Financial Management - Awareness and Knowledge - Part 2 PDF

REGIONAL CAPACITY BUILDING HUB
Module 2 Financial Management
Knowledge & Awareness Module
2011
Spondored by: Mission Directorate,JnNURM Ministry of Urban Development (MoUD),
Prepared by: Administrative Staff College of India (ASCI)
Jawaharlal Nehru National Urban Renewal Mission Regional Capacity Building Hub
Sponsored by: Sub Module : 2.1 Municipal Accounting Reforms

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Mission Directorate,JnNURM
Ministry of Urban Development (MoUD), Government of India, Nirman Bhavan, Maulana Azad Road, New Delhi 110 011 Prepared by:
Administrative Staff College of India (ASCI)

Bella Vista Campus, Raj Bhavan Road, Khairatabad, Hyderabad 500082 Phone: 04066533000 Ext 221, 040-66534221, Fax: 040 -23316211, Website: www.asci.org.in
Module Prepared by: Administrative Staff College of India (ASCI)
MODULE PREPARATION TEAM
Team Leader Prof. V. Srinivas Chary Editorial Advice, Guidance and Review Prof. D. Ravindra Prasad Prof. V. Srinivas Chary
Content Contributions
Mr. D V Rao Mr. Sreekanth Prof. D. Ravindra Prasad Prof. V. Srinivas Chary Prof. T. Murali Mohan Miss. Eshwari Alla Miss. Priyanka Kulkarni Peer Review: IDFC, New Delhi
Sub Module : 2.1 Municipal Accounting Reforms
COMPONENT BACKGROUND
INTENDED AUDIENCE(S)
LEARNING OBJECTIVES
MODULE OVERVIEW/CO NTENTS/ STRUCTURE MODULE DELIVERY OUTLINE
DESCRIPTION JnNURM is a reform-led urban governance strengthening and improvement at ULB, parastatals and state government levels. Financial Management reforms, therefore, is the cornerstone and a necessary condition for investments in mission cities as well as across ULBs the states. The module addresses the training needs of all functionaries elected as well as appointed - at ULBs, parastatals and other related urban governance institutions and state government departments who are directly or indirectly involved in urban management. The primary aim of this module is to help the municipal functionaries to provide a larger understanding on financial management reforms including accounting, budgeting and resource mobilisation so that, in turn they become enabled to sustain the investments being made through JnNURM. It is also intended to develop a basic understanding of key issues and their prospective solutions. This module provides an overall understanding of the key aspects pertaining to municipal accounting and budgeting reforms, national municipal accounting manual, accrual based double entry accounting system, budget practices, means of resource mobilization and cost recovery and innovative illustrations through case studies. Awareness Overview of Knowledge Skills
MODULE DELIVERY SUPPORTING MATERIALS MODULE DELIVERY MODULE PREPARATION
Additional supporting material is given in a CD enclosed with this module.
Send your feedback on the material, how they can be improved to schary@asci.org.in Centre for Urban Governance, Administrative Staff College of India
Introduction to National Detailed Municipal Accounts understanding on Municipal Accounting Manual Double Entry Reforms, Step by Step approach of Accounting Budgeting Practices and implementing Double System to Entry Accounting System Cost Recovery Mechanisms Accounts Overview of Municipal Professional and Budgeting Practices other municipal Overview of Resource officials Mobilisation mechanisms and Cost Recovery Presentations using powerpoint, interaction, group discussion and peer learning to find out differences and issues pertaining to good urban management, site visits where necessary, exercises, etc.
Contents of the enclosed Compact Disc (CD)
1. Soft Copy of the Module in PDF Format 2. Power Point Presentations of Financial Management Module 3. Reference Material for Sub Modules
Contents
2.1 Municipal Accounting Reforms ...................................................................................... 12 2.1.1. Introduction ................................................................................................................ 12 2.1.1.1. Need for updating municipal accounts ............................................................... 12 2.1.1.2. Current scenario .................................................................................................. 12 2.1.1.3. Advantages of cash basis of accounting ............................................................. 13 2.1.1.4. Disadvantages of cash basis of accounting ......................................................... 13 2.1.1.5. Continuance of the system .................................................................................. 13 2.1.2. Accrual Based Double Entry Accounting System ..................................................... 13 2.1.2.1. The 74th Constitutional Amendment .................................................................. 13 2.1.2.2. Single entry Vs Double entry.............................................................................. 14 2.1.2.3. Advantages of double entry accounting system .................................................. 15 2.1.2.4. Accrual based accounting system ....................................................................... 16 2.1.2.5. Benefits of accrual based accounting system...................................................... 16 2.1.2.6. Cash basis Vs Accrual basis of accounting......................................................... 17 2.1.2.7. Fund basis of accounting .................................................................................... 17 2.1.3. National Municipal Accounts Manual (NMAM) ...................................................... 19 2.1.3.1. Government of India (GoI) Initiative ................................................................. 19 2.1.3.2. National Municipal Accounts Manual Chart of Accounts ............................... 19 2.1.3.3. Major Head Code ................................................................................................ 19 2.1.3.4. Minor Head Code................................................................................................ 20 2.1.3.5. Detailed Head Code ............................................................................................ 20 2.1.3.6. Main books of account ........................................................................................ 21 2.1.4. Municipal Financial Management ............................................................................. 23 2.1.4.1. Revenue Income.................................................................................................. 23 2.1.4.2. Revenue Expenditure .......................................................................................... 23 2.1.4.3. Liabilities ............................................................................................................ 23 2.1.4.4. Assets .................................................................................................................. 24 2.1.4.5. Reconciliations .................................................................................................... 24 2.1.4.6. Financial Statements ........................................................................................... 26 2.1.4.7. Trial Balance ....................................................................................................... 26 2.1.4.8. Income and Expenditure Account ....................................................................... 26 2.1.4.9. Balance Sheet ...................................................................................................... 27 2.1.4.10. Statement of Cash Flows .................................................................................. 27 Sub Module : 2.1 Municipal Accounting Reforms
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2.1.3.7. Accounting documents........................................................................................ 21
Module 2 Financial Management 2.1.4.11. Receipts and Payments Account ....................................................................... 27 2.1.4.12. Notes to Accounts ............................................................................................. 27 2.1.4.13. Financial Performance Indicators ..................................................................... 27 2.1.5. Guidelines for Preparation of Opening Balance Sheet .............................................. 28 2.1.5.1. Assets and Liabilities .......................................................................................... 28 2.1.5.2. Listing and valuing fixed assets .......................................................................... 28 2.1.5.3. Depreciation of Fixed Assets ............................................................................. 29 2.1.5.4. Listing current assets........................................................................................... 29 2.1.5.5. Listing Liabilities .............................................................................................. 29 2.1.5.6. Revision of Opening Balances ............................................................................ 29 2.1.5.7. Good Practices Accounting Reforms: .............................................................. 29 2.2. Municipal Budgeting ................................................................................................ 32 2.2.1. Introduction ................................................................................................................ 32 2.2.2. Key principles for development of a good municipal budget .................................... 33 2.2.3. Types of Budget ......................................................................................................... 33 2.2.3.1. Line-Item Budget ................................................................................................ 34 2.2.3.2. Performance Budget............................................................................................ 34 2.2.3.3. Program Budget .................................................................................................. 34 2.2.3.4. Zero-based Budgeting ......................................................................................... 35 2.2.3.5. Case Study: Zero Based Budgeting in Madurai .................................................. 35 2.2.3.6. Outcome Budget ................................................................................................. 36 2.2.3.7. Case Study: Outcome based Budget - Kolkata Municipal Corporation: ........... 37 2.2.3.8. Participatory Budgeting ...................................................................................... 38 2.2.4. Budget Classification ................................................................................................. 38 2.2.4.1. Expenditure ......................................................................................................... 38 2.2.5. Budget Preparation and Execution......................................................................... 40 2.2.6. Budget Preparation Process ....................................................................................... 41 2.2.6.1. Establishment of Objectives ............................................................................... 41 2.2.7. Calendar for Preparing Municipal budget.................................................................. 42 2.2.8. Budget Execution ....................................................................................................... 43 2.2.9. Budget Maintenance and Monitoring ........................................................................ 43 2.2.10. Budget Watch Register ............................................................................................ 43 2.2.11. Current Scenario in Municipal Budget .................................................................... 44 2.2.12. Budgeting in the New Accounting System .............................................................. 44 2.2.13. Components of Budget in the New Accounting System ......................................... 45 2.2.14. Budget Reports......................................................................................................... 46 Sub Module : 2.1 Municipal Accounting Reforms
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2.2.4.2. Receipts ............................................................................................................... 39
Module 2 Financial Management What is NEW in the new Budgeting System ............................................................... 47 2.2.15. Making Budgets Inclusive: ...................................................................................... 47 A Review of Internal Earmarking of Municipal Funds in the States:.............................. 48 2.2.16. Constitution of BSUP Fund: Some Experiences ..................................................... 49 Case 1: BSUP Fund in Hyderabad ................................................................................... 49 Case 2: Pro-Poor Budgeting (West Bengal model) ......................................................... 49 2.2.17. Gender Budgeting: ................................................................................................... 50 2.2.18. Case Study - Budget Procedures with Focus on External Oversight ....................... 51 The Way Forward ................................................................................................................ 53 2.3. Revenue Improvement and Cost Reduction ........................................................ 55 2.3. Revenue Improvement and Cost Reduction ..................................................................... 56 2.3.1. Municipal Finances in India....................................................................................... 56 2.3.2. Municipal Revenues: ................................................................................................. 56 2.3.3. Composition and Trends of Municipal Revenues ...................................................... 59 2.3.4. Municipal Expenditure............................................................................................... 59 2.3.5. Composition and Trends of Municipal Expenditure .................................................. 60 2.3.6. Property Tax............................................................................................................... 60 2.3.6.1. Property tax - local revenue ................................................................................ 61 2.3.6.2. Rental Value Basis of Property Taxation: .......................................................... 62 2.3.6.3. Capital Value Basis:............................................................................................ 63 2.3.6.4. Problems of current systems: .............................................................................. 64 2.3.6.5. Property Tax Reforms under JnNURM .............................................................. 64 2.3.6.6. Reforms in Rate and Base Structure: .................................................................. 65 2.3.6.7. Reforms in Valuation and Assessment: .............................................................. 65 Unit Area System: ............................................................................................................ 66 2.3.6.9. Enhancing Property Tax Coverage: .................................................................... 69 2.3.6.10. Property Enumeration and Mapping ................................................................. 70 2.3.6.11. Property Identification Code ............................................................................. 70 2.3.6.12. Records Management........................................................................................ 70 2.3.6.13. Public Information ............................................................................................ 70 2.3.6.14. Self-Assessment Scheme .................................................................................. 70 2.63.6.15. Service of notices/bills .................................................................................... 71 2.3.6.15. Indexation: ........................................................................................................ 72 2.3.6.16. Improving Property Tax Collection Mechanisms: ............................................ 72 2.3.6.17. Incentives and penalties: ................................................................................... 73 2.3.6.18. Partnerships with other agencies:...................................................................... 73 Sub Module : 2.1 Municipal Accounting Reforms
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2.3.6.8. Reforms in Property Tax Administration: .......................................................... 68
Module 2 Financial Management 2.3.6.19. Monitoring and Enforcement: ........................................................................... 73 2.3.6.20. Citizen Interface Mechanisms: ......................................................................... 73 2.3.6.21. Grievance Redressal and Appeal: ..................................................................... 75 2.3.6.22. Training and Capacity building ........................................................................ 75 2.3.6.23. Recent Initiatives in Property Tax Reforms Case Studies ............................. 75 2.3.6.24. Good Practices practices in Self-assessment .................................................... 86 2.3.7. Other ULB Taxes: ...................................................................................................... 87 2.3.7.1. Vacant Land Tax: ................................................................................................ 87 2.3.7.2. Octroi: ................................................................................................................. 87 2.3.7.3. Advertisement Tax:............................................................................................. 88 2.3.7.4. Others: ................................................................................................................. 88 2.3.7.5. Advertisement Tax - Andhra Pradesh Experience: ............................................. 88 2.3.8. Non-Tax Revenues..................................................................................................... 90 2.3.9. User Charges .............................................................................................................. 90 2.3.9.1. Present Practices in User Charges: ..................................................................... 91 2.3.9.2. Mandatory reform under JnNURM .................................................................... 91 2.3.9.3. Tariff Setting: ...................................................................................................... 92 2.3.9.4. Tariff Policy Reform ........................................................................................... 94 2.3.9.5. Challenges to Achieve Full Cost Recovery ........................................................ 96 2.3.9.6. Preliminary Considerations ................................................................................. 97 2.3.9.7. Steps to implementing the reform ....................................................................... 99 2.3.9.8. Provisions for Water Charges in Andhra Pradesh ............................................ 100 2.3.10. Other Non Tax Revenues: ...................................................................................... 102 2.3.10.1. Fees from Markets and Slaughter Houses ...................................................... 102 2.3.10.2. Rent from shop rooms and buildings .............................................................. 103 2.3.10.4. Building permission fees................................................................................. 104 2.3.10.5. Trade licence fees ........................................................................................... 105 2.3.10.6. Encroachment fees .......................................................................................... 105 2.3.10.7. Parking fees ..................................................................................................... 106 2.3.10.8. Miscellaneous non-tax items........................................................................... 106 2.3.11. Duty on Transfer of Property ................................................................................. 107 2.3.12. Other Land-based Instruments of Cost Recovery .................................................. 109 a) Betterment levy .......................................................................................................... 109 b) Valorisation ............................................................................................................... 109 c) Impact fee ................................................................................................................. 109 d) Exactions .................................................................................................................. 110 Sub Module : 2.1 Municipal Accounting Reforms
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2.3.10.3. Good-will auction of shop rooms ................................................................... 104
Module 2 Financial Management 2.3.13. Cost Reduction ....................................................................................................... 110 2.3.13.1. Public Private Partnerships: ............................................................................ 110 2.3.13.2. Energy Audit: .................................................................................................. 111 2.3.13.3. Case Studies Energy Audit .......................................................................... 112 2.3.13.4. Good Practices - Improved Cost Recovery ..................................................... 113
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Sub Module 2.1 Municipal Accounting Reforms
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2.1 Municipal Accounting Reforms

