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Panchayat Raj and Rural Development · Chapter 10

Local Body Finance

What to remember

  • Panchayats raise money from own taxes and fees, shared State taxes, grants from the State (on State Finance Commission advice) and grants from the Union Government (on Union Finance Commission advice).
  • The State Finance Commission (SFC) is set up under Article 243-I every five years to review Panchayat finances; the Union Finance Commission recommends grants to supplement the State's resources for local bodies.
  • Fiscal decentralisation works only when Functions, Funds and Functionaries (the 3 Fs) are transferred together.

1. Why local body finance matters

Local governments provide village roads, drinking water, drainage, street lights, sanitation and many basic services. They can do this only if they have a reliable and sufficient flow of money, and the freedom to decide how to spend it. The 73rd Amendment (1992, in force from 24 April 1993) therefore includes provisions on finance.

2. Constitutional provisions on Panchayat finance

ArticleProvision
243GState may give Panchayats powers and responsibilities for economic development and social justice (Eleventh Schedule)
243HState law may authorise Panchayats to levy and collect taxes, duties, tolls and fees; assign State taxes; give grants-in-aid; and constitute funds
243-IState Finance Commission to be set up within one year of the Amendment and then every five years
243JAudit of accounts of Panchayats
280(3)(bb)Union Finance Commission to recommend measures to increase the State's Consolidated Fund to supplement Panchayat resources

The Eleventh Schedule lists 29 subjects that may be given to Panchayats, such as agriculture, minor irrigation, drinking water, rural housing, roads, poverty alleviation, education, health and sanitation.

3. Sources of Panchayat income

A. Own revenue

  • Tax revenue: house or property tax, tax on vacant land, water tax, lighting tax, drainage tax (the actual heads are fixed by State law).
  • Non-tax revenue: fees for licences and permissions (building permits, trade licences), market and bus-stand fees, rent from shops and buildings, income from tanks, ponds and common property, fines.
  • Own revenue gives freedom, but it is small in most villages because incomes are low and tax collection is weak.

B. Assigned and shared revenue

  • The State may give Panchayats a share of State taxes or transfer certain taxes entirely, for example a share of duties on transfer of property. Arrangements are decided by the State law and the SFC.

C. Grants-in-aid

  • State grants: based on SFC recommendations, plus grants for State schemes and salary support.
  • Union grants: recommended by the Union Finance Commission, passed through the State to Gram Panchayats. These are of two broad kinds: basic (untied) grants, which Panchayats can use for local needs, and tied grants, which must be used for specified purposes such as sanitation and drinking water. Some grants have been linked to performance and reforms.
  • Scheme funds: Centrally sponsored schemes such as MGNREGA, PMAY-G and others, where money is spent as per scheme rules.

D. Borrowing: limited and needs State approval.

4. Finance Commissions

CommissionAppointed byMain task for local bodies
Union Finance Commission (Article 280)President, every five yearsRecommends sharing of Union taxes with States and grants to supplement resources of local bodies
State Finance Commission (Article 243-I)Governor, every five yearsRecommends sharing of State taxes between State and local bodies, grants-in-aid, and measures to improve Panchayat finances

Important: the SFC recommendations are sent to the State Government, which must place the report with an Action Taken Report before the Legislature. The Union Finance Commission uses the SFC reports while making its own recommendations. A Union Finance Commission's term is for a defined five-year award period.

Distinguish the vertical imbalance (local bodies have large duties but small revenue) from the horizontal imbalance (rich and poor Panchayats differ). Transfers are designed to correct both.

5. Budgeting in Panchayats

A Gram Panchayat prepares an annual budget showing expected receipts and planned spending. Steps:

  • 1. Estimate income from own sources and known grants.
  • 2. Hold Gram Sabha meetings to find local needs.
  • 3. Prepare the Gram Panchayat Development Plan (GPDP) using Gram Sabha inputs, with convergence of schemes. The People's Plan Campaign is the annual drive for this planning.
  • 4. Draft the budget for the next year, with separate accounts for receipts and payments.
  • 5. Approval by the Panchayat (and monitoring through the Gram Sabha); upper tiers prepare their own budgets.
  • 6. Spending through approved bank accounts, with receipts and vouchers.
  • 7. Accounts are kept and published online through eGramSwaraj, which replaced the older PRIASoft software.

Good budgeting principles: realistic income estimates, priority to essential services, funds for operations and maintenance, transparency, and reserve for emergencies.

