Municipal finance: property tax, transfers and municipal bonds

Detail

1. Constitutional basis (Part IXA, added by the 74th Amendment, 1992)

• Art. 243X: taxes, funds and grants of municipalities. The word used is "may". The state may give these powers, but it does not have to. A state can give its municipalities four things by law:
• (a) power to levy, collect and keep taxes, duties, tolls and fees.
• (b) a share of taxes, duties, tolls and fees that the state collects. The state assigns this share to the municipalities.
• (c) grants-in-aid (money given to support a body's work) from the Consolidated Fund of the State.

• (d) funds set up to receive and pay out municipal money.

• Art. 243Y: the State Finance Commission (SFC) also reviews municipal finances.

• The SFC is set up under Art. 243I for panchayats. Art. 243Y gives the same SFC the job of reviewing municipalities too.
• The Governor sets up the SFC every five years.
• It recommends three things: how state taxes are shared between the state and municipalities, which taxes municipalities may levy, and what grants they should get.

• The SFC's report and an action-taken note are laid before the state legislature.

• Art. 280(3)(c): the Union Finance Commission. It suggests ways to increase the Consolidated Fund of a State so that the state can help its municipalities. This rests on the SFC's recommendations. The 74th Amendment added this clause. Art. 280(3)(bb), added by the 73rd Amendment, does the same for panchayats.

• Key point: the Constitution gives municipalities no tax of their own. Every tax power comes through state law. Compare the Union List and State List in the Seventh Schedule.

2. Own sources of revenue

Own-source revenue means money a city body raises itself through taxes, fees and charges, not money transferred from above.

• Property tax (a yearly tax on land and buildings, paid by the owner). It is the largest own revenue source of urban local bodies (ULBs). There are three ways to assess it:

Method	What the tax is based on	Weakness
Annual rental value (ARV)	Rent the property could earn in a year	Rent-control laws keep values low; disputes
Unit area value (UAV)	Built-up area × a fixed rate per square metre for the zone	Rates go out of date unless revised
Capital value (CV)	Market value of the property	Valuation must be updated often

• GIS mapping (digital maps that link every building to a tax record) finds properties that are missing from the tax rolls.

• Profession tax (a tax on professions, trades and jobs). Art. 276 caps it at ₹2,500 per person per year.

• Advertisement tax on hoardings and signboards.
• Entertainment tax by local bodies. It survived GST (Goods and Services Tax, 2017) because State List Entry 62 was amended by the 101st Amendment (2016). The amended entry keeps the tax power only for panchayats and municipalities.
• User charges (prices for a service, paid by the people who use it), such as water charges and solid-waste charges. Other sources are fees (licences, building permits) and fines.

• (NCERT, Class 6: local bodies collect "local taxes and fines". The chapter asks students whether some services in Indore are paid for.)

• Lost sources:

• Octroi (a tax on goods entering a city) was abolished in most states.
• Entry taxes were absorbed into GST in 2017.
• GST compensation went to the states, not straight to cities.

3. Weak finances: the problem

• NCERT (Class 11): local bodies have "very little funds of their own". They depend on state and Union grants.
• RBI Report on Municipal Finances (released 13 November 2024):
• It covers 232 municipal corporations, which is more than 90% of all municipal corporations [2].
• It covers the years 2019-20 to 2023-24 (Budget Estimates) [2].

• Its theme is "Own Sources of Revenue Generation in Municipal Corporations: Opportunities and Challenges". A primary survey on property tax adds to its findings [2].

• Main findings:

• The revenue account is in surplus, but municipal corporations still depend heavily on transfers and grants from the Union and state governments [2].
• For most corporations, own revenue does not cover revenue expenditure (day-to-day running costs). This hurts their functional and financial autonomy [2].
• Revenue is concentrated: the top 10 corporations take over 58% of all municipal revenue receipts.

• Total municipal revenue is only about 0.6% of GDP.

• RBI's property-tax prescription [2]:

• GIS mapping
• digital payment systems
• dynamic valuation (property values updated regularly)
• rate rationalisation and regular revision of rates

• better monitoring to plug leakages

• Contrast with Bolivia (NCERT, Class 11 box): Bolivia's decentralisation gave municipalities an automatic, per-capita share of national revenue. In India, transfers depend on state discretion.

4. Finance Commission grants

Item	15th FC (2021-26)	16th FC (2026-31)
Total for ULBs	₹1.21 lakh crore	₹3,56,257 crore (about ₹3.56 lakh crore) [3]
Structure	Grants for million-plus cities tied to air quality, water and solid waste; grants for other cities	Basic ₹2,32,125 crore (80%) + Performance ₹58,032 crore (20%) of the base amount [3]
Conditions	Notified property-tax floor rates (minimum rates), with collections growing; audited accounts published	Local bodies set up as the Constitution requires; provisional and audited accounts published; SFC set up on time [3]
Special parts	—	Special infrastructure ₹56,100 crore for wastewater in 24 cities with population of 10-40 lakh (Census 2011) [3]; urbanisation premium ₹10,000 crore [3]

• Urbanisation premium: a one-time grant to states [3]. It rewards two things:
• merging peri-urban villages (villages on a city's edge) into the nearby ULB [3];

• drafting a Rural to Urban Transition Policy [3].