2.1.1. Introduction
An account is a record of the financial transactions. Accounting system can be defined as the series of tasks in an organisation/institution by which transactions are processed as a means of maintaining financial records. Such a system should recognise, calculate, classify, post, analyse, summarise and report transactions. It presents a true picture of the financial position, ensures adherence to the budgetary provisions, ensures utilisation of funds strictlyin conformation with financial standards and would be useful for collection of revenues.
2.1.1.1. Need for updating municipal accounts

Accurate preparation of municipal accounts within the stipulated time is of vital importance in the overall functioning of urban local bodies (ULBs), among others, for the following reasons. 1. 2. 3. 4. 5. 6. 7. To ensure collection of revenues due to ULBs. To present true picture of the financial position of the ULBs To ensure utilisation of funds strictly in conformity with financial standards. To ensure adherence to the budgetary provisions. To prepare Budget Estimates and Administration Report. To detect misappropriation and misapplication of funds, frauds and errors To ensure timely conduct of audit and to initiate appropriate measures on the audit reports, and ultimately 8. To ensure good governance
2.1.1.2. Current scenario Sub Module : 2.1 Municipal Accounting Reforms

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Currently, municipal accounts are prepared on cash based system. Under this system, receipts and payments are recorded after they are actually received or paid in cash. It is a single entry system. All receipts and payments are classified into various heads of account and the closing balance at the year-end is arrived. The classification of transactions in municipal accounts has a closer reference to the functions, programmes and activities of the municipality. The classification of each item of receipt and payment has to be made according to the head of the account to which it relates. The adoption of cash basis owes its origin to the pre-eminence of budget as the principal means of financial control. A municipality, being a service oriented institution, needs to spend the monies received/raised only against planned expenditure. Further, its objective is not profitoriented and therefore nothing is mentioned about the performance or better utilization of resources and/or savings.

The cash based accounting system cannot stand for arithmetical accuracy, since receipt and payment records only are maintained. It does not distinguish between asset, liability, income and expenditure. As a result, financial performance of the municipality for a period and status of financial position at a given point of time cannot be ascertained.
2.1.1.3. Advantages of cash basis of accounting

It is easy to maintain. Heads of account similar for receipts and payments. Classification of transactions (heads of account) has closer reference to functions, programmes and activities of municipality.
2.1.1.4. Disadvantages of cash basis of accounting

Only receipts actually received are reflected and receivables are not known. Only payments actually made are reflected and payables are not known. Represents only surplus/deficit in cash. Assets and liabilities are not reflected, and consequently, financial strength (net worthiness) not reflected.
2.1.1.5. Continuance of the system

Since money transactions are done in cash, the single entry accounting system became the logical and accepted system of accounting. Simplicity is one of the main advantages of the cashbased single entry accounting system, and its wide appeal is also influenced by the prevailing institutional and operational conditions. Some of the factors promoting the continued use of the single entry system are the non-provision of actual transactions/liabilities/receivables in accounting, political apathy regarding fiscal and financial reporting and non-disclosure of financial status to higher levels of government and the public.
2.1.2. Accrual Based Double Entry Accounting System

2.1.2.1. The 74th Constitutional Amendment
The municipal functional domain is radically changing from infrastructure provision to regulatory and then commercialisation. The 74th CAA has enhanced the functional domain and even made the municipality to prepare plans for economic development and social justice. Even, the government grants stipulate collection of user charges on the infrastructure created with those grants/funds. Added to it, the heavy cost of infrastructure made the municipality to go for commercial borrowing/capital market. These factors necessitate that the accounting system be converted to facilitate determination of financial performance as well as assessment of financial status.
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Module 2 Financial Management 2.1.2.2. Single entry Vs Double entry

Single entry system of accounting is defined as a method in which transactions are recorded on a single entry basis. Only a single line is entered in the book for each transaction. Each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or payment. This system is demonstrated in the following example. Single Entry System Date Description Jan 1 Opening Balance Jan 2 Purchase of stationery Jan 4 Water charges received Jan 11 Shop room rent received Jan 21 Street lighting electricity bill Jan 31 Closing balance
Amount (Rs.) 1,000 (150) 275 125 (50) 1,200
The above system uses a single column, only the difference between receipt and payment is totalled - not the individual values of each. Knowing the individual total amounts of receipts and payments is important, for example, when formulating a budget. In the above example, the individual receipt and payment amounts can be determined only by sorting through the transactions and tabulating the receipts and payments totals separately. This process can be designed into the system by using a separate column for receipts and payments as demonstrated below: Separating Receipts and Payments Date Jan 1 Jan 2 Jan 4 Jan 11 Jan 21 Jan 31 Description Opening Balance Purchase of stationery Water charges received Shop room rent received Street lighting electricity bill Closing balance Amount (Rs.) Receipt Payment 1,000 150 275 125 50 1,200
The above example uses two columns. It still is considered to be a single entry system, since only one line is used to record each transaction. This single-entry system often is expanded to provide more useful information. For example, additional columns can be added to classify the receipts as taxes, fees, user charges etc. Some single-entry systems may add dozens of columns for different types of receipts and payments. Small enterprises can adopt such a system. It is not possible for a system which has large number of transactions. On the other hand, under the double entry system of accounting, every transaction has two sides debit and credit. For instance, if cash is paid for stationery, the transaction has resulted in depletion of cash (Cr) for the organisation due to expenditure on stationery (Dr). Likewise, if, for instance, a lessee pays shop room rent, the transaction has resulted in the increase in the
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cash balance (Dr) and generation of income (Cr) to the organisation. Thus, in double entry system of accounting, the two sides of a transaction are recorded in the account books. In this system, two entries are made for each transaction - one entry as a debit in one account and the other entry as a credit in another account. The two entries keep the accounting equation in balance so that: Assets = Liabilities + Owners' Equity (Reserves) To illustrate, consider a transaction involving receipt of water charges on Jan 4 for Rs.275. In a single-entry system, the transaction would be recorded as follows: Amount Date Description Receipt Payment Jan 4 Water charges received 275 In a double-entry system, the transaction would be recorded as follows: Date Jan 4 Accounts Cash a/c Dr To Water charges a/c Debit 275 Credit 275
A narration may be added to this journal entry to indicate that the receipt is from water charges. In this system, the double entries take the form of debits and credits, with debits in the left column and credits in the right. For each debit, there is an equal and opposite credit and the sum of all debits therefore must equal the sum of all credits.
2.1.2.3. Advantages of double entry accounting system

The following are the advantages of double entry accounting system over single entry accounting system: Recording of transactions in their entirety: Both the debit and credit aspects of a transaction are recorded to ensure the completeness of a transaction. Accuracy of financial statements: As the debit and credit elements of a transaction are recorded, the accuracy of the financial statements is established. Errors in recording of transactions can be detected and rectified with ease. Indicator of financial position: The Income and Expenditure Statement discloses the income earned or losses incurred during the financial year under report. The Balance Sheet discloses the financial health
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of the organisation on a given date. This is not possible in the case of single entry system of accounting. Reliability of MIS Reports: The reports generated from the books of account based on the double entry system of accounting give a reliable picture of the situation, as arithmetical accuracy is ensured. Thus, the status of the accounts of the customers, suppliers, assets and liabilities can be known with higher degree of reliability.
2.1.2.4. Accrual based accounting system

Determination of financial performance as well as assessment of financial status can be accomplished through accrual based accounting system. Accrual based accounting is a method of recording financial transactions based on accrual, i.e. on occurrence of claims and obligations in respect of incomes or expenses, assets or liabilities based on happening of an event, passage of time, rendering of service, fulfillment (partially or fully) of contract, diminution in value etc., even though actual receipt or payment of money may not take place. In this system, there is a change in accounting of transactions and reporting of financial results, so as to provide the municipalities with the financial reports, in the form of two important financial statements for the purposes noted against each: Financial Statement Income and Expenditure Account Balance Sheet, ie., Statement of Assets and Liabilities Purpose To determine the financial performance of the ULB To assess the financial status of the ULB
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2.1.2.5. Benefits of accrual based accounting system

Revenue is recognized as it is earned and that income constitutes both revenue received and receivable. Expenditure is recognized as and when the liability for payment arises and thus it constitutes both amount paid and payable Expenses are matched with the income earned in the year A distinct difference is maintained between items of ordinary nature and capital nature Costs which are not charged are carried forward and kept under constant review Surplus or deficit as shown at the year-end represents the correct financial position. Presents true picture of financial position of the municipality and helps in better financial management Assists in effective follow-up of receivables and payables Facilitates the credit rating organizations to appraise the financial position of municipality
Accrual system has to be recorded through double entry system. In a double entry system of accounting, each transaction consists of two elements, a debit and a credit. Debits must always
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equal credits. Because debits equal credits, it prevents arithmetical inaccuracies. The dual effect of each transaction is balanced.
2.1.2.6. Cash basis Vs Accrual basis of accounting

Cash basis of accounting differs from accrual basis of accounting in terms of the following: Cash Basis of accounting Statement of receipts and payments made based on entries recorded in the Cash Book Only one entry is made for a transaction (either receipt or payment)in the books of accounts Receipts and payments represent the amounts actually received and payments actually made The receipts and payments statement commences with the opening balance both cash on hand and cash at bank. Accrual Basis of accounting Income and expenditure account prepared.
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Two entries are made for each transaction in the books of account Income includes revenues actually received and receivable and expenditure includes both payments made or payable Income and expenditure account is confined to the year of accounting only and it will not include the items of income and expenditure relating to past or future years The difference between the two sides debit and credit will indicate the net surplus/deficit. The system shall, necessarily, have the Balance Sheet, ie statement of assets and liabilities.
The difference between the two sides receipt and payment will indicate the cash balance at the end of the period. The statement need not necessarily be accompanied by a statement of assets and liabilities
2.1.2.7. Fund basis of accounting

A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, recording cash and other financial resources, together with all related liabilities and residual equities or balances and changes therein which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. It is postulated that the fund basis of accounting helps in taking managerial decisions in a more conducive accounting environment. This is simply because governmental operations are by their very nature diverse. The other major factor is the need to assure legal compliance at every step. As a single government entity is involved in multifarious activities, each with a specific purpose; some in the nature of business and others as a part of service activity, it implies that each activity-purpose must be accounted for separately. Therefore, including all financial transactions in a single fund makes it difficult to analyze the way government funds are being used or expended. The linked problem is that in Government, usually separate entities become
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responsible for particular group of assets, unlike in the private sector where a single company will have all kinds of assets that are shown in its Balance Sheet. Therefore, governmental accounting system should necessarily be organized and operated on a fund basis.
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2.1.3. National Municipal Accounts Manual (NMAM)

2.1.3.1. Government of India (GoI) Initiative
During the National Workshop on Municipal Accounting Reforms organised by Ministry of Urban Development, GoI in September 2003, it was agreed that CAG with USAID - FIRE (D) support, would prepare National Municipal Accounts Manual and it would be provided to the State Governments by MoUD, based on which, States will develop State Municipal Accounting Manuals according to their specific requirements. Accordingly, CAG has developed National Municipal Accounts Manual (NMAM) and it was made available to all States in December 2004 for development of state specific Budget and Accounts Manuals conforming the provisions of NMAM to be used by all ULBs. Some States have developed state specific Manuals and revised the accounting rules.
2.1.3.2. National Municipal Accounts Manual Chart of Accounts