6. Accounting, audit and accountability

  • Local Fund Audit: audit by the State's audit department.
  • CAG: gives Technical Guidance and Supervision (TGS) over audit of Panchayat accounts.
  • Social audit: community verification of work and spending, especially for MGNREGA.
  • Ombudsman and vigilance: to handle complaints on funds.
  • Online payments: PFMS and direct bank transfers reduce leakage.
  • Public display: income and expenditure must be shared in Gram Sabha and on boards.

7. Fiscal decentralisation

Fiscal decentralisation means giving lower tiers of government the responsibility and resources to spend and raise money.

The 3 Fs are:

  • Functions: actual powers and subjects (activity mapping of the Eleventh Schedule).
  • Funds: adequate and predictable money.
  • Functionaries: staff under the control of Panchayats.

Reforms and trends:

  • Direct transfer of Union grants to Gram Panchayat bank accounts rather than through higher tiers.
  • Move to untied funds and local choice of priorities.
  • Digital tracking of receipts and expenditure.
  • Own-source revenue improvement through property survey, mapping and tax revision.
  • Performance-linked grants that reward better accounts and tax collection.

Weaknesses: heavy dependence on transfers, scheme-tied spending, weak tax effort, shortage of trained accounts staff, and delays in release of SFC funds.

8. Urban and rural comparison

FeatureRural local bodiesUrban local bodies
Amendment73rd74th
Part of ConstitutionPart IXPart IXA
Finance Commission provision243-I243-Y
Schedule of subjectsEleventh (29)Twelfth (18)
Main own revenueHouse tax and feesProperty tax and fees

9. Role of the Gram Panchayat and the officials

The Sarpanch chairs the Gram Panchayat, while the Panchayat Secretary keeps records, collects taxes and maintains accounts. The Mandal Parishad Development Officer supervises Gram Panchayats in the mandal, and the District Panchayat Officer does so in the district. Annual accounts must be placed before the Gram Sabha. Funds may be withdrawn from the bank account only with the signatures prescribed by rule, and cash books must be kept up to date. Recovery of taxes can be done under the State law, and penalties apply to defaulters.

10. Why own revenue should be raised

A Panchayat that raises its own revenue is less dependent on higher governments and is more accountable to its people, because villagers pay and therefore ask questions. Ways to raise own revenue include updating property records, revising tax rates at regular intervals, collecting dues on time, leasing common assets in a transparent manner, and charging fair user fees for water supply and sanitation services. Good service delivery also improves willingness to pay.

Exam traps

  • Article 243-I is the SFC for Panchayats; Article 243-Y is the SFC for municipalities.
  • The Union Finance Commission is under Article 280; its recommendations on local bodies are in 280(3)(bb) and (c).
  • SFC is constituted by the Governor; the Union Finance Commission by the President.
  • SFC is set up every five years; the Union Finance Commission is also set up every five years.
  • Own revenue means taxes and fees levied by the Panchayat; shared taxes and grants are not own revenue.
  • Tied grants must be used for specified purposes; untied grants may be used by the Panchayat for local needs.
  • The Eleventh Schedule has 29 subjects; the Twelfth Schedule has 18.
  • The 3 Fs are functions, funds and functionaries.

One-liners

  • 1. The 73rd Amendment came into force on 24 April 1993.
  • 2. Article 243H deals with the powers of Panchayats to levy taxes.
  • 3. Article 243-I provides for the State Finance Commission.
  • 4. The SFC is constituted every five years.
  • 5. The Governor constitutes the State Finance Commission.
  • 6. The Union Finance Commission is constituted by the President.
  • 7. The Eleventh Schedule lists 29 subjects.
  • 8. Article 243J provides for audit of Panchayat accounts.
  • 9. House tax is a common Gram Panchayat own tax.
  • 10. GPDP stands for Gram Panchayat Development Plan.
  • 11. Tied grants are for specified purposes.
  • 12. Social audit is a community check of records and works.

Practice questions

  1. The 73rd Amendment came into force on

    1. 26 January 1950
    2. 1 June 1993
    3. 2 October 1992
    4. 24 April 1993
    Answer

    D. 24 April 1993

    The 73rd Amendment took effect on 24 April 1993.

  2. Which Article provides for the State Finance Commission for Panchayats?

    1. 243H
    2. 243J
    3. 280
    4. 243-I
    Answer

    D. 243-I

    Article 243-I covers the SFC.

