Tax collections at panchayat level are extremely low, which is posing a challenge to fiscal federalism and accountability, the Economic Survey said today.
Low level of tax collections by local governments in rural areas is posing challenge in reconciling fiscal federalism and accountability, the Economic Survey 2017-18 tabled by Finance Minister Arun Jaitley in Parliament said.
"Panchayats received 95 per cent of their revenues from the devolved funds from the centre/state, while generating only 5 per cent from own resources," it said.
Panchayats in states like Kerala, Andhra Pradesh and Karnataka do collect some direct taxes, while villages in states like Uttar Pradesh almost entirely depend on transfer funds, it said.
"This is because some state governments have not devolved enough taxation powers to the Panchayats - permissible taxes for Panchayats include property and entertainment taxes but not land taxes or tolls on roads," it said further.
As per the survey, land revenue collection remained low between 7 to 19 per cent due to low base values applied to properties and low rates of taxes levied.
In rural Kerala and Karnataka, which are ahead of others in devolving powers to panchayats, the house tax revenue collection is only one third of the potential.
"The centre which collects these taxes in some Union Territories (UTs) also did not fare better and was able to collect only 30 per cent of the potential revenue," the survey said.
Economic and political development has been associated with a rising share of direct taxes in total taxes, it pointed out, adding direct taxes account for about 70 per cent of total taxes in Europe, while in India it is only around 35 per cent.
"Unlike in other countries, reliance on direct taxes in India seems to be declining, a trend that will be reinforced if the Goods and Services Tax (GST) proves to be a buoyant source of revenue," said the survey.
The government's pre-budget document has called for a better data and evidence to evaluate the impact of 73rd and 74th Constitutional Amendments (that devolved more powers to the rural and urban local governments, respectively on India's federal structure, governance and accountability).
Stating that the local governments in India in tier 2 and tier 3 locations rely much more on devolved resources, it said they generate less tax resources and collect less direct taxes.
"The reason does not seem to be so much that they don't have enough taxation power. Rather, they are not fully utilising existing taxation powers," the survey said.
Posing questions ranging from a potential unwillingness to tax by state, stemming possibly from close proximity of state and citizens or citizens being able but unwilling to pay more because they are dissatisfied with quality of services, the survey said addressal is necessary so as to avoid a trap.
"...unless the underlying problems are identified and solved, the states and third tier governments could remain stuck in a low equilibrium trap forever depending on outside resources with weak accountability mechanisms and weak own- resource general capacity," it said.
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