Own revenue sources of majority of the Municipal Corporations not adequate for meeting RevEx: RBI report

Own revenue sources of majority of the Municipal Corporations (MCs) in the country are not adequate for meeting the revenue expenditure, thereby affecting their functional and financial autonomy, according to RBI’s “Report on MCs”.

The Corporations need to boost their own sources of revenue through tax reforms, rationalise user charges, and strengthen collection mechanisms so that they can ensure more stable and sustained revenues, which in turn enables efficacious service delivery and urban infrastructure development, per the report prepared by officials of RBI’s Department of Economic and Policy Research.

Revenue receipts

The revenue receipts of MCs, including own tax revenue, own non-tax revenue, and transfers, amounted to 0.6 per cent of GDP in 2023-24 (the same as in 2019-20). MCs are are the third tier of the government in large urban areas.

Tax revenues are the largest source of revenue of the MCs (30 per cent of the total revenue receipts) followed by revenue grants, contributions, and subsidies (24.9 per cent) and fees and user charges (20.2 per cent). The other major revenue sources include assigned revenues, compensation, and rental income from municipal properties.

“Municipal corporations need to augment their own revenue sources for greater operational and financial flexibility. By optimising property and water taxes, increasing non-tax revenues, and adopting transparent governance practices, urban local bodies can improve their finances,” the report said..

RBI officials suggested leveraging technologies such as Geographic Information System (GIS) mapping and digital payment systems to enhance property tax collections.

Further, periodic revisions in water and drainage taxes, and fees and user charges, coupled with use of technology for plugging leakages, can also help improve their revenue collections.

Revenue Growth

The officials noted that growth in revenue earned through property taxes has not been commensurate with the rapid increase in property values in urban centres.

The lack of a systematic process for listing vacant lands has also hindered comprehensive coverage of taxable properties. Vacant lands often remain untaxed, and the vacant land tax is levied only when owners submit building plans for approval

“The demand for high-quality public services in urban areas is growing rapidly with a rising urban population. Yet MCs in India invested with this responsibility generate limited revenues and rely heavily on the upper tiers of the government for their funding needs, limiting their operational flexibility.

“State-specific strategies to strengthen MC finances through local taxation reforms, better enforcement, augmenting institutional capacity and transparent financial management are crucial for resilient municipal finances and effective urban development,” RBI officials said.

The report noted that compared to advanced economies and other comparable emerging market economies, Indian MCs generate much lower revenues and consequently, spend fewer resources as a percentage of GDP.

“The MCs have underdeveloped own-source revenue streams, including both tax and non-tax revenues. MCs that rely more on their own revenues enjoy greater financial autonomy and stability, allowing them to strategically plan and implement urban development projects without relying heavily on unpredictable grants from the upper government tiers,” RBI officials said.