The first step in the Accounts Manual is Codification Structure. A Chart of Accounts (COA) has been designed. It defines the heads under which the transactions are classified and facilitates maintenance of accounts and preparation of financial statements. It not only fulfills the accounting requirements, but also the budgeting and MIS requirements; and will be flexible to consolidate and facilitate generation of various information reports. The Account Code primarily represents the subject of income, expenditure, liability or asset. It is a numeric and consists of 7 digits. The 7 digit code is structured as (i) Major Head Code, (ii) Minor Head Code and (iii) Detailed Head Code. The first three digits represent Major Head Code, the next two, the Minor Head Code and the last two, the Detailed Head Code. All the 7 digits are linked together and one is subset of the other.
2.1.3.3. Major Head Code

The financial statements of ULB are drawn at Major Head Codes of Account and hence this is a mandatory level of information. Keeping in view of ULB requirements, all Major Head Codes are incorporated. The first digit of the Major Head Code shall indicate the nature or type of the account. The first digit shall be assigned one of the following numbers depending on the nature of the account: '1' shall denote an account relating to 'Revenue Income' '2' shall denote an account relating to Revenue Expenditures '3' shall denote an account relating to 'Capital Receipts & Liabilities' '4' shall denote an account relating to 'Capital Expenditures & Assets' The next 2 digits of the Major Head Code shall denote the group codes for the various heads of accounts. For example,
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Code 1-10 shall denote Tax Revenue related accounts Code 2-10 shall denote Establishment Expenses related accounts Code 3-50 shall denote Other Liabilities related accounts Code 4-10 shall denote Fixed Assets related accounts
2.1.3.4. Minor Head Code

The Minor Head Code shall be of 2 digits. An item covered by a Minor Head Code is a subset of the Major Head Code. Thus, it shall be necessary to refer the Minor Head Code in conjunction with the associated Major Head Code. The Minor Head Code provides further details of transactions in respect of the Major Head Code it is associated with. For example, Under the Major Head Code 110 relating to Tax Revenue, the Minor Head Code 01 shall denote Property Tax Under the Major Head Code 210 relating to Establishment Expenses, the Minor He ad Code 10 shall denote Salaries, Wages and Bonus Under the Major Head Code 350 relating to Other Liabilities, the Minor Head Code 10 shall denote Creditors Under the Major Head Code 410 relating to Fixed Assets, the Minor Head Code 20 shall denote Buildings.
The schedules to financial statements of ULB are drawn at Minor Head Codes of Account and hence this is a mandatory level of information.
2.1.3.5. Detailed Head Code

The Detailed Head Code shall be of 2 digits. An item covered by a Detailed Head Code is a subset of the Minor Head Code. Thus, it shall be necessary to refer the Detailed Head Code in conjunction with the associated Minor Head Code. The Detailed Head Code provides further details of transactions in respect of the Minor Head Code it is associated with. For example, Under the Minor Head Code of Account 110-01 covering Property Tax, the Detailed Head Code 01 shall denote Property Tax - General. Thus, the Account Code for this will be 110-01-01. Under the Minor Head Code of Account 210-10 covering Establishment Expenses under Salaries, Wages and Bonus, the Detailed Head Code 04 shall denote City Compnesatory Allowance. Thus, the Account Code for this will be 210-10-04. Under the Minor Head Code of Account 350-10 covering Creditors, the Detailed Head Code 01 shall denote Suppliers. Thus, the Account Code for this will be 350-10-01. Under the Minor Head Code of Account 410-20 covering Buildings, the Detailed Head Code 01 shall denote Office Building. Thus, the Account code for this will be 410-20-01
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The detailed heads are to be identified by State Government. They can also give flexibility to the ULBs to add new heads. List of detailed heads are also provided in the Chart of Accounts.
2.1.3.6. Main books of account

The main books of account under the double entry system are (1) Cash book (2) Journal book; and (3) Ledger. 1. Cash book It is a book of original entry recording transactions involving cash and/or bank. It has two sides, receipt and payment. All collections shall be recorded on the receipt side and all payments on the payment side. Separate cash books shall be maintained in respect of each bank account. Similarly, separate books be maintained for separate Fund Accounts. It is a book of original entry for recording all transactions other than those involving cash and/or bank. A non-cash/bank transaction is first recorded in the journal book by dividing into its debit and credit aspects, from which a posting is made in the relevant ledger account. Recording of income in respect of property tax bills raised; or recording of liability on receipt of suppliers bills are examples of transactions, which shall be first recorded in the journal book It is a book containing all the accounts in the Chart of Accounts. The ledger has two sides, viz., Debit (Dr.) and Credit (Cr.). The head of account which is debited while recording an accounting entry in the Journal book or which is recorded on payment side of the cash book shall be posted on the debit side of the Ledger. Similarly, the head of account which is credited while recording an accounting entry in the journal book or which is recorded in the receipt side of the cash book shall be posted on the credit side of the Ledger. Each entry in the cash book and the journal book shall have a posting in the Ledger.
2.
Journal book
3.
Ledger
2.1.3.7. Accounting documents

Vouchers prepared at the ULB shall form the base documents for recording the transactions in the books of original entry. Four accounting documents are prescribed in the Manual. 1. Cash/Bank Receipt Voucher Cash/Bank Payment Voucher Contra Voucher A document prepared for recording receipt entries in the cash book. A cash receipt voucher shall be prepared for receipts in cash; and a bank receipt voucher for receipts by cheques, drafts or pay orders, which need to be deposited in banks for realization. A document prepared for recording payment entry in cash book.
2.
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3.
A document prepared for recording transactions involving deposit of cash into bank, withdrawal of cash from bank or transfer of amount from one bank to another.

4. Journal Voucher A document prepared for recording entries in the journal book. These entries do not involve any cash/bank related transactions
Some more registers, forms and documents are also prescribed.
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2.1.4. Municipal Financial Management
2.1.4.1. Revenue Income

The following 9 (nine) major heads of revenue have been identified and the accounting procedure in respect of all the revenue items have been explained in the Manual. 1) 2) 3) 4) 5) 6) 7) 8) 9) Tax Revenue Assigned revenues and compensation Rental income from municipal properties Fees and user charges Sale and hire charges Revenue grants, contributions and subsidies Income from investments Interest earned, and Other income.
All details regarding accounting principles, scheme of accounting the entries, accounting records and procedure, provisioning for doubtful recoveries, period-end procedure, writes-off and internal controls have been explained.
2.1.4.2. Revenue Expenditure

Revenue expenditure is classified into the following 11 heads of account. 1) Establishment expenditure 2) Administrative expenditure 3) Operation & maintenance 4) Interest & finance charges 5) Programme expenditure 6) Revenue grants, contributions and subsidies 7) Provisions and write off 8) Miscellaneous expenditure 9) Depreciation 10) Prior-period items 11) Transfer to reserve funds. Details regarding accounting records and procedure, accrued expenditure, treatment of prepaid expenditure and internal controls have been explained.
2.1.4.3. Liabilities
Liabilities are classified into the following 10 heads of account. 1) Municipal Fund
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2) Earmarked Funds 3) Reserves 4) Grants, contributions for specific purposes 5) Secured Loans 6) Unsecured Loans 7) Deposits received 8) Deposit works 9) Other liabilities 10) Provisions Details regarding creation of special funds, accounting principles, accounting records and procedure, investment of special funds, period-end procedures and internal controls have been detailed.
2.1.4.4. Assets
Assets are classified into the following 14 heads of account a. Fixed assets b. Accumulated depreciation c. Capital works-in-progress d. Investments general fund e. Investments other funds f. Stock-in-hand g. Sundry debtors (receivables) h. Accumulated provisions against debtors (receivables) i. Pre-paid expenses j. Cash and bank balance k. Loans, advances and deposits l. Accumulated provisions against loans, advances and deposits m. Other assets n. Miscellaneous expenditure to be writte-off Details regarding the accounting procedure in respect of purchase/acquisition (including acquisition by way of gift/donation) and disposal of fixed assets are explained. Accounting for revaluation of the assets and depreciation on the fixed assets are also explained. The accounting principles, accounting records and procedures, period-end procedures and internal controls are also explained. Similarly, the details about investments, stores, leases and hire purchases are also explained.
2.1.4.5. Reconciliations
The ULB has to prepare periodic accounts at quarterly basis and this shall be in addition to the annual accounts. To facilitate the preparation of these accounts, it is necessary to carry out daily and monthly reconciliations and other accounting procedures. The procedures to be followed on daily, monthly, quarterly and annual basis are detailed.
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The daily procedures cover, (a) Closing of Cash book (b) Physical verification of cash balance (c) Deposit of collections (both cash and cheques) in the bank (d) Checking ledger accounts with the books of original entries, i.e., Cash Book and Journal Book (e) Verification of number of receipts issued as reported by the collection office with the Collection Register, and (f) Updation of Subsidiary Ledgers. The monthly procedures cover (a) Bank reconciliation (b) Recording of expenditures incurred against permanent advance (c) Payment of statutory deductions and remittances (d) Payment of provident fund dues and pension contribution in respect of employees on deputation (e) Reconciliation of Function wise - Income/Expenditure Subsidiary Ledgers with respective Trial Balance totals (f) Compilation of details of closing stock for recording the consumption of stores at the end of the month, and (g) Closing of ledger accounts. The quarterly procedures cover (a) Reconciliation of deposits, advances, receivables and incomes (b) Provision for period-end expenses (c) Transfer of revenue grant received in advance for specific purpose to grant income (d) Recognition of grant income for revenue expenditure incurred in respect of grant receivable as reimbursement (e) Accrual of interest on borrowings (f) Recording of provision for bills remaining unpaid in respect of Special Fund expenditure (g) Accrual of interest on investments (h) Accrual of interest on loans to employees (i) Reconciliation of Capital Work in Progress (j) Reconciliation of Inter Unit Balances (k) Passing of adjustment entries, and (l) Closing of ledger accounts. The annual procedures cover (a) Physical verification of stores (b) Physical verification of fixed assets (c) Transfer of funds from Special Funds to Special Funds (Utilised) (d) Confirmation of all categories of advances (e) Provision for unrealised revenue (f) Accounting of pre-paid expenses (g) Contribution of difference in interest to the Provident Fund (h) Expenditure for the benefit of SC/ST/BC or similar other welfare schemes
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(i) Confirmation from Government/Quasi-government and Government owned agencies, and (j) Closing of ledger accounts.
2.1.4.6. Financial Statements

After completing the annual procedure and other reconciliation activities, the ULB shall prepare the Financial Statements. The Financial Statements consists of: 1) Balance Sheet 2) Income and Expenditure Account 3) Statement of Cash Flows 4) Receipts and Payments Account 5) Notes to Account 6) Financial Performance Indicators
2.1.4.7. Trial Balance

The process of preparation of financial statements shall be preceded by preparation of Trial Balance. The Trial Balance is a list of closing balances in all the accounts in the ledger and the cash books. The objective of preparation of Trial Balance is to determine the equality of the (posted) debits and credits, and to generate a basic summary of accounts for facilitating preparation of the financial statements like (1) Balance Sheet, (2) Income and Expenditure Account, (3) Statement of Cash-flows and (4) Receipts and Payments Account. Preparation of Trial Balance involves the following steps: a) All ledger accounts shall be closed at period-end and the debit and credit balances be totalled b) Debit balances to be posted in the debit column and the credit balances in the credit column of Trial Balance c) Posting of ledger accounts in the Trial Balance shall be in the same order as shown in the Chart of Accounts d) Cash books shall be closed and the balances posted in the Trial Balance e) Both debit and credit columns in the Trial Balance to be totalled Since every debit entry has a corresponding credit entry, the sum-total of debit balances in various account heads shall be equal to the sum-total of credit balances in other account heads. From the Trial Balance prepared, the ULB shall prepare Balance Sheet and Income and Expenditure Account.
2.1.4.8. Income and Expenditure Account

The Account details the income earned and the expenses incurred, and the excess of income over expenditure or vice-versa for that period. Since the financial statements are prepared under accrual basis, the Income and Expenditure Account shall include all the incomes earned during the year, whether actually received or not; and all the expenditure incurred whether actually paid or not.
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Module 2 Financial Management 2.1.4.9. Balance Sheet

Balance Sheet is prepared at the end of each accounting period to know the financial status as on that date. It presents the assets, liabilities and reserves of the ULB as on a specified date. Thus, the excess of the assets over the internal liabilities and borrowings indicates the networth of the organisation. Higher the net-worth, higher will be the credit-worthiness of the organization. The details of various Balance Sheet items should be provided through separate schedules and attached to the Balance Sheet.
2.1.4.10. Statement of Cash Flows

