compulsorily be placed in the concerned State Legislature within six months of submission and followed with an annual statement on the devolution made and grants given to individual local bodies and the implementation of other recommendations through an appendix to the State budget documents.(29)

Anything like above done yet in Karnataka?

Read more ...

h. SFCs should carry out a more thorough analysis of the finances of local bodies and make concrete recommendations for improvements in their working. In case of smaller local bodies such recommendations could be broad in nature, but in case of larger local bodies, recommendations should be more specific. With historical data being available with the SFC, and with the improvement in efficiency of data collection, the SFC would be in a position to carry out the required detailed analysis. The special needs of large urban agglomerations particularly the Metropolitan cities should be specially addressed by the SFC.(32)

How has Karnataka state finance Commission addressed special neds of a large Metropolitan area like Bengalurur? Nothing done here yet, right?

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A lot of above sounds like greek and latin, let me try in easier terms

• Direct tax: Money collected directly from citizens. Central govt collects Income tax, Local government collects property tax
• Indirect tax: Money collected indirectly from us by state or central governments. Like the VAT that you pay when buying anything. Or the entertainment tax you pay to the multiplex or IPL when buying tickets. Or the taxes, cess etc whe you pay for petrol.

How much of the tax you and me pay comes back to our local area, and how exactly does it travel down - that is the key thing to understand.

• Property tax goes directly to BBMP, very clearly (who did you write the check to?). But even there, as mentioned in Ramesh's article, collections need to be 5 times higher than they are.
• Extra money that we pay for Petrol in Bangalore, how exactly does that come back to Bangalore? Likewise for Entertainment tax (which goes to state), or various other cess (ex: education cess in phone bill, goes to Center) that we pay to state or center.
• How much of income tax paid by us comes back to support public works in Bangalore. JNNURM etc are adhoc measures, is there a clear way of sharing funds between central (Delhi), state (Karnataka), and City (Bengaluru)?

All of us need to demand a clear, transparent, and non adhoc way for center, state and local area to share funds (as in direct control of funds) for development work across the three tiers of governments. Without such clarity, changes to functional structure of government (Metropolitan Council, Board, directly elected mayor etc etc) wont do much. Creating new governing bodies would be like building new towns, but far far away from roads, rails or rivers :)

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Naveen, what you talk above is state vs center angle, and focus is more on collection. How you collect taxes is one thing, and then how you distribute it across the 3 tiers of governance (center, state, local area) is another.

As an example, even if center collects all income tax, do we know things like these on distribution side?

• What pecentage of it is shared with the state,
• and how is the distribution percentage derived?
• And then, how much of its share does state share with the local areas?
• Should state get all the percentage meant for itself and its local areas, and then decide how to distribute that further between local areas,
• or should the allocation be done by the center directly to local areas?

Both Collection as well as Distribution of Taxes needs some thinking to better enable local governments.

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SB - excellent thread. I had similar thoughts when I wrote the flwg on the another thread here.

Briefly, if states were mandated to collect all taxes from within their areas, including income-tax, sales tax, central excise, commercial taxes, etc. & share such collections with the central govt on say, a 60-40 basis, as also budget for expenditures in the same ratio (viz. 60-40), this alone would lead to much better performance as follows :

1) States will have incentives to improve tax collections since they benefit if the collection is larger, thus there would be better efforts followed by much higher collections.
2) Budget allocations under various heads will be dependent on priorities as decided by the concerned state & not based on a centrally administered budget, in most cases.
3) There is greater chance for better checks on corruption since the state becomes more directly responsible for collections, especially with reference to income-tax, which is being dodged by a staggeringly huge mass of people.
4) Competition between states will also help push efforts to collect more income tax from all those that fall under the net, but do not pay up.
5) No mutterings such as "Maharashtra contributes so much but gets so little".

The idea is to employ a closed loop within each state, as much as possible & escape the centrally administered budget funding & the inherent biases & inefficiencies based mostly on party considerations & political compulsions that have notoriously been plaguing the country & retarding it's progress. There will thus be "rich" states & "poor" states, & the rich states will be able to better address their priorities directly, whilst the poor states will aspire to improve & get on par with other rich states - a healthy economic competition will brew up, instead of state heads & party leaders making numerous trips to Delhi to get something sanctioned, which again depends on the central govt's own political compulsions.

Exceptions will of course be :
1) Poverty elimination programs where some states will be much more dependent on central assistance than others, based on human development & financial health of individual states.
2) Defense budgeting.
3) Foreign affairs.
4) Calamities funds.

Though railways & other national services such as highways, ports & harbors need to be administered centrally, development would take place based on state contributions also & budget sharing, thus, it would depend on what the state wants & not based on central govts own priorities.

Collection of all taxes locally at source is on one extreme, but we need to push for reducing the problem of an overlong, indirect chain between what is paid by local users (a growth sector) & the funds that are brought back to bear for local needs - development, services & maintenance. In fact, there is no close relation nor correspondence between revenues generated locally & resources allocated for development, demand & maintenance - thus, the system is deficient & weak as it more or less depends on 'political' needs of the ruling party rather than actual.

Escaping budget funding by creating closed loops with dedicated funds to a much larger extent than at present, wherever possible is also, perhaps the best way to involve citizens more actively as the ward committees will become more directly responsible for addressing local citizens' grievences & accounting of cash flows.

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