Finances and Accountability of Panchayats in India

Like many countries including those with federal constitutions, local governments in India render public services locally to the residents of their jurisdictions. These public services include drinking water, sanitation, primary health & education, roads etc. Local Government in rural and urban India are called Panchayats and Municipalities that provide basic services in rural and urban areas respectively.

Panchayat became a constitutional entity in 1993, through the 73rd Constitutional Amendment Act. Panchayats are constituted in every fifth year through an election process and are operational in all States and Union Territories at three rungs, i.e. district, block, and gram/village. In small states, middle level is not mandatory.

Through 73rd Constitutional Amendment Act, Part IX-The Panchayat has been inserted into the Constitution. The section contains many provisions starting from Article 243, 243A to 243O. Article 243G mandates Panchayats to function as institutions of local self-government for economic development and social justice. It is expected from Panchayats to provide services on local subjects including twenty-nine matters listed in the Eleventh Schedule of the Constitution. The other constitutional provision envisages State Governments to devolve concomitant finances through assignment of taxes and non-taxes. In addition, Article 243-I provides for the constitution of state finance commission (SFC) after every five years to transfer resources from the state kitty to Panchayats in the form of devolution, grants – both conditional and unconditional, assignment of tax and non-tax handles. It was envisaged that the recommendations of SFC could generate stress on the state finances, hence, through the 73rd Constitutional Amendment Act, a sub-clause was inserted in Article 280 mandating Union Finance Commission (UFC) to suggest measures to augment the consolidated fund of states for Panchayats. So far, the 10th, the 11th, the 12th, the 13th, the 14th, and the 15th UFC have made recommendations and allocated grants to Panchayats.

Panchayat Finances

Panchayat finances consist of the following: a) own revenues, b) borrowings, c) vertical schemes of the union and state governments, d) grants from the SFC, and e) grants from the UFC.

Own Revenue

The former Union Minister of State for Rural Development, Shri G Venkat Swamy, while introducing the Constitution (73rd Amendment) Bill in the Parliament said, inter alia, the following:

Ideally, the assignment of taxes to Panchayats can be broadly associated with the tasks devolved to them. It may be noted that certain basic local functions do exist in the jurisdiction of Panchayats and demand significant funds. Own revenue covers hardly five to ten percent of total Panchayats’ expenditure. Since, Panchayat is a State subject, de-jure assignment of taxes to Panchayats varies across states. The way taxes and non-taxes are levied also differs considerably in States. However, property tax remains the mainstay of the own source revenue. However, this tax remains inelastic because of inefficient administration in its collection. Its assessment is based on the annual rental value of taxation and its associated evil: under declaration of rentals.

After own-source revenues, assigned revenues are the most efficient in the dispensation to Panchayats. Such revenues are levied and collected by the State government and are passed on to Panchayats for their use. Some States deduct collection charges. The practices in assigning revenue are marked by large interstate variation. However, typical examples of assigned revenue are the surcharge on stamp duty, professional tax, and entertainment tax. In many states, these taxes form part of the own-source revenue of Panchayats.

Water Tax, Lighting Tax, Animal and Vehicle Tax, Taxes on Professions, Trade, Callings and Employments, Boat Tax, Toll Tax are the other taxes which have been assigned to the Panchayats in most States.

The relative importance of these taxes varies from state to state. The block and district Panchayats are endowed with powers to collect very few taxes, whereas village Panchayats are given substantial taxing powers. In several cases, under the tax rental arrangement, the village Panchayats collect taxes and pass them on to the higher level of Panchayats (Alok 2006).

Borrowings

Part IX of the Constitution is silent on borrowings. Hence, it’s a common perception that Panchayats lack the authority to procure loans. It is noteworthy that the Local Authorities Loans Act of 1914, a Central Act, does exist enabling the grants of loans to local authorities including Panchayats (Alok 2009).

Vertical Schemes

In most states, a significant portion of Panchayat finances is provided by the Union Government through state governments. These financial transfers, primarily in the form of Centrally Sponsored Schemes (CSSs)¹ are administered by various ministries and departments of the Union Government, covering a wide range of subjects among the twenty-nine matters listed in the Eleventh Schedule of the Constitution. However, the efficacy of many of these schemes has been subject to scrutiny. It has been argued that CSSs should be converted to block transfers.

In the third decade of the twenty first century, the Panchayats are being increasingly recognised as implementing institutions for the schemes of line ministries. The most important of these is the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), where the Panchayats at the district, intermediate and village levels have been given specific responsibilities as principal authorities for planning and implementation. Similarly, other schemes, e.g., Jal Jeevan Mission, Swachh Bharat Mission, Samagra Shiksha Abhiyan, National Health Mission, Pradhan Mantri Awas Yojna, Pradhan Mantri Gram Sadak Yojna, Integrated Child Development Services etc., are also implemented by the Panchayats.