The statement is prepared to assess the ability of the ULB to generate cash and cash equivalents and the needs of the ULB to utilise those cash flows. Cash flow statement is used in conjunction with other financial statements to provide information to evaluate the changes in assets and liabilities of a ULB, its financial status, and the actual performance in terms of cash inflows and outflows.
2.1.4.11. Receipts and Payments Account

It shows the sources of funds and the applications of funds during the accounting period. The Receipts and Payments Account shall be prepared from the Balance Sheet, Income and Expenditure Statement, Ledgers and Cash Book.
2.1.4.12. Notes to Accounts

It shall comprise of statement of significant accounting principles, statement on contingent liabilities, subsidy report and other disclosures. The statement of significant accounting principles shall state important accounting principles followed by the ULB in respect of accounting of transactions and in the preparation and presentation of the financial statements. The statement of contingent liabilities represents an obligation relating to a past transaction or event or condition, that may arise in consequence of a future event now deemed possible but not probable. It represents a claim against the ULB which is contingent on the happening of a future uncertain event, the financial implications of which may or may not be ascertainable at the end of the accounting period. Subsidy report is one wherein general funds are provided to make good of the deficiency in respect of water supply, sewerage, lighting, solid waste management etc funds. Other disclosures mean other important financial information about the ULB, which have not been disclosed in the financial statements.
2.1.4.13. Financial Performance Indicators

A ratio is an arithmetical relationship between two figures. Some ratios have to be worked out to indicate the performance of the ULB. Financial ratio analysis is a study of ratios between various items or group of items in the financial statements of the ULB.
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The financial performance indicators to be worked out are: 1. Income Ratios 2. Expense Ratios

3. 4. 5. 6. 7. 8. 9. Net Income Ratios Efficiency Ratios Leverage Ratios Investment Ratios Liquidity Ratio Asset Ratios, and Performance Ratios.
2.1.5. Guidelines for Preparation of Opening Balance Sheet

2.1.5.1. Assets and Liabilities
Under accrual system of accounting, opening balance of assets and liabilities is a prerequisite. Detailed guidelines are issued in the Manual for preparation of opening balance sheet. The ULB shall bring to book all its assets and liabilities. This exercise can be taken up in three phases: List and value all fixed assets; List and value all current assets (bank balances, cash balances, investments, advances and receivables etc.); and List and value all liabilities ( Deposits, borrowings and payables etc.)
2.1.5.2. Listing and valuing fixed assets

The first exercise of listing and valuing fixed assets is making an inventory of all assets. All assets must be grouped under various categories, like land, buildings, vehicles, roads, etc. as identified in the Accounts Manual. Separate teams should be formed for collecting particulars for each category/class of assets (land, for instance). The Manual provides 29 formats for collecting the information. The designated team should collect particulars such as identification number (survey no. in case of land, registration no. in case of a vehicle, name of a building), location of the asset, its acquisition date, value, and so on. In the first instance, assets should be listed based on physical verification. Further details such as date of acquisition and value should be obtained, if available, from records. After having completed listing and collecting the particulars of all assets that can be 'seen', expenditure (sanctions) records should be examined to (a) list the assets that might have been missed in the first round, and (ii) capitalize expenditure incurred on refurbishing/ renovating/strengthening buildings, roads, parks, etc There would be cases, where particulars of acquisition date or value may not be readily available. In such cases, depending upon the kind of asset, a value has to be worked out that would correctly represent its economic worth. This exercise could be undertaken, if the relevant records are not traced.
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Module 2 Financial Management 2.1.5.3. Depreciation of Fixed Assets

Depreciation' is the charge of a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation of an asset is worked out with reference to the estimated number of years of useful life of the asset. The depreciation amount shall be deducted from the value of the fixed asset for the purpose of calculating opening balance of the assets.
2.1.5.4. Listing current assets

Current assets like bank balances, cash balances, investments, advances and receivables have to be worked out. The receivable cover all taxes, fees and lease amounts etc. due to the municipality.
2.1.5.5. Listing Liabilities

Similarly, the liabilities also have to be listed. The liabilities include borrowings, deposits, payables etc. The payables cover salary dues, pension dues, dues to contractors and suppliers, dues to government agencies etc.. It is advisable that the whole exercise is supervised and guided by a Steering Committee chaired by the Commissioner or Examiner of Accounts.
2.1.5.6. Revision of Opening Balances

Secondly, when the opening balance sheet is prepared for the first time, it may be possible that it is not correctly made. Even otherwise, it may become necessary to revise the Opening Balance in subsequent years. Guidelines for revision of Opening Balance have also been provided in the Manual.
2.1.5.7. Good Practices Accounting Reforms:

The Gujarat Accounting Initiative While Tamil Nadu is the best known and cited example of accounting reforms initiative, there are a few other city level initiatives as well. In 1990, as part of its financial assistance to Gujarat Urban Development Project in 1985, World Bank had insisted on the introduction of accrualbased accounting in the recipient municipal corporations (six in number) andalso in Anand, which had the status of a municipality. The process began in 1990 with the design of a financial accounting system for the municipal bodies by consultants, paid for by the World Bank.
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Later, after 1994, the same continued, with the municipalities paying. Finally, from 1998 onwards, the new system was operationalized. However, due to a number of reasons this effort could not be sustained. Chief among these were lack of involvement of consultants in the

implementation stage, lack of interest of the State Government to carry forward the work after World Bank assistance got over, lack of insistence on part of the Bank, inadequate scope of reforms which completely overlooked reforms in audit areas, lack of contextualization of the system to local requirements, among others. Karnataka Municipal Accounting Initiative: Karnataka is presently in the process of implementing fund based accounting system (FBAS) in all ULBs, the first state to do so in accordance to requirements of the NMAM. The grounds for shifting to fund based accounting was set by the Bangalore Agenda Task Force (BATF) which initially implemented this system in Tumkur (budget of around Rs.20 crores) and Bangalore (budget of around Rs.1000 crores). Both these ULBs shifted to FBAS in 2002. In 2003, based on learnings from this exercise BATF advised shifting of all ULBs to FBAS; this was undertaken by KUIDFC through ADB support. Karnataka has prepared uniform accounting and budget manual based on NMAM for implementation across 43 ULBs in the state in the first phase. Uniform software and training manuals have also been developed. Fresh commerce graduates have been recruited in most ULBs who are also being trained. Local firms of Chartered Accountants are being appointed as Field Level Consultants (FLCs) to prepare the opening balance sheer and implement the system. The entire initiative is being run under the Additional Secretary (Reforms), a special senior level position created to implement this. He is being assisted by a nodal firm (IPE) responsible for drafting the manual, budget rules, training and providing handholding support for implementation. The reports and MIS would also have the provision to be integrated and analyzed at the state level. This would allow benchmarks and detailed analysis through the software (developed by e Governments foundation). This is being implemented from 2005-06. Other Accounting Initiatives at City Level Importance of State Role: Apart from Tamil Nadu, Gujarat and Karnataka, there have been incidences where individual cities have wanted to shift to double entry accounting. Ludhiana is the best example which undertook all necessary groundwork to shift to double entry accrual system of accounting under dynamic leadership. However, once the leadership changed this initiative was given a cold treatment since the State Laws did not require ULBs to move to the more complex form of accounting. Agra is another such example which also undertook necessary ground work to shift to double entry accrual system of accounting but was thwarted in this initiative as they received no support from the State Government. Apart from these, metros like Chennai and Mumbai also shifted to double entry accounting system of accounting, but these reforms were not reflected at the state level till much later.
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Sub Module 2.2 - Municipal Budgeting
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2.2. Municipal Budgeting

2.2.1. Introduction
Budget is a financial plan describing proposed expenditure and means of financing the same. It embodies the estimated income and expenditure (both capital and revenue) for a financial year. It is a proposal of how much money is to be spent on what and how much of it will be contributed by whom or how it would be raised during a financial year. It plays an important role in planning and controlling operations of the ULBs. The budgeting process in ULBs, which involves both local officials and non-officials at many stages, is an important aspect of peopleoriented municipal governance. It is an instrument to promote accountability in the delivery of services and provision of infrastructure on the part of civic functionaries in addition to being a guide for planning revenues and expenditures and tracking financial performance. The main purposes of Municipal Budget are: a. Plan to keep local authorities solvent (expenditure well covered by revenue and reserves), realistic revenue estimation and also tap loans which can be obtained and repaid. b. Establishes priorities for plans and services c. Resource allocation to different activities to set level and direction of each work during budgetary period d. Legal authorization for expenditure during budgetary period. e. It should set goals and formulate a plan to achieve them f. Establish priorities in the selection of programmes g. Determine the level of taxation necessary to finance these programmes and identify the level of financing required from financial and other institutions h. Estimate the Income and Expenditure i. j. Serve as a control tool for the Municipalitys resources Provide the citizens a written document, which plainly describes activities and expenditures that will be undertaken during the next fiscal year. Serve as a day to day operations guide.
k. Serve as a short and long term planning tool l.
The Budget helps the ULB personnel to serve the citizens better while maintaining fiscal accountability. It also provides a framework for conducting the day to day operations of ULB. A good municipal budget is expected to play the following roles:
infrastructure and services;
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(1) A policy-making role in allocating resources between various categories of
Module 2 Financial Management (2) A management role in allocating resources to particular agencies/departments and
estimating the inputs personnel, equipment and money required to achieve specific outputs;
(3) A control role in giving authority to local officials to collect and spend money and in
prescribing who can spend how much and on what. In spite of the critical role that the budget plays, barring a few, there has not been any major attempt in the country to reform the municipal budgeting process. Majority of the municipalities follow complicated systems which have been continuing since the colonial times.
2.2.2. Key principles for development of a good municipal budget

There are certain key principles that can guide the development of a good municipal budget: Budget realism is very important. If a budget is unrealistic, it will be impossible to execute it as passed. An unrealistic budget undermines the credibility of the budget process, muddles rules for compliance and makes it difficult to hold responsible people accountable for its execution. Ownership of budget is a prerequisite for a quality budget and to ensure that the executing units can be held accountable for execution of their budgets. Budget comprehensiveness is the key to ensure that all public spending is subject to consistency and the ULBs can be held accountable for the use of public funds. In the absence of budget comprehensiveness, budgetary funds are likely to be diverted to offbudget activities, reducing transparency and accountability. Clarity and timeliness in budget preparation are critical to financial accountability. This enables both the ULB and civil society to hold the executive accountable for executing the budget as planned
2.2.3. Types of Budget

Budgets are several types including: i) Line Item Budget; ii) Performance Budget; iii) Program Budget, iv) Zero-based Budget and v) Outcome Budget. Normally, government budgets are planned and approved on a detailed line-item basis. However, actual spending may be controlled and managed on a broader and less detailed level. Each type of operating budget, however, differs in the way in which funds are allocated for expenditures and in the orientation of the budget: control, management efficiency, or planning. Budget Type Line-Item Performance Program Zero-Based Outcome Characteristics Expenditures and revenues related to commodities Expenditures and revenues related to work load Expenditures and revenues related to public goals Budget starts from scratch or as if it were for a new operation Related outcome with reference to input Criteria Control Management Efficiency Planning/Impact Cost-effective delivery of public services Outcome to input
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Sub Module : Municipal Budgeting
2.2.3.1. Line-Item Budget

The line-item budget is a financial document that lists how much the local municipality will spend on every item that it uses. Cost categories include personal services, operating expenses, and capital outlay. These cost outlays are often further detailed in object codes. For example, personnel expenses can be further separated into salaries, allowances and retirement benefits, etc. The primary orientation of a line-item budget is that of expenditure control and accountability. The line-item budget is relatively easy to prepare and illustrates how much money is appropriated to specific cost categories. While the simplest budget to prepare, the line-item budget does not provide any information regarding activities and functions of a program, department, or municipality. An example of a line-item budget is illustrated below. Example of Line Item Budget Expenditures Item 01 Personal Services 02 Supplies 03 Contingencies Sub total Amount (Rs.) 1,00,000 20,000 10,000 1,30,000
2.2.3.2. Performance Budget

A performance budget allocates money to various programmes within an organization but also details the service level on which the budget is predicated. The service level is identified by the use of performance measures. In addition to controlling costs, the primary orientation of the performance budget is that of improving the internal management of the programme. A performance budget is illustrated as follows: Example of a Performance Budget Road Maintenance/ Performance Measures Paving Roads Miles to pave: 10 miles Cost per mile: Rs.4,00,000 Sub total cost Resurfacing Roads Miles to resurface: 5 miles Cost per mile: Rs.1,50,000 Sub total cost Total Road Maintenance cost Amount (Rs.)
40,00,000
7,50,000 47,50,000
2.2.3.3. Program Budget

