Flaws in the Fiscal Architecture of Indian Municipalities
Indian cities generate nearly two-thirds of the national GDP but control less than 1% of the country's tax revenue. The introduction of GST led to the loss of local taxes like octroi, making municipalities dependent on intergovernmental transfers. The article argues for 'fiscal democracy,' where cities have the right to levy taxes directly, similar to Scandinavian models. It suggests that municipal bonds and a share of GST compensation could restore cooperative federalism and ensure cities are seen as foundations of national prosperity rather than just cost centers.
Key Points
- Municipalities lack fiscal autonomy and predictable revenue streams, leading to a 'peculiar inversion of democracy.'
- Over-centralization of taxation has weakened local governance and service delivery.
- Reforms should include empowering cities to earmark a portion of GST compensation for municipal borrowing.
Exam Facts
- Constitutional Context: 74th Amendment Act related to urban local bodies.
- Revenue Loss: Cities lost nearly 19% of their own revenue sources after GST subsumed local taxes like octroi.
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