State Finance Commission (SFC)

Generally, proceeds from own sources contribute abysmal share to the local pool. Panchayats generally rely more on fiscal transfers from the State government in the form of shared taxes and grants. State taxes are shared as per the recommendations of SFC in many States. The SFC created, under Article 243-I, is viewed as the sub-national equivalent of the UFC. The legal provisions for the SFC are, therefore, similar to that of the UFC except the wordings of the first paragraph of Article 243-I that provides for the constitution of the SFC ‘at the expiry of every fifth year,’ This is not akin to the provision exits under Article 280 constituting UFC ‘at the expiry of every fifth year or earlier’. The missing part ‘or earlier’ disallows the constitution of a new SFC before the completion of the five-year-period. The article mandates SFC to review the financial position of the Panchayats and make recommendations to the Governor on the principles that should govern:

1. The distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State, and their inter se distribution between the Panchayats at all levels for such proceeds;
2. The determination of the taxes, duties, tolls and fees which may be assigned to, or appropriated by, the Panchayats;
3. The grants-in-aid to Panchayats from the consolidated fund of the State;
4. The measures needed to improve the financial position of the Panchayats;
5. Any other matter in the interest of sound finance of the Panchayats.

The first SFC of Andhra Pradesh, included the share of Union taxes in the state taxes and non-tax revenue to form the divisible pool. However, the first SFCs of Madhya Pradesh, and the second SFCs of Orissa have not included the share of union taxes and included only the state tax and non-tax revenues. The first SFCs of Tamil Nadu, Uttar Pradesh and West Bengal have gone a step further and recommended that only the tax revenues of the State form the divisible pool. As an exception, the Karnataka SFCs have adopted a different mechanism by using the phrase “Non-loan gross own revenue receipts” in defining the divisible pool.

Union Finance Commission (UFC)

With the insertion of the sub-clause, the successive UFCs have been recommending grants to Panchayats.

Firstly, the UFC-X, recommended a grant of Rs. 100 per capita of rural population to Panchayats, which was estimated to a total of Rs. 4,381 crore for five years, i.e., 1995-2000. The UFC recommended Rs 1000 crore for municipalities and the aggregated amount of Rs. 5,381 crore was 1.38 per cent of the union divisible tax pool.

Secondly, the UFC-XI, recommended a grant of Rs. 8,000 crore to Panchayats and Rs. 2,000 crore to municipalities for five years, i.e., 2000-05. The total amount of Rs. 10,000 crore represented 0.78 percent of the divisible pool.

Thirdly, the UFC-XII, proposed a sum of Rs. 20,000 crores to Panchayats and Rs. 5,000 crore to municipalities for five years, i.e., 2005-10. The aggregated amount of Rs. 25,000 crore was equivalent to 1.24 per cent of the central divisible pool.

Fourthly, the UFC-XIII, made a departure from the previous practice of ad-hoc lump-sum grants and calculated the grants in terms of a share of Panchayats and municipalities in the union divisible tax pool. The share was 1.5 per cent to Panchayats and 0.78 per cent to municipalities. That worked out to be Rs. 87,519 crore for five years, i.e., 2010-15.

Fifthly, the UFC-XIV, did not proceed on the path created by the UFC-XIII and reverted to old path by recommending an ad-hoc grant of Rs. 2,00,292 crore to Panchayats and Rs. 87,149 crore to municipalities.

Sixthly, the UFC-XV, recommended a marginal increase over previous number. The commission recommended Rs. 2,36,805 crore for Panchayats and Rs. 1,21,055 crore to municipalities for five years, i.e., 2021-26.

In 2023, the UFC-XVI was fully constituted. The commission is mandated to make its own assessment in recommending the path and quantum of fiscal transfer to Panchayats keeping various facts in view. Ideally, the share in the Union divisible is a better option for the Commission instead of recommending the ad-hoc lump-sum grants which is insensitive to inflation and keeps Panchayats devoid of national economic growth.

Enhancing Accountability and Transparency in Panchayat Finances

The concern has been raised, many times, by the Comptroller and Auditor General of India (C&AG), Shri Girish Chandra Murmu. He advocated transparency and accountability in the effective management of Panchayat finances.

One approach to enhance accountability and transparency in Panchayat finances is through proactive engagement with stakeholders. The stakeholders, including local residents, civil society organisations, government officials, and elected representatives, have a vested interest in the effective management of public funds and the delivery of essential services at the grassroots level. Therefore, auditors can gather valuable input, feedback, and insights by involving stakeholders in the auditing process.

Furthermore, the stakeholder engagement fosters transparency and accountability by promoting open communication, dialogue, and information sharing between auditors, Panchayat officials, and the community. Through transparent communication channels, stakeholders can be kept informed about audit findings, financial performance, and corrective actions taken to address deficiencies or irregularities. This transparency builds trust and confidence in the integrity of Panchayat governance and financial management processes.

Hence, the auditors play a key role in overseeing practices in financial management and ensuring compliance with legal and regulatory requirements. It is practically difficult for the C&AG auditors and Local Fund auditors to undertake audit requirements of about 2.72 lakhs Panchayats.

Timely preparation of accounts of panchayats is essential for timely audit. In this direction, Office of C&AG collaborated with the Institute of Chartered Accountants of India (ICAI), in 2023, to create a pool of accountants for strengthening accounting system at Panchayats².

Conclusion

In conclusion, enhancing accountability and transparency in Panchayat finances requires collaborative efforts and active engagement with stakeholders. Therefore, auditors play a crucial role in facilitating stakeholder engagement and gathering input to improve financial management practices and governance processes. They can effectively engage with stakeholders to gather inputs, promote transparency, and enhance accountability in Panchayat finances, ultimately contributing to improved governance and the service delivery at grassroot level.