Program budget differs from the traditional line-item approach to preparing, reviewing, and presenting the budget. Rather than focusing on what the local municipality buys, a program budget allocates money to major program areas, focusing on the expected results of services and activities to be carried out. Program areas often utilized by government entities include
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public safety, public works, human services, leisure services, and general administration. The emphasis of program projects is on the attainment of long-term local community goals. Program areas are generally related to an organizations goals and often cross organizational lines. For example, public safety is considered to be a single program concern. A program budget is illustrated below: Example of a Program Budget Program Public Safety Fire Protection Police Protection Sub total Leisure Services Parks and Recreation Library Services Sub total TOTAL Amount (Rs.) 20,00,000 20,00,000 40,00,000 10,00,000 10,00,000 20,00,000 60,00,000
Both the performance and program budget use indicators to measure financial and operational performance, but the budgets have a different focus. A performance budget emphasizes management efficiency, whereas a program budget emphasizes the benefits that the local community gains from municipal expenditures.
Fund Based Budgeting. As for the legal provisions, The Kolkata Municipal Corporation (KMC) Act provides for fund based budgeting. It specifies that budget should be prepared in such a manner as to separately state the income and expenditure of the Corporation to be received and incurred in terms of the six accounts they are maintaining Water Supply, Sewerage & Drainage; Road Development & Maintenance; Bustee Services; Commercial Projects; Solid Waste Management and the General Head. It is noteworthy that the Act way back in 1980 had envisaged a system of Fund Based Budgeting.
2.2.3.4. Zero-based Budgeting

Zero based Budgeting is a budgeting and financial management strategy to help policy makers achieve more cost-effective delivery of public services. "Zero based" budgets may be useful for large ULBs which tend to renew and request resources for schemes and programmes simply because they have been funded before. The notion of a zero base means that each year's budget starts from scratch or as if it were for a new operation, with the idea that the ULB and each of its functions or activities must be justified in the light of competing demands for funding. Such budgets focus on the flows of revenue and expenditure as experienced by the ULB. These are useful in planning for the resources needed to meet routine and current obligations. More broadly, what we might term as the recurrent budget is the identification of all outlays expected during the current year except those related to long term debt payments. Therefore, this annual or operating or recurrent budget includes all expenses and asset procurements which would require funds from a single year's appropriations, grants or revenues.
2.2.3.5. Case Study: Zero Based Budgeting in Madurai
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Madurai Corporation has been using the concept of Zero-Based Budget (ZBB) for budget preparation. Budgets are prepared by the Accounts Department based on consolidation of budgets prepared by all departments. The budget is placed before the Standing Committee on Taxation and Finance for approval. Once it is approved, the draft budget is placed for public feedback (Box 2). The budget is then placed before the Council for approval. Once approved, it is then submitted to the State Government for approval. The governing Act provides detailed guidelines for preparation and presentation of ULB budgets. Although ZBB allowed for improved financial and perspective planning, budget prepared till date have generally been very rigid and fail to provide enough information for decision makers to allow for effective policy and resources linkages, and more importantly review trade-offs. Till the financial year (2005-06), budgets were prepared with a single-year perspective; resultantly, these were largely short sighted.
Box 2 Public Participation in Budget Preparation
Based on recommendations of the Second SFC, Madurai Corporation has made attempts for participatory budget preparation based on the Brazilian model. Draft budgets are circulated free of cost to Ward Committees and put up on Notice Board of the Corporation for feedback. However, public participation is still not as forthcoming as envisaged and the Corporation needs to take additional steps in ensuring citizens
New Concepts in Perspective Budgeting: For the financial year (2006-2007) Madurai Corporation, as required by State directives, has prepared a biennial budget to allow for long term perspective planning and ensuring that ongoing major projects do not get stuck mid-way. The revised budget for 2006-07, along with modifications, if any, was to be presented during the next budget session. Tamil Nadu is the first state in the country to bring in the concept of biennial budgeting system. The biennial budgeting concept is a novel means of ensuring continuity of reform action, as well as perspective planning, though only mid-term and not longterm. Madurai Corporation, on the whole, has taken steps towards perspective budgeting, but is lacking in its ability to use budget analysis as a tool for effective decision making inspite of using the ZBB.
2.2.3.6. Outcome Budget

Outcome budgeting symbolizes a shift from traditional budgeting in the sense that it goes beyond budgeting by inputs (how much can we spend) towards budgeting by measurable outcomes (what can we achieve with what we spend). The first step in developing an outcome budgeting system involves the process of defining the desired outcomes (outcomes are essentially more long term and typically are made up of more than one output) for the concerned department or function. This is followed by the process of identifying the interventions required for achieving target outcomes. Finally, the expenditure required for implementing the identified interventions is estimated, which forms a line item in the budget for that particular year. Benefits of Outcome Budget The outcome budgeting is a very good way to focus on the initiatives to meet vision, goals and objectives to improve the service delivery of municipal services. The use of outcome budgets for deployment of resources enables the cities to deliver the quality and level of services matching the expectations from citizens perspectives. As such, the implementation of Outcome
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Budgeting assists in productive deployment of public funds matching the citizens priorities and preferences. The outcome budget approach inducts several improvements in the entire budget preparation process in ULBs thereby addressing the existing weaknesses in their budgeting process. Some of these weaknesses are lack of citizens participation, missing linkage of policy, planning with budgeting, use of incremental budgeting, top-down budgeting approach, lack of performance measurement and monitoring and public oversight. The real value of Outcome Budget lies in its utility as a policy tool to establish effective linkage with allocation and disbursement of public funds on the basis of measurable performance. The goals of municipality in respect of being transparent and accountable towards citizens is facilitated through use of Outcome Budgeting approach and dissemination of the budgeted and actual financial outlays, outputs and outcomes through internet, newspapers etc. The outcome budget can be used as a tool to enhance the productivity of individual staff, service centers/units and departments. The implementation of Outcome Budgeting facilitates effective monitoring of performance of individual staff, service centers/units and departments. Preparation of outcome budget also meets the recommendations of JNNURM in this respect; and the citizens satisfaction is ensured through meeting their outcome goals progressively year after year with use of Outcome Budget approach.
2.2.3.7. Case Study: Outcome based Budget - Kolkata Municipal Corporation:

Budget Process: Every year Municipal Finance and Accounts Department (MFAD) initiates the budget process by holding discussions with various department heads to understand the extent of work they are going to execute in the forthcoming year. Deliberations are held where the officers of the MFAD brainstorm on the extent of work successfully completed in the last year. Using this information they come up with the most logical and rational budget estimate of expenditure. More stress is put on capital expenditures and their rationale and future financial impact on the KMC. In some cases the techniques of doing a zero based budgeting are also taken up. The budget is then discussed between the Mayor-in-Council, and the Mayor and the Deputy Mayor take an active role in formalizing the budget. The budget is then placed before the full house of Councilors for necessary adoption. Rolling Plan: KMC is considering adopting a rolling budget technique with 5 year vision plans to come out of the short sighted approach of budgeting on yearly basis. Along with this, Government of India and many donor agencies are pressing for performance based outcome/output budgeting. KMC is also analyzing this side so as to adopt the outcome measures in the fold of budgeting. Also under serious consideration is the integration of budgeting with economic analysis and integration of the budgeting with accounting function. Reporting: Already, the KMC has started publicizing the projects it intends to undertake, so that the citizens can scrutinize the performance of the KMC. KMC is doing this under the banner of Guard the Guardians where it has through newspaper advertisements published the proposed capital spending in each ward for the year. Hereby, the KMC is paving the way for social audit by the citizens themselves. This is a positive step even though it could be improved in the future by mentioning the expected benefits and outcomes (kms of roads constructed, level of increase in water connections etc). This would allow better social audit and monitoring against clearly defined and visible benchmarks.
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Module 2 Financial Management 2.2.3.8. Participatory Budgeting

Participatory budgeting (PB) began more than a decade ago in Porto Alegre, one of the most populated cities in South Brazil. PB is a process through which citizens present theirdemands and priorities for civic improvement, and influence through discussions and negotiations the budget allocations made by their municipalities. Since 1989, budget allocations for public welfare works in Porto Alegre have been made only after the recommendations of public delegates and approval by the city council. Participatory budgeting has resulted in improved facilities for the people of Porto Alegre. For instance, sewer and water connections went up from 75 percent of total households in 1988 to 98 percent in 1997. The number of participants in the participatory budgeting process in Porto Alegre reached 40,000 per year in less than a decade, indicating PBs ability to encourage increasing citizen involvement. The success of peoples participation in determining the use of public welfare funds in the city of Porto Alegre has inspired many other municipalities to follow suit. So far, of the 5,571 municipalities in Brazil, more than 140 (about 2.5 percent) have adopted PB. The positive impact of PB is a noticeable improvement in the accessibility and quality of various public welfare amenities in those municipalities that have adopted it. The participation and influence of people belonging to low-income groups in the budget allocation process are proof of their empowerment. However, lack of representation of very poor people in the process is a shortcoming of PB that needs to be addressed.
2.2.4. Budget Classification

Budget classification is based on the objective of enforcement of accountability on the part of various functionaries. The following are the broad heads under which the Municipal Budget estimate is prepared: Receipts Ordinary/Revenue Receipts Capital Receipts Expenditure Ordinary/Revenue Expenditure Capital Expenditure
2.2.4.1. Expenditure
The expenditure incurred by a Municipality can be broadly classified into (a) Revenue Expenditure and (b) Capital Expenditure.
2 3 4 5 6
Administrative Expenses Operations and Maintenance Interest and Finance Expenditure Programme Expenses Revenue Grants and Contribution.
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(a) Revenue Expenditure: Revenue expenditure can be defined as the outlay benefiting only the current year. It is treated as expenditure to be matched against revenue. The following are the broad categories of revenue expenditure. 1 Establishment Expenses

The department heads based on their past experience and also taking into account the future developments estimate the expenditure for each of these heads. The revenue expenditure can be broadly classified into two broad categories Regular or Recurring and Non- Recurring expenditures. For all recurring or routine expenditure, the department heads shall base their proposals for the next year on the actual expenditure for the current year upto the date of commencement of the budget preparation process as adjusted by the estimates for the balance part of the year. For the non-routine expenditures, the functionaries shall base them on the objectives set by the Municipality and the plans spelt out. The Commissioner/Secretary of Municipality shall ensure that the budget proposals for routine expenditures are based on the revised budget estimates of the previous year and not based on the budget of the previous year. Further, the budget proposals for non-routine expenditure are backed by proper justification. The department head shall ensure that the budget proposals made are in line with the goals and objectives spelt out. (b). Capital Expenditure: Capital expenditure can be defined as the expenditure intended to benefit future period in contrast to a revenue expenditure, which benefits the current period. The term is generally restricted to expenditure that adds fixed asset units or that has the effect of improving the capacity, efficiency, life span or economy of operations of an existing asset. The objectives laid down for the municipality drive the capital expenditure budget. The capital expenditure incurred during the year can be either on account of the on going works, the expenditure for which is expected to be recognized during the year and the new development works that may start during the year. In addition to the public works, the department heads shall also estimate the capital expenditure that may be incurred on other assets, movable or immovable. The department head shall however note that the budget proposals for capital expenditure are not be based on what will be paid out during the year but will be estimated on what will be incurred during the year.
2.2.4.2. Receipts
The Receipts of a Municipality can be classified into (a) Revenue Receipts and (b) Capital Receipts. a. Revenue Receipts: The revenues drive the municipalitys operations. It generates the cash flow for the running the municipality and for the development works of the Municipality. The Municipality derives its revenue mainly from the following sources(i) tax revenues, (ii) non tax revenues, and (iii) grants. Tax Revenues: The tax revenues broadly include the following 1. Property tax 2. Profession tax Employees / Traders and Institutions 3. Advertisement tax 4. Entertainment tax 5. Timber tax The Revenue Officer of the municipality shall depending on the economic activities including the growth in real estate, the business environment and other relevant factors estimate the
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property tax and other taxes that will accrue for the year. The past data and the current year trend can be used to estimate the revenue. The Revenue Officer shall also estimate the collections during the budgeting year and the same shall also be part of the budget proposal estimation document. Non Tax Revenues: The non tax revenues broadly include the following 1. Revenue from properties 2. Fees and User Charges including License Fees 3. Sale and hire charges The department head concerned shall estimate the revenue from these categories of income. In case of revenue from municipal properties, the Revenue Officer can estimate the income by preparing a list of properties and make adjustments for the escalations, if any, during the year. (b).Capital Receipts/Grants: Capital receipts include transfers from Municipal General Revenues for the execution of developmental works, grants released by the State Government and Government of India for specific works/schemes, Loans from Market, HUDCO and other sources.
2.2.5. Budget Preparation and Execution

