State Finance Commission for Panchayats (Article 243-I)

At a Glance

• What it is A commission to review the finances of panchayats every five years
• Article Article 243-I (and 243-H on taxes)
• Constituted by The Governor
• Central link The Central Finance Commission supplements state resources
• Exam link UPSC Prelims, Polity: Local Government: Panchayats and Municipalities

Where Does It Fit?

This is the fifth topic of the category on Local Government. Structural empowerment of panchayats means little without money. The Constitution therefore provides for powers to tax, for grants, and for a State Finance Commission.

Financial Powers of Panchayats

The state legislature may authorise a panchayat to levy, collect and appropriate taxes, duties, tolls and fees; assign to a panchayat taxes, duties, tolls and fees levied and collected by the state government; provide for grants-in-aid to the panchayats from the consolidated fund of the state; and provide for the constitution of funds for crediting all moneys of the panchayats. All these are voluntary provisions. The state legislature may also make provisions for the maintenance of accounts by the panchayats and the auditing of such accounts.

The State Finance Commission

The Governor of a state shall, after every five years, constitute a finance commission to review the financial position of the panchayats. It makes recommendations to the Governor on: the principles governing the distribution between the state and the panchayats of the net proceeds of taxes, duties, tolls and fees levied by the state and the allocation of shares among panchayats at all levels; the determination of taxes, duties, tolls and fees that may be assigned to panchayats; the grants-in-aid to the panchayats from the consolidated fund of the state; the measures needed to improve the financial position of the panchayats; and any other matter referred by the Governor in the interests of sound finance of the panchayats. The state legislature may provide for the composition of the commission, the qualifications of its members and the manner of their selection. The Governor places the recommendations with the action taken report before the state legislature. Constituting the State Finance Commission every five years is a compulsory provision. The Central Finance Commission also suggests measures needed to augment a state’s consolidated fund to supplement panchayat resources on the basis of the State Finance Commission’s recommendations (Article 280).

Sources of Panchayat Revenue

The Second Administrative Reforms Commission concluded that internal resource generation is weak, partly because of a thin tax domain and partly because panchayats are reluctant to collect revenue; panchayats are heavily dependent on grants; most grants are scheme-specific, leaving little flexibility; states are not keen to devolve funds; and in the critical Eleventh Schedule matters such as primary education, health, water and sanitation, it is the state government that still implements and spends. Overall, panchayats have responsibility but grossly inadequate resources. Gram panchayats are better placed than other tiers because they have a tax domain of their own, including property or house tax, profession tax, land tax or cess, vehicle taxes, entertainment tax, licence fees, water rate and lighting rate; the intermediate and district tiers depend on tolls, fees and non-tax revenue such as ferries, markets, and registration of vehicles.

Why Finance Is the Weak Link

The Roadmap for Panchayati Raj (2011-16) lists the reasons for sub-optimal performance: inadequate devolution of the 3Fs; excessive bureaucratic control; tied funds; overwhelming dependence on government funding; reluctance to use fiscal powers, since it is difficult to tax one’s own constituency; a weak Gram Sabha; parallel bodies created for scheme implementation; and poor infrastructure and training. Of these, the lack of funds is both a cause and a result of weak accountability: when panchayats do not raise their own resources, people are less likely to ask for a social audit. That is why the State Finance Commission, which is meant to give a rule-based share of state revenue, is considered the most important financial mechanism for panchayats, even though not many states have implemented the recommendations.

Why Is This Topic Important?

• Important mechanism Frequently asked in Prelims
• Link to Article 280 Central Finance Commission
• Mains angle Financial devolution gap

What Came Next?

The next topic covers elections to panchayats under Article 243K.

Key People and Terms

• State Finance Commission Reviews finances of local bodies
• Grants-in-aid State funds to panchayats
• Tied funds Funds for specific schemes
• Own-source revenue Taxes raised by the panchayat
• Action taken report Report on follow-up

Exam Corner

Mains Angle

Questions on this topic usually ask about fiscal federalism at the local level. Use these points to add depth.

• Fiscal gap Responsibility without resources
• Dependence on grants Scheme-specific funds
• SFC role Rule-based devolution
• Own revenue Reluctance to tax