  3. Which Article lets State law authorise Panchayats to levy taxes and fees?

    1. 243G
    2. 243H
    3. 243-I
    4. 243J
    Answer

    B. 243H

    Article 243H deals with taxes, duties, tolls and fees.

  4. Audit of Panchayat accounts is covered by Article

    1. 243-I
    2. 243-Y
    3. 243H
    4. 243J
    Answer

    D. 243J

    Article 243J deals with audit.

  5. The State Finance Commission is constituted by the

    1. President
    2. Chief Minister alone
    3. Prime Minister
    4. Governor
    Answer

    D. Governor

    The Governor appoints the SFC.

  6. The Union Finance Commission is constituted by the

    1. Speaker
    2. President
    3. Governor
    4. Chief Justice
    Answer

    B. President

    Article 280 empowers the President.

  7. The Eleventh Schedule lists how many subjects for Panchayats?

    1. 7
    2. 29
    3. 18
    4. 12
    Answer

    B. 29

    The Eleventh Schedule has 29 subjects.

  8. The Twelfth Schedule lists how many subjects for municipalities?

    1. 29
    2. 12
    3. 7
    4. 18
    Answer

    D. 18

    The Twelfth Schedule has 18 subjects.

  9. Article 243-Y relates to the Finance Commission for

    1. municipalities
    2. Panchayats
    3. co-operatives
    4. Union Territories only
    Answer

    A. municipalities

    Article 243-Y is for urban local bodies.

  10. Which of these is an own tax of a Gram Panchayat?

    1. Customs duty
    2. Corporation tax
    3. Income tax
    4. House tax
    Answer

    D. House tax

    House tax is levied by Panchayats under State law.

  11. Which of these is a non-tax own revenue of a Panchayat?

    1. Scheme funds
    2. Rent from shops
    3. SFC grant
    4. Union tax share
    Answer

    B. Rent from shops

    Rents and fees are own non-tax revenue.

  12. GPDP stands for

    1. General Public Development Programme
    2. Gram Panchayat Debt Policy
    3. Group Panchayat Dues Plan
    4. Gram Panchayat Development Plan
    Answer

    D. Gram Panchayat Development Plan

    GPDP is the annual local plan.

  13. The three Fs of fiscal decentralisation are

    1. farms, factories and forests
    2. functions, funds and functionaries
    3. fees, fines and forests
    4. finance, fees and food
    Answer

    B. functions, funds and functionaries

    All three must be transferred together.

  14. Grants that must be used for specified purposes are called

    1. own revenue
    2. bank loans
    3. tied grants
    4. untied grants
    Answer

    C. tied grants

    Tied grants are purpose-specific.

  15. Grants that Panchayats can use for local needs are called

    1. untied grants
    2. tied grants
    3. tolls
    4. fines
    Answer

    A. untied grants

    Untied grants give local choice.

  16. Which software records Panchayat accounts?

    1. Photoshop
    2. GSTN
    3. PRIASoft
    4. e-Courts
    Answer

    C. PRIASoft

    PRIASoft is used by PRIs for accounts.

  17. Technical guidance and supervision over local body audit is given by the

    1. Comptroller and Auditor General
    2. Election Commission
    3. NITI Aayog
    4. Finance Ministry only
    Answer

    A. Comptroller and Auditor General

    CAG provides TGS to State audit.

  18. SFC reports are accompanied by an Action Taken Report placed before the

    1. Gram Sabha
    2. State Legislature
    3. Supreme Court
    4. Parliament
    Answer

    B. State Legislature

    The State government must place it before its Legislature.

  19. Fiscal decentralisation means

    1. moving all taxes to the Union
    2. closing local bodies
    3. ending audit
    4. giving lower tiers money and powers to spend and raise revenue
    Answer

    D. giving lower tiers money and powers to spend and raise revenue

    It transfers responsibilities and resources.

  20. Vertical imbalance in local finance means

    1. no budget
    2. too many taxes
    3. rich and poor villages differ
    4. local bodies have large duties but small revenue
    Answer

    D. local bodies have large duties but small revenue

    Duties exceed revenue.

  21. Horizontal imbalance means

    1. differences in revenue capacity among local bodies
    2. too many Panchayats
    3. Union-State conflict
    4. no grants
    Answer

    A. differences in revenue capacity among local bodies

    Rich and poor Panchayats differ.

