Why is the fiscal architecture of municipalities flawed?, Pg8

Key Highlights:

• Indian municipalities control less than 1% of the country's tax revenue despite urban India generating nearly two-thirds of the national GDP.
• Introduction of GST caused Indian cities to lose approximately 19% of their own revenue sources like Octroi, entry tax, and local surcharges.
• Municipal bonds are promoted as a new frontier of local finance, but their credibility remains low due to skewed assessment frameworks.
• Scandinavian countries empower municipalities to levy and collect income taxes directly, ensuring a transparent relationship between citizens and local governments.

Detailed Insights:

• Indian cities heavily depend on intergovernmental transfers, loans, and schemes due to the centralisation of taxation powers.
• Cities are expected to manage solid waste, affordable housing, climate resilience and digital infrastructure without adequate resources.
• Credit rating agencies often discount grants as "non-recurring income," perpetuating the myth that cities survive on charity.
• Property tax typically accounts for only 20-25% of a city’s total revenue potential and shifts the burden of urban financing disproportionately onto residents.
• A reimagined model of fiscal federalism is needed where municipalities have predictable, adequate, and untied revenues.
• Rating systems for municipal bonds must account for the governance capacity of a city, including transparency, audit compliance, and citizen participation.
• Cities should be empowered to earmark a portion of their GST compensation or State share as collateral for municipal borrowing.

Key Concepts Involved:

• Fiscal Federalism: A system of distributing financial powers and responsibilities between a central government and subnational governments.
• GST Compensation: Mechanism to compensate states for revenue losses arising from the implementation of the Goods and Services Tax (GST).
• Municipal Bonds: Debt instruments issued by municipalities to finance public projects.