Preparation of budget is one of the most important activities of any Municipality. Budgets are not predictions for the future. The goal of budget is to tell what we need to know to take meaningful actions in the present. Preparation of budget is more of a team work involving many players and effective coordination between all of them is essential for preparing a meaningful and timely budget that shall enable the Municipality to achieve its objectives. The responsibility matrix sets out clearly the roles and responsibilities of each of the players involved in the budgeting exercise. An illustrative responsibility matrix is given below. Illustrative Responsibility Matrix Activity Responsibility Convene initial budget meeting of key players including the Mayor / Chairperson Mayor / Deputy Chairperson, and the Chairpersons of the Standing Committees concerned to decide the objectives for the budgeting year. Preparation of Budget Calendar Deputy Mayor / Deputy Chairperson with the assistance of Commissioner/Secretary Prepare the budget proposals estimation sheet and send it to Accounts Officer the department heads and implementation officers. Coordinate and assist the department heads / implementing Accounts Officer officers in understanding the coding structure including the chart of accounts and help in preparation of budget Department heads / implementing officers to complete and Department head / return the estimation sheets. implementing officers Consolidate and verify the budget proposals prepared by the Accounts Officer & department heads. Secretary/Commissioner Prepare the draft budget proposals and check whether the Standing Committees concerned budget proposals reflect the objectives spelt out before the preparation of budget Convene a meeting of the concerned Standing Committees to Deputy Mayor / Deputy discuss the draft budget proposals before it is submitted to Chairperson
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the Standing Committee for Finance Preparation of budget by the Standing Committee Placing of Budget before the Council Approval of Budget
Standing Committee for Finance Standing Committee for Finance Council
2.2.6. Budget Preparation Process

The budgeting process broadly involves the following stages 1) Establishment of clear set of objectives for the Municipality for the budget year 2) Prepare a budget calendar indicating the activities and the timelines for completion of each activity 3) Estimation of Revenue and Expenditure by the respective departments/ implementing officers (revenue and capital) 4) Consolidation of budget proposals by the Accounts Department and perusal of the same by the Commissioer/Secretary 5) Submission of the budget proposals by the Secretary to the Standing Committees concerned 6) Submission of the budget proposal by the Standing Committees concerned to the Standing Committee for Finance 7) Preparation of budget estimates by Standing Committee for Finance 8) Placing of the budget estimates before Council 9) Approval of Budget by the Council.
2.2.6.1. Establishment of Objectives

The first step in budget preparation is establishing the objectives for the next fiscal or the budgeting period. The objectives can be derived from the City Development Plan (CDP), if any prepared. The following are the examples of questions that need to be addressed at this stage. Please note that the questions below are only illustrative and not exhaustive. a) What is the Vision of the Municipality and what activities the Municipality needs to take during the year to progress to the same? b) What new assets are required? c) Would certain citizen service be improved like providing web based payment options? d) Would any additional recruitments be required to fill vacancies to enable citizen services? e) Where will financial resources come from to meet commitments (Mix of revenues, grants, scheme funds and borrowings)? f) Are any specific steps required to enhance income like assessing un assessed properties? g) Should tax rates be raised? h) Should certain charges like rent be increased? i) Will any of the assets require any major improvement? j) Is there any major capital expenditure planned as part of any programme?
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k) What needs to done to manage the Solid Waste?. Is the existing procedure adequate or should that be strengthened?. If so, how that can be done? (this question needs to be raised for all functions) l) Would the town hall require any refurbishment? m) What requires immediate attention and what can wait? This stage is the most important stage in the budget preparation process. This stage shall include all the key players involved in preparation of Budget including the Mayor / Chairperson, the Deputy Mayor / Deputy Chairperson and the Chairpersons of the Standing Committees concerned. The meeting shall be convened by the Mayor / Chairperson. As of now, the citizens are not involved in the preparation of budgets. However, as this being the local government budget, it is suggested that the citizens are also involved at this stage of preparation of budget. Involving the public brings about transparency and improved governance.
2.2.7. Calendar for Preparing Municipal budget

The Budget preparation and monitoring process follows a Budget calendar. The Budget calendar provides milestones by which officials in the ULB need to prepare the budget and place before the concerned authorities. The Budgeting activity for next financial year shall commence as specified in the municipal Acts. The following are various stages of Budget preparation and approvals. Specimen Budget Calendar: Activity Mayor / Chairperson to convene a meeting of all key Budget Players including the Deputy Mayor / Deputy Chairperson department heads / implementing officers to initiate the budget process Circular issued by Deputy Mayor / Deputy Chairperson for preparation of Budget Proposals along with formats for preparation of the same Preparation of Budget Proposals by the department heads / implementing officers Compilation of the Department Budget Proposals by the Accounts Department for perusal by Secretary Submission of Budget Proposals by Secretary/Commissioner to the Standing Committees concerned Review of Budget Proposals by the Standing Committees concerned and submission of the same to the Standing Committee for Finance Preparation of Budget Estimates by Standing Committee for Finance and placing the same before the Council Approval of Budget by the Council Copies of Budget to Government, the officer authorised by Government and Auditors Timelines for Completion October 31
November 10
December 25 January 7 January 15
March 7 March 31 March 31
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February 15
2.2.8. Budget Execution

Budget execution refers to the stage of the budget process where resources are released to spending agencies to implement expenditure programmes. The budget execution process ensures that the funds are spent on authorised and intended purposes, as expressed in the budget. For effective execution of the budget, the following guidelines need to be followed: (1) Timely preparation and approval of budget by the Municipal Corporation/Council.
(2) Transparent and clear processes for within-year budget changes, such as revised
estimates, re-appropriations and supplementary estimates.
(3) Limiting changes in the budget, as a general rule, to those that could not be anticipated
during budget formulation and/or would have significant consequences if not addressed.
(4) Predictability in expenditure allocations, including timely release of funds to the

spending agencies to undertake budgeted expenditures by close tracking of projected revenues.
(5) Effective cash management to ensure that ULBs can provide cash when required to
execute the budget as passed.
(6) System for proper monitoring and recording of transactions so that excessive or
unauthorised expenditure is avoided.
2.2.9. Budget Maintenance and Monitoring

Once the Corporation/Council sanctions Budget estimates, the same shall be adopted for the financial year. All expenditure during the year shall be regulated in accordance with the allotments made in the budget for the year. Sometimes, necessity may arise to take up activities that are not estimated in the budget. In this situation an ULB will have option of seeking reappropriation / additional allotment to take up the activity duly justifying the reasons. If increase in estimate in respect of any proposal does not result in reduction in fund balance below statutory minimum, then application for re-appropriation shall be made. If increase in estimate in respect of any proposal results in reduction in fund balance below statutory minimum, then application for additional allotment shall be made.
2.2.10. Budget Watch Register

The Budget Watch Register shall be maintained by not only the Accounts Section but also by different operating sections. While the individual entries in the Budget Watch Register are to be made by the concerned staff in the Accounts Section, it is the responsibility of the Head of the Accounts Section to ensure that the Budget Watch Register is maintained upto date by posting all the entries therein. After the Corporation/Council approves the Budget, the Budget allocations under different heads are posted Section-wise in the Budget Watch Register. The Budget Watch Register enables the ULB to capture budget proposals for each budget head and function. It monitors actual expenditure as and when bills are admitted against the sanctioned proposals.
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As and when a work is taken up or whenever a payment is to be made, the budget allocation shall be verified by the Accounts Section. If the expenditure is within the budgetary allocation, the bill will be admitted, after making an entry in the Budget Watch Register. If the expenditure is beyond the budgetary allocation, the bill will not be admitted unless there is re-appropriation of the budgetary allocation with the approval of the Council/concerned authority. Thus a bill is admitted only after ensuring that it is within the budgetary allocation. At any point of time, the Budget Watch Register will indicate the budgetary allocation, the cumulative payments made till that date under the relevant budget head and the balance available under the relevant budget head.
2.2.11. Current Scenario in Municipal Budget

The current budgeting practices in most municipalities in the country suffer from the following drawbacks: 1. Though budget is a forecast, in reality the forecasting is done on an ad hoc basis and not on scientific lines; 2. Budget heads or categorization is not rational and is not fully useful for expenditure planning and control; 3. Budget formats do not focus on the goals and programmes as a result of which it is not possible to hold municipal functionaries accountable for their functions; 4. Feedback mechanisms from operational to decision-making levels and accountability mechanisms are generally weak; 5. Information systems linking budget, accounts and performance management functions are not developed; 6. The distinction between recurrent and capital expenditures is often not clear; capital budgets are either not prepared or are prepared on unscientific lines; 7. Even the existing budgets are not compiled and presented on time; 8. The budget execution, management and monitoring processes are not effective, as a result the management role of the budget is diluted; 9. Budget, accounting, municipal management information system, annual reporting and audit systems are not integrated. Most of the ULBs budget is on an "incremental" basis, which means that costs upto date serve as the basis for addition of cost increases or higher budgets during each successive year. Such an approach simply accepts historical costs and financial experience. It does not examine costs, facts and financial innovations.
Although these have lent the needed flexibility in tracking and controlling the expenses / revenues overall and under a budgetary head, the budget is not, however, used as a tool for measuring and promoting accountability on part of service functionaries.
2.2.12. Budgeting in the New Accounting System
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Traditionally, the budgeting processes in the ULBs have been undertaken with the following: Income head-wise classification for receipts into ULBs, and Department-wise classification for payments out of ULBs

Generally accepted principles of budgeting require budgeting system to be integrated with the accounting system. Traditionally, the Municipalities were maintaining the accounts on cash based single entry system of accounting. The budget was also prepared on the same lines. As Municipalities transition to Accrual based Double Entry System of Accounting, the Budget prepared should also reflect the accounting system followed. Therefore, the Municipalities that have transitioned to Accrual Based Double Entry System of Accounting shall prepare their budget based on the new system. Following details gives an overview of Budgeting in the new system focusing on the components of the budget in the new system, the coding structure and the budget reports generated in the new system.
2.2.13. Components of Budget in the New Accounting System

Budget in the new system is built around five components Fund, Function, Functionary, Field and Account Heads. These components are briefly described below. Fund 1) A Fund is defined as an activity for which separate books of accounts and financial statements are required to be maintained and prepared, as per the orders of the state government. The general municipal activities will come under General Fund. 2) The Municipalities shall prepare separate budget for each type of fund and the same shall be passed separately by the council. Further, the Municipalities shall consolidate all the FUNDS for which separate budget has been prepared. Such consolidated budget shall be an integral part of the Budget placed before the Council. Function The next important component of a budget is the Function. A Function represents the services offered or specific functions performed by the Municipality. Solid Waste Management, Mosquito Eradication Programme, Immunisation, Accounts, Administration are examples of Functions of a Municipality. The list of function groups are given in National Municipal Accounts Manual (NMAM). Functionary Functionary represents the department / position which performs the various functions of the Municipalities. This includes the Implementing Officers of Transferred Institutions. Engineering Department, Health Department, General Section are some of the examples of Functionaries. Some of the Functions undertaken by these Functionaries would include Public Works by Engineering Department, Immunisation by Health Department and Administration by the General Section. Every Functionary would prepare budget proposals for each of the function it undertakes. Field Field represents the geographic distribution of the Municipalities. A Field represents the geographic area to which the income or expenditure relates. An electoral ward is an example of a Field. The functionaries shall prepare a function-wise budget for each Field.
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Account Heads The Account Heads are defined for the Assets, Liabilities, Income or Revenue and the Expenditure. The Budget proposals shall be prepared using the Account Codes as recommended in the NMAM. a. Assets Assets represent the tangible / intangible rights owned by the Municipality or assigned / transferred to the Municipality and carrying probable future benefits. Land, Receivables like property tax receivables, Cash and Bank Balances and Advances to Suppliers / Contractors are all examples of Assets. The Municipalities shall budget the capital expenditure proposed to be incurred in the budgeting period and also the advances that may be given / received back. b. Liabilities Liabilities represent any amount owed by one person (in this case the Municipality) to another, payable in money or in goods or services: the consequence of an asset or service received or a loss incurred or accrued; particularly, any debt (a) due or past due (current liability), (b) due at a specified time in the future (e.g. funded debt, accrued liability), or (c) due only on failure to perform a future act (contingent liability). The Municipalities shall budget the liability that may exist as on the closing date of the budgeting period. c. Income Income includes the money or money equivalent earned or accrued during an accounting period, increasing the total of previously existing net assets and arising from provision of any type of services and rentals, including any grants/ contribution received from the State Government, etc. The Municipalities shall estimate the income for the budgeting period based on the past trends and the current economic conditions. d. Revenue Expenditure This represents the costs relating to the operations of an accounting period or to the revenue earned during the period or the benefits of which do not extend beyond that period. The above components of the budget have been codified and the same has been incorporated in the National Municipal Accounts Manual.
2.2.14. Budget Reports