  22. A reason for weak own revenue in villages is

    1. excess grants
    2. low incomes and weak tax collection
    3. too much tax staff
    4. no population
    Answer

    B. low incomes and weak tax collection

    Own revenue is small in most villages.

  23. Direct transfer of Union grants to Gram Panchayat accounts helps by

    1. increasing audit
    2. ending Panchayats
    3. reducing delays through higher tiers
    4. reducing planning
    Answer

    C. reducing delays through higher tiers

    Direct transfer improves timeliness.

  24. A community check of records against works is called

    1. income tax audit
    2. stock audit
    3. social audit
    4. bank audit
    Answer

    C. social audit

    Social audit involves villagers.

  25. Why is Gram Sabha input used in GPDP?

    1. To set exam dates
    2. To reflect local needs in planning
    3. To fix prices
    4. To reduce taxes
    Answer

    B. To reflect local needs in planning

    GPDP is built from local needs.

  26. The People's Plan Campaign is used for

    1. bank audit
    2. census
    3. crop insurance
    4. annual Panchayat planning
    Answer

    D. annual Panchayat planning

    It is a drive to prepare local plans.

  27. Activity mapping is related to

    1. division of functions among tiers
    2. tax audit
    3. crop planning
    4. land survey
    Answer

    A. division of functions among tiers

    Activity mapping allocates Eleventh Schedule functions.

  28. Which provision lets the Union Finance Commission recommend measures to supplement Panchayat resources?

    1. Article 243-I
    2. Article 243J
    3. Article 280(3)(bb)
    4. Article 40
    Answer

    C. Article 280(3)(bb)

    280(3)(bb) refers to Panchayats.

  29. Which statement about performance-linked grants is correct?

    1. They punish all villages
    2. They reward better accounts and own revenue effort
    3. They replace audit
    4. They are bank loans
    Answer

    B. They reward better accounts and own revenue effort

    They reward reforms.

  30. Which is shared revenue rather than own revenue?

    1. House tax
    2. Shop rent
    3. Licence fee
    4. A State-assigned share of property transfer duty
    Answer

    D. A State-assigned share of property transfer duty

    Shared revenue comes from the State.

  31. A common weakness of local finance is

    1. heavy dependence on transfers
    2. excess trained staff
    3. no schemes
    4. too many own taxes
    Answer

    A. heavy dependence on transfers

    Most Panchayats rely on transfers.

  32. Through which portal can Panchayat plans and accounts be made public?

    1. Lok Sabha portal
    2. eGramSwaraj
    3. NABARD portal
    4. Election portal
    Answer

    B. eGramSwaraj

    eGramSwaraj publishes plans and accounts.

  33. Consider the statements: 1. Article 243-I deals with the SFC for Panchayats. 2. Article 243-Y deals with the SFC for municipalities. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  34. Consider the statements: 1. The Governor constitutes the SFC. 2. The President constitutes the SFC. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    The Governor does.

  35. Consider the statements: 1. The Eleventh Schedule lists 29 subjects. 2. The Twelfth Schedule lists 29 subjects. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    The Twelfth lists 18.

  36. Consider the statements: 1. House tax is an own tax of Panchayats. 2. Union grants are own revenue. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Grants are transfers.

  37. Consider the statements: 1. Tied grants are for specified purposes. 2. Untied grants can be used for local needs. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  38. Consider the statements: 1. The SFC is constituted every five years. 2. The Union Finance Commission is constituted every five years. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  39. Consider the statements: 1. The 3 Fs are functions, funds and functionaries. 2. Functionaries means grants. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Functionaries means staff.

  40. Consider the statements: 1. Article 243J deals with audit. 2. Article 243H deals with taxes. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  41. Consider the statements: 1. CAG gives technical guidance on audit. 2. Local Fund Audit is done by the State. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  42. Consider the statements: 1. GPDP is a local plan. 2. GPDP uses Gram Sabha inputs. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  43. Consider the statements: 1. Social audit is conducted by the community. 2. Social audit replaces all other audit. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    It supplements other audits.

  44. Consider the statements: 1. The 74th Amendment relates to urban bodies. 2. The 73rd Amendment relates to Panchayats. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  45. Consider the statements: 1. Own revenue comes only from Union grants. 2. Own revenue includes taxes and fees. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 2 only

    Own revenue is locally raised.

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