• Total local-body grants under the 16th FC are ₹7,91,493 crore. Of this, rural bodies get ₹4,35,236 crore and urban bodies ₹3,56,257 crore [3].

• Conditional grants: grants paid only if the body meets set conditions. They push states to fix property-tax rates and publish accounts.

5. Market borrowing: municipal bonds

• A municipal bond is a debt paper sold by a city body to investors. The city borrows money for infrastructure and repays it with interest over a fixed period.
• Milestones:

Year	Event
1997	Bangalore: first municipal bond, with a state guarantee
1998	Ahmedabad: first bond without a state guarantee
2015	SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (ILMDS) [4]
2017	Pune issues bonds under the SEBI rules
2021	Ghaziabad: India's first certified green municipal bond, ₹150 crore, for a tertiary sewage treatment plant under Swachh Bharat Mission-Urban [6]
2023	Indore: public issue of green municipal bonds; offer documents filed with SEBI (December 2022 to February 2023) [4]

• Listing rules: bonds sold to the public must be listed on a stock exchange within 6 working days after the issue closes. Privately placed bonds must be listed within 4 working days [5].
• Green municipal bonds: SEBI's circular of 24 November 2022 sets disclosure rules for municipal bonds that count as green debt securities [7]. A green bond is a bond whose money can be spent only on environment-friendly projects.
• Incentive: MoHUA (Ministry of Housing and Urban Affairs) has given cities an incentive for bond issues under AMRUT (Atal Mission for Rejuvenation and Urban Transformation, 2015).
• What a city needs before it can borrow:
• a credit rating, which tells investors how safe the loan is;
• accrual accounting, which records income and costs when they arise, not only when cash moves;

• revenue-earning projects that can pay back the loan.

• Pooled finance: several small ULBs borrow together through one bond. This lets small towns reach the market.

• Urban Challenge Fund (Budget 2025-26): backs bankable city projects, meaning projects that can attract loans and private money.

Prelims Hooks

• Art. 243X: the state may authorise municipalities to levy taxes, assign them state taxes, give grants-in-aid and create funds. These powers are not automatic.
• Art. 243Y gives municipal finances to the same SFC set up under Art. 243I. There is no separate urban finance commission.
• Art. 280(3)(c) (74th Amendment) covers municipalities; Art. 280(3)(bb) (73rd Amendment) covers panchayats.
• Art. 276 caps profession tax at ₹2,500 a year.
• Entertainment tax by local bodies survived GST through State List Entry 62, amended by the 101st Amendment, 2016.
• RBI Report on Municipal Finances (Nov 2024): 232 municipal corporations; theme own sources of revenue; top 10 corporations take >58% of revenue.
• 16th FC: ULB grants of ₹3,56,257 crore; 80:20 basic-to-performance split; ₹10,000 crore urbanisation premium for merging peri-urban villages [3].
• Bond firsts: Bangalore 1997 (state-guaranteed), Ahmedabad 1998 (no guarantee), SEBI ILMDS Regulations 2015, Ghaziabad: first certified green municipal bond (₹150 crore) [6].
• Trap: the 15th FC tied ULB grants to notified property-tax floor rates. The 16th FC's entry conditions are about accounts and timely SFCs [3].

Mains Points

• Fiscal decentralisation trails functional decentralisation.
• The Twelfth Schedule gives cities 18 functions.
• Art. 243X leaves their money to state discretion.

• Result: the RBI found that own revenue does not cover running costs in most corporations [2]. This is "funds lag functions".

• Property tax is the key reform.

• The tools are GIS mapping, capital-value assessment, regular revaluation and digital collection [2].

• The Finance Commissions tie grants to property-tax floor rates and published accounts. This links outside transfers to the city's own effort.

• Transfers vs. autonomy: FC grants are growing, rising from ₹1.21 lakh crore to ₹3.56 lakh crore [3]. But grants with conditions can reduce local choice. Bolivia-style automatic per-capita shares are an option for predictable funding.

• Municipal bonds are useful but limited.
• Since 1997, few large cities have issued bonds, because the conditions are hard to meet: ratings, accrual accounts and bankable projects.
• Weaker ULBs can get there through pooled finance, green bonds [6][7], incentives and the Urban Challenge Fund.
• First, states must hold regular SFCs and city elections.