The following are the outputs of the budgeting process as per the new system. 1 Budget Summary 2 3 4 5 6 Budgeted Balance Sheet Budgeted Income and Expenditure Statement Summary of Function Group Wise Budget Detailed Function-wise Budget
In addition to the above, if the Municipality is preparing the budget field-wise, the summary of field-wise budget and the detailed field-wise budget shall also be prepared. Also the consolidated budget estimates shall be accompanied by the following subsidiary statements 7 Estimate of revenue income 8 9 Estimate of revenue expenditure Estimate of capital receipts
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Budgeted Receipts and Payments Account

10 Estimate of capital expenditure 11 Estimate of repayment of loans 12 Estimate of loans and advances 13 Estimate of deposits and recoveries 14 Estimate of investments
What is NEW in the new Budgeting System

Traditionally Budgets were being drawn up with (a) Income Head wise classification for receipts and (b) Department wise classification for payments under the various heads. 1) While this lent the flexibility of tracking and controlling the expenses /revenues overall and under a budgetary head, it could not be fully used as a tool for municipal management for measuring and promoting accountability on the part of functionaries. 2) The focus of budgeting in the new system is therefore to bring in the responsibility and budget centre concept into the budgeting exercise by building a close linkage between the function the functionary as identifiable by personnel/positions responsible for any function . the field as identifiable by the geographical boundaries (zone / electoral wards) in which the cost is incurred. In the new system, every functionary will prepare a function wise budget proposal using the account heads. It is however recommended that the Municipalities prepare a Function wise and field wise budget. The advantage of this kind of budget is that the income or expenditure can be tracked to the electoral ward which helps the elected representatives identify the expenditure incurred on each ward and brings in transparency in governance. The following are some of the features of budgeting in the new system The Income is estimated on accrual basis. The actual amount receivable is estimated in the budget rather than the collection. The expenditure shall be driven by what is committed and incurred rather than what is paid. Budgetary control will be exercised keeping in mind the total commitments made. The budget in the new system is driven by the function or an activity. Hitherto, the budgets were department-wise. In the new system, the spending shifts to a function driven expenditure rather than a department level expenditure. This will help the Municipalities and other stakeholders in identifying the expenditure incurred on any specific function and the income received out of it. One of the key outputs of the new budget is the balance sheet that indicates the asset and liability position as at the close of a budget period. This shall help the Municipality in planning for the future, fixing the priorities right and identifying the programmes and the means of financing the same.
2.2.15. Making Budgets Inclusive:
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Internal earmarking, within local body budgets, for basic services to the urban poor, is an important reform required for the attainment of the following larger objectives envisaged under JNNURM: Scale-up delivery of civic amenities and services with emphasis on universal access to the urban poor. Provision of basic services to the urban poor including security of tenure at affordable prices, improved housing, water supply and sanitation, and ensuring delivery of other existing universal services of the government for education, health and social security. Integrated development of slums through projects for providing shelter, basic services and other related civic amenities with a view to providing services to the urban poor.
There are two main aspects of this reform one, adoption of clear, affirmative policy of earmarking (allocating) certain quantum (%) of funds for urban poor and two, creation and operation of appropriate budgetary mechanism to ensure that funds allocated for urban poor get spent on urban poor. In response to this reform conditionality, states and ULBs have initiated processes (policy adoption) aimed at earmarking a certain percentage of the budget exclusively for the urban poor. For example, Gujarat state has adopted a policy for earmarking 20 percent of its budget for urban poor and has made it mandatory for ULBs in the state to earmark the same proportion of their budgets for provision of services to the urban poor. Andhra Pradesh State has given policy direction to municipal bodies to allocate 40% of total budget for provision of services to the urban poor. Though this is a step in the right direction it will be effective only when a appropriate budget restructuring is undertaken for actualising policy of internal earmarking of specific budget for providing services to urban poor.
A Review of Internal Earmarking of Municipal Funds in the States:

Andhra Pradesh Andhra Pradesh is perhaps the first Indian State to earmark the municipal funds for urban poor and other backward sections i.e., women and children, SC/ST. The Government of Andhra Pradesh, through G.O Ms No. 265 (shown in Annexure I), has provided for utilizing 40% of net funds by municipal bodies for the urban poor living in slums. It has also laid down that while spending the funds, priority may be given to urban water supply and sanitation schemes. The Government also gave priority to allocate funds to other vulnerable sections i.e., Scheduled Caste and Scheduled Tribe population, in proportion to their share in total population. The G.O. mentioned above also stipulates that separate sub-plans for these budgets to be prepared by the municipal bodies. This is perhaps the first attempt to earmark budgetary expenditure for the socially disadvantaged population in urban areas. The spending for these purposes should be complimentary to the allocation of net funds for urban poor. Further, the Government also directed reserving 5% of municipal funds for women and children, which is also perhaps the first attempt towards gender-budgeting and which is increasingly being voiced to be implemented. The only vulnerable group for which earmarking has not been made is the disabled physical and mentally retarded. West Bengal
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The Government of West Bengal has also made it mandatory for the ULBs to allocate at least 25% of the annual municipal budgetary expenditure from the ULBs own revenue for the urban poor living in slums. The GO issued also gives a list of issues to be addressed while preparing/ drawing an action plan for poverty alleviation and it details accounting heads/sub-heads for booking capital and revenue expenditure. The letter issued to that effect is shown in Annexure II. Orissa The Government of Orissa has also made it mandatory for the ULBs to allocate at least 25% of their annual municipal budget for providing basic services delivery to the urban poor living in slums. It ordered that the ULBs should make Council Resolution in this respect and indicate a timeframe for undertaking reform. The official orders issued to that effect are shown in Annexure III. Creation of separate BSUP fund: Internal earmarking of Municipal budgets has to take place on both revenue and expenditure sides of municipal budget. Allotment of municipal funds coming from various revenue sources own sources as well as grants/scheme funds provided by State and Central governments could be utilized under a special BSUP Fund. However, for efficient and effective use of funds, there has to be an expenditure plan of with fund requirements. At Fund level, the balancing of expenditure and income accounts is important for ensuring and sustaining internal earmarking for the urban poor.
2.2.16. Constitution of BSUP Fund: Some Experiences

Some of the ULBs have already constituted BSUP Fund {or, its equivalent Urban Poverty Alleviation (UPA) Fund} within their municipal accounts and began to earmark certain amount/proportion of their funds as contribution to the BSUP/UPA Fund. These municipal bodies have started operating thesefunds through internal earmarking and supplementing with other funds coming from the upper tiers. The details of these models will be discussed below.
Case 1: BSUP Fund in Hyderabad

The Greater Hyderabad Municipal Corporation (GHMC) has constituted BSUP Fund by earmarking 40% of the net surplus funds for the urban poor, as directed by the state government order referred earlier. While estimating the same, net surplus funds allocated to UPA Fund (or, transfer made to Reserve Fund kept for that purpose) have been estimated at 40% of the operating surplus, with the operating surplus equal to the revenue income minus revenue expenditure. The net surplus funds of UPA Fund, the municipal budget allocation to Urban Community Development (UCD) department as well as the JNNURM funds of the ULB have been
Case 2: Pro-Poor Budgeting (West Bengal model)

Although allocation of funds in the ULB budget has been much thought about and discussed, very few Indian States have taken forward the idea towards implementation. One such attempt has been made by the Government of West Bengal to bring all general budgetary allocations of ULBs that target urban poor under one umbrella. The Government of West Bengal has also instructed that the ULBs need to ensure 25% of the ULBs total annual expenditure, including ULBs own source of revenue, spent on the poor/ slum areas.
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Under the suggested model, the Government of West Bengal had given an indicative list of poverty issues to be addressed by ULBs in annual development plan and to make provisions in the budget for improving quality of life of slum dwellers and the poor. The issues that may be considered by the ULBs relate to (1) Livelihoods, (2) Health, (3) Education, (4) Vulnerability, (5) Environment, (6) Civic Amenities, (7) Shelter, and (8) Food Security. Instructions are also given with respect to the basis of apportionment for sub-categories of services i.e., for each primary accounting code. The categories of services include: Civic Amenities o Water supply o Sewerage Health o Hospital services o Epidemic control Sanitation and solid waste management Public works o Roads and bridges Education o School buildings and other educational institutions construction and renovation o School equipment, furniture and tools and accessories Urban Forestry o Parks and gardens o Play grounds o Planning and regulation o Urban poverty alleviation and social welfare
For each of the above services it proposed to prepare expenditure estimates using apportionments, separately on both (a) Revenue account (b) Capital account. From this it was proposed to estimate the total budgetary estimate on service delivery for the urban poor on both revenue and capital accounts. Revised budgetary expenditure can be prepared thereafter based on the total budgetary expenditure arrived as above for the key services to the poor.
2.2.17. Gender Budgeting:

Gender Budgeting is an approach to ensure institutionalization of women into development, and it started with examining budgets at macro level from the view point of their effectiveness on women. Gender Budgeting was started in Australia and began to gain increasing acceptance as a tool for engendering economic policy making at national to sub national levels. Gender Budget looks at the allocation and distribution of resources to determine how they impact women and men differently. Budgets normally ignore the different socially determined roles and responsibilities and capabilities of men and women. Gender Budgeting is not a separate budget for women; rather it is a dissection of the government budget to establish its gender-differential impacts and to translate gender commitments into budgetary commitments (NRCUP 2007). The main objective of a gendersensitive budget is to improve the analysis of incidence of budgets, attain more effective targeting of public expenditure and offset any undesirable gender-specific consequences of previous budgetary measures. Gender perspective on public expenditure has been gaining
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ground in India since the publication of the report of the Committee on the Status of Women in 1974. The Eight Five Year Plan (1992-97) highlighted for the first time the need to ensure a definite flow of funds from general development sectors to women. However, it did not make an impact on ensuring flow of funds and benefits to women. The Ninth Five Year Plan (1997-2002), while reaffirming earlier commitment, had adopted Women Component Plan as one of the major strategies and directed both Central and State governments to ensure not less than 30 per cent of the funds/ benefits are earmarked in all the womens related sectors. It also directed that a special vigil be kept on the flow of earmarked funds/ benefits through an effective mechanism to ensure womens empowerment. The Union Government of India has taken some initiatives towards gender budgeting though to a limited extent at national level. In the absence of non-availability of disaggregated data on gender related public expenditure, Gender Development Indices (GDI) approach has been drawn in order to support better planning and programme formulation and ensure adequate allocation of resources. Gender auditing and development of evaluation of evaluation of mechanisms is also suggested to be undertaken alongside. Attempts are being made to collect data and information in disaggregatedform from various sources and to collate, disseminate and analyse the same for meaningful planning and evaluation of policies for womens empowerment. Although Gender Budgeting is yet to come to the local government level and ULB level, pilot exercises made by Janaagraha in Karnataka have shown that there is exist opportunity to roll it down at local government level (NRCUP 2007). Under JNNURM, it is suggested to develop gender profile, perform gender budget analysis and dialogue and debate with the stakeholders in the ULBs and work out interventions that promote gender equity and participation in basic civic services, livelihoods/ employment, healthcare and education.
2.2.18. Case Study - Budget Procedures with Focus on External Oversight

