Panchayat Finance [UPSC Notes: Polity & Governance]

In this article, you can read about the Panchayat finances’ sources, management, control and generation for the UPSC exam. It forms a part of the polity part of the IAS syllabus. Panchayati Raj institutions and functioning are important for the civil services exam and candidates must study all their aspects.

Aspirants would find this topic very helpful while preparing for the IAS Exam.

Gram Panchayat Funds

A major portion of Part IX of the Constitution covering Articles 243C, 243D, 243E, 243 G and 243 K deals with the structural empowerment of the PRIs but the real strength in terms of both autonomy and efficiency of these institutions is dependent on their financial position (including their capacity to generate own resources). In general, Panchayats in our country receive funds in the following ways:

  1. Grants from the Union Government based on the recommendations of the Central Finance Commission as per Article 280 of the Constitution
  2. Devolution from the State Government based on the recommendations of the State Finance Commission as per Article 243 I
  3. Loans/grants from the State Government
  4. Programme-specific allocation under Centrally Sponsored Schemes and Additional Central Assistance
  5. Internal Resource Generation (tax and non-tax)

Across the country, States have not given adequate attention to fiscal empowerment of the Panchayats. Panchayats’ own resources are meagre. Kerala, Karnataka and Tamil Nadu are the states which are considered to be progressive in PRI empowerment but even there, the Panchayats are heavily dependent on government grants. One can draw the following broad conclusions:

  1. Internal resource generation at the Panchayat level is weak.
  2. This is partly due to a thin tax domain and partly due to Panchayats’ own reluctance in collecting revenue.
  3. Panchayats are heavily dependent on grants from Union and State Governments.
  4. A major portion of the grants both from Union as well as the State Governments is scheme specific. Panchayats have limited discretion and flexibility in incurring expenditure.
  5. In view of their own tight fiscal position, State Governments are not keen to devolve funds to Panchayats.
  6. In most of the critical Eleventh Schedule matters like primary education, healthcare, water supply, sanitation and minor irrigation even now, it is the State Government which is directly responsible for implementation of these programmes and hence expenditure. Overall, a situation has been created where Panchayats have responsibility but grossly inadequate resources.

For fiscal decentralization to be effective, finances should match expenditure assignments related to the transferred activities. This calls for a two-fold approach – first demarcation of a fiscal domain for PRIs to tap resources directly both Tax and Non-tax and second devolution of funds from the Union and State Governments.

In the Indian context, the concept and practice of local government taxation have not progressed much since the early days of the British rule. Most of the revenue accrual comes from taxation of property and profession with minor supplement coming from non-tax receipts like rent from property and fees for services. It is high time that a national consensus emerges on broadening and deepening the revenue base of local governments. A comprehensive exercise needs to be taken up in this sector on a priority basis.

The exercise will have to simultaneously look into four major aspects of resource mobilisation viz.

(i) potential for taxation

(ii) fixation of realistic tax rates

(iii) widening of tax base and

(iv) improved collection.

Devolution of funds from the higher tiers of the government forms a major component of the Panchayat’s resources.

Own Resource Generation

Though, in absolute terms, the quantum of funds the Union/State Government transfers to a Panchayat forms the major component of its receipt, the PRI’s own resource generation is the soul behind its financial standing. It is not only a question of resources; it is the existence of a local taxation system which ensures people’s involvement in the affairs of an elected body. It also makes the institution accountable to its citizens.

In terms of own resource collection, the Gram Panchayats are, comparatively in a better position because they have a tax domain of their own, while the other two tiers are dependent only on tolls, fees and non-tax revenue for generating internal resources.

The taxation power of the Panchayats essentially flow from Article 243 H which reads as follows: “the Legislature of a State may, by law

  1. Authorise a Panchayat to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits;
  2. Assign to a Panchayat such taxes, duties, tolls and fees levied and collected by the State Government for such purposes and subject to such conditions and limits;
  3. Provide for making such grants-in-aid to the Panchayats from the Consolidated Fund of the State; and
  4. Provide for constitution of such Funds for crediting all moneys received, respectively, by or on behalf of the Panchayats and also for the withdrawal of such moneys therefrom as may be specified in the law.”

State Panchayati Raj Acts have given most of the taxation powers to Village Panchayats. The revenue domain of the intermediate and District Panchayats (both tax as well as non-tax) has been kept much smaller and remains confined o secondary areas like ferry services, markets, water and conservancy services, registration of vehicles, cess on stamp duty and a few others.

A study of various State Legislations indicates that a number of taxes, duties, tolls and fees come under the jurisdiction of the Village Panchayats. These inter alia include octroi, property/house tax, profession tax, land tax/cess, taxes/tolls on vehicles, entertainment tax/fees, license fees, tax on non-agriculture land, fee on registration of cattle, sanitation/drainage/conservancy tax, water rate/tax, lighting rate/tax, education cess and tax on fairs and festivals.


The above details would help candidates prepare for UPSC 2020.

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