Bangalore Experience Good Practice Budget Information Data Sheet (BIDS). Preparation of BIDS is an innovative process where various departments prepare their individual budgets using certain broad criteria. These include management and performance levels and quality of service delivery, their capabilities, range, requirements, geographical reach and field realities. These are expressed quantitatively sing a BIDS. There is sufficient scope in this exercise for the officials to plan responsive schemes. BIDS prepared by individual departments is reviewed by the Revenue Officer or the Zonal DC in charge of the department. Suggestions for review or changes are made if required, following which BIDS is finalized and a summary of this is prepared. The Budget Committee, under coordination of the Chief Accounts Officer, reviews BIDS of each department. A final budget of the individual departments is drawn up, based on the discussions and consensus of the Budget Committee. The budget is also used to plan the levels of procurement for the year for various departments. The approach allows linkage between the need based budgeting, procurement planning & resource allocation for BMP. Following this a consolidation of the final budget statements of individual departments is carried out. Budget notes explaining new items, any departure from earlier years, are prepared in details. The budget document has a standardized format indicating vision, goals, functional objectives, and critical issues. Finally, the budget is passed on to the Taxation and Finance Committee, which passes the budget and forwards it to the Council. Upon clearance by the Council, it is sent to the
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State for approval. External oversight and accountability of the budget are credited through the PROOF Platform (discussed below). This process has now been in operation for over six years and has provided a sound rationale to the entire budget making exercise. This also allows spending within the available budget lines. PROOF Initiative The PROOF campaign was a collaborative effort of four non-profit independent organizations in Bangalore, in carrying out budget analysis/fiscal performance audit of BMP, and started in 2002. The focus of the campaign was disclosure, debate, dialogue, and discussion on the use of public funds. The framework of performance assessment is done in three areas: (i) Analysis of the financial statements of BMP: this includes comparison of revenue and expenditure statement with original budget figures, scrutiny of current and long-term assets, and short-term and long-term liabilities. (ii) Performance indicators: five sectors were selected for performance analysis, which include, health, education, road works, slum development, and revenue. Indicators were developed on a broad framework of input, output and effectiveness. (iii) Management discussion and analysis: focuses on management discussions and analyses of overall performance of BMP, and discussions of selected activities. The fiscal performance audit of the BMP by the PROOF was started with the financial year 200203. The initial focus was to assess implementation of the various programs approved in the budget. The first step was to engage BMP in the process, to disclose their quarterly financial performance and later to respond to the queries on the analysis of the financial statement. A format was created on information pertaining to revenue and expenditure, assets and liabilities, for a management discussion and for analysis of the past quarter. Prior to the launching of the campaign, the BMP budget and the bi-monthly review were not available to the public. The budget statement of the BMP had 800 items, making it difficult to comprehend. The PROOF format simplified the budget statement into four categories for revenue, capital, and fiduciary receipts and expenditures and a few selected major items. The model adopted for disclosure was that of the Governmental Accounting Standards Board (GASB). PROOF has been conceived of as a continuous effort, with quarterly assessments. Each year the campaign has a ten-month time framework, ending with review of performance of the financial year. In the first year, there were quarterly public hearings. From the second year onwards, while quarterly assessments were made, public hearings were held half-yearly, as the BMP felt there was no substantial content for a quarterly public hearing. The quarterly discussions have been well planned, highly structured interactions and were coordinated by PROOF organizers, between officials and PROOF coordinators. Citizens interaction with the BMP officials is now done half-yearly based largely on a five-point questions list developed by PROOF and given to BMP to provide information. Clearly, as an initiative to increase transparency and accountability in Municipal Corporation spending, the example of PROOF is probably one of the best in Indian scenario; other NGOs and city governments have the studied possibility of its replication across their cities quite actively, thus, highlighting its success. Although the PROOF campaign kicked off soundly and augured well for ensuring improved accountability in BMP spending, there are a multitude of issues which need to be sorted out before it can be taken to its logical end. Key issues include low levels of involvement of councilors; lack of capacity building of citizens; selective representations from areas where the NGO is more active; limited role in budget preparation; lack of information on impact of each PROOF campaign on expenditure allocations in BMP, thus, blotting the extent of accountability of BMP spending; lack of public involvement in major decisions; etc. On the whole, PROOF is a very positive initiative in PFMA involving a public
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debate on the budgetary performance. Some of the limitations mentioned above need to be addressed in due course. However, the process has still not been fully institutionalized. There is a need to refocus and re-launch PROOF, aimed at increased participation, convergence with broader issues and impact evaluation.
The Way Forward

The shift to function-wise accrual based Budgeting is a big step towards the next generation of reforms that include outcome based budgeting that enhances transparency and communication to the citizens about the progress and achievements in the major areas like health, sanitation, education etc. Budgeting is a financial plan describing proposed expenditure and means of financing the same. It embodies the estimated receipts and expenditure, i.e. both capital and revenue, for the financial year. It is a proposal of how much money is to be spent on what and how much of it will be contributed by whom or how it would be raised during a financial year. Budget plays an important role in planning and controlling operation of the ULBs. Budget preparation is based on the bottom up approach. The basis for preparation of budget will be the inputs from various functionaries drawn from the requisitions, requirements and actual performance of the ULBs. Once the budget estimates are sanctioned by the Council, the same shall be adopted for the financial year. All expenses during the year shall be regulated in accordance with the allotments made in the budget for the year.
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Sub Module 2.3 Revenue Improvement and Cost Reduction
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Sub Module :
2.3.
Revenue Improvement and Cost Reduction
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Sub Module :
2.3. Revenue Improvement and Cost Reduction

2.3.1. Municipal Finances in India
As per the Report of the Twelfth Finance Commission, India has 3,723 ULBs, of which 109 are MCs, 1432 are municipalities and 2182 are Nagar Panchayats. The total revenue of the municipalities grew from Rs.11,515 crore in 1998-99 to Rs.15,149 crore in 2001-02 at a compounded average growth rate (CAGR) of 9.6 per cent. The total expenditure increased from Rs 12,035 crore to Rs 15,914 crore during the same period, registering a CAGR of 9.8 per cent. In spite of the growth of the municipal sector in the country, it accounts for a very small proportion of both Gross Domestic Product (GDP) (at current prices) as well as revenue and expenditure of the upper tiers of Government. Total revenue of the municipal sector accounts for about 0.75 per cent of GDP of the country. In contrast, the ratio is 4.5% for Poland, 5% for Brazil and 6% for South Africa [Buckley (2005)]. Similiarly, municipal revenue forms a little more than 2 per cent of combined revenue of State and Central Governments. Total revenue of ULBs has been growing at a lower rate (9.7 per cent during 1998-99 to 2001-02) than the growth of combined revenue of Central and State Governments (10.8 per cent during 1998-99 to 2001-02). This reflected in a marginal decline in the share of municipal revenue in total government revenues from 2.5 per cent in 1998-99 to 2.3 per cent in 2001-02. Table 1a provides an overview of the relative importance of municipal revenues in relation to revenues of the States and the Centre. Table 1a: Revenue Significance of Municipal Sector
Year Municipal Revenue (Rs. In Crore) 11,515 13,173 14,581 15,149 Percentage of GDP at factor cost 0.72 0.75 0.77 0.73 Revenue share of Municipal Revenue (as per cent of total revenue of ) State Govt. Central Govt. Combined State & Central Govt. 4.4 4.1 2.5 4.2 4.4 2.5 4.2 4.5 2.4 4.1 4.2 2.3
1998-99 1999-00 2000-01 2001-02
Source: Reports of Eleventh and Twelfth Finance Commission, Economic Survey 2004-05 In terms of total expenditure, the municipal sector accounts for about 0.79 per cent of the GDP of the country. While, municipal expenditure accounts for little over 2 per cent of the combined expenditure of State and Central Governments, it declined further between 1999-2000 and 2001-2002. Table 1b presents an overview of the relative importance of municipal expenditure in relation to the expenditures of the States and Centre.
2.3.2. Municipal Revenues:

The revenue base of urban local bodies can be broadly categorized into tax revenues, non-tax revenues, assigned or shared revenue, grants-in-aid, loans and other receipts. Table 1 lists out revenue sources under each major revenue head. It may be mentioned that composition as well as relative importance of revenue sources of municipal corporations varies across the States.
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Sub Module : 2.3. Revenue Improvement and Cost Reduction
Table 1b: Expenditure Significance of Municipal Sector

Year Municipal Expenditure (Rs. In Crore) 12,035 14,452 15,743 15,914 Percentage of GDP at factor cost 0.75 0.82 0.83 0.76 Revenue share of Municipal Expenditure (as per cent of total expenditure of ) State Govt. Central Govt. Combined State & Central Govt. 4.52 4.31 2.21 4.60 4.85 2.36 4.53 4.84 2.34 4.22 4.39 2.15
1998-99 1999-00 2000-01 2001-02
Table 1: Revenue Sources of Urban Local Bodies in India Revenue Head Tax Revenue Sources of Revenue Property Tax, Octroi, Advertisement Tax, Tax on Animals, Vacant Land Tax, Tax on Carriages and Carts Non Tax Revenue User Charges, Municipal Fees, Sale and Hire Charges, Lease amounts Other Receipts Sundry receipts, law charges, costs recovered, lapsed deposits, fees, fines & forfeitures, rent on tools and plants, miscellaneous sales etc. Assigned (Shared) Entertainment tax, surcharge on stamp duty, profession tax, motor Revenue vehicles tax Grants in aid Plan Grants made available through planned transfers from upper tier of Government under various projects, programmes and schemes Non Plan Grants made available to compensate against the loss of income and some specific transfers Loans Loans borrowed by the local authorities in India HUDCO, LIC, State and Central governments, Banks and Municipal Bonds etc Table 2 sets out the major components of tax revenue of selected municipal corporations in India. While, property tax is the major revenue source in most of the municipal corporations, octroi is the major source in the municipal corporations of Maharashtra and Gujarat. Octroi has been abolished in all other States excepting Maharashtra and Gujarat. Table 3 illustrates the major user charges and fees levied by the select MCs in India. There is considerable heterogeneity in the levy of user charges by MCs across states. Table 2: Sources of Major Tax Revenues of selected Municipal Corporations in India State Andhra Pradesh Bihar Delhi Gujarat Karnataka Kerala Madhya Pradesh Municipal Corporation Hyderabad Patna Delhi Surat Bangalore Kochi Indore Major Taxes Property Tax, Profession Tax Property Tax, Profession Tax Property Tax, Advertisement Tax Property Tax, Octroi Property Tax, Advertisement Tax Property Tax, Profession Tax Property Tax, Advertisement Tax
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Maharashtra Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal Mumbai Ludhiana Jaipur Chennai Varanasi Kolkata Octroi, Property Tax Octroi, Property Tax Octroi, Property Tax Property Tax, Profession Tax Property Tax, Advertisement Tax Property Tax, Advertisement Tax
Table 3: Sources of Major User Charges and Fees of Selected Municipal Corporations in India 1998-2002 State Maharashtra West Bengal Andhra Pradesh Gujarat Karnataka Orissa Tamil Nadu Uttar Pradesh Municipal Corporation Greater Mumbai Kolkata Hyderabad Surat Bangalore Bhubaneswar Chennai Kanpur User Charge and Fees Water Charges, Sewerage Charges, Building Licence fees Planning fees, Car parking fees, mutation fees Dangerous and Offensive Trade Licence fees, market fees, slaughter house fees Water Charges, Building related fees, betterment charges Betterment charges, building licence fees, penalty for late tax payment Building Licence fees, market fees Building Licence fees, market fees, other licence fees, parking fees Building licence fees, market fees
Table 4: Sources of Shared Revenues of Selected Municipal Corporations in India State Maharashtra West Bengal Karnataka Gujarat Tamil Nadu Andhra Pradesh Municipal Corporation Greater Mumbai Kolkata Bangalore Surat Chennai Hyderabad Shared Municipal Taxes Non agricultural assessment tax, entertainment tax Motor Vehicles tax, entertainment tax Entertainment tax, surcharge on stamp duty Entertainment tax Surcharge on sales tax, duty on transfer of property, entertainment tax Surcharge on stamp duty, profession tax, entertainment tax
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Shared tax revenue, which varies in terms of composition and nature across states, also forms significant proportion of MC resources (Table 4). Entertainment tax is an important tax, not levied by the MCs, but collected and assigned to the MCs by State Governments. In Andhra Pradesh and Tamil Nadu, in addition to entertainment tax, profession tax and surcharge on stamp duty arealso assigned to local bodies.

Apart from their own revenue sources, i.e., tax and non-tax revenue sources, the MCs depend upon grants from State Governments. These grants are primarily intended to compensate for the mismatch of functions and finance. Most of the MCs receive financial support in the form of revenue grants from State Governments to meet current expenses. Similarly, capital grants are also provided for meeting project related expenditure. Table 5 shows the composition of grantsin-aid in selected MCs. In addition to own revenues, shared revenues, user charges & fees and grants-in-aid, loans also constitute an important source of municipal revenues in some ULBs.
2.3.3. Composition and Trends of Municipal Revenues

Relative contribution of various components in the total revenue over the years has been presented in Table 6. Between 1999-00 to 2003-04, while the share of non-tax, assigned revenue, non-plan and plan grants improved, the share of tax revenue in total revenue receipts of MCs declined. The average shares of major revenue components (average of 2000-04) based on the data of 35 Municipal Corporations are shown in the Figure 2. Among the various revenue sources, tax revenue assumes greater importance in terms of both size and share. The aggregate tax revenue of the 35 MCs constituted 45 per cent of average aggregate total revenue (total receipts), which was followed by non-tax revenue constituting 28 per cent of the average aggregate. Table 6: Composition of Municipal Revenue and trends (percent to total)
S.N 1 2 3 4 5 6 7 8 Revenue Component Tax Revenue Non Tax Revenue Assigned Revenue Non Plan Grants Other revenue receipts Revenue Receipts Plan Grants Loans Other capital receipts Capital Receipts Total Receipts 1999-00 47.87 24.92 2.78 9.14 10.29 95.00 1.75 2.08 1.17 5.00 100.00 2000-01 47.39 25.45 2.92 9.90 7.41 93.08 1.34 4.04 1.55 6.92 100.00 2001-02 44.76 28.73 3.23 10.67 4.65 92.04 3.07 3.08 1.80 7.96 100.00 2002-03 43.11 31.65 4.12 9.96 4.82 93.67 2.26 2.14 1.94 6.33 100.00 2003-04 42.95 31.17 3.59 9.39 4.53 91.64 3.58 2.35 2.43 8.36 100.00 Avg. % 45.21 28.38 3.33 9.87 6.34 93.08 2.40 2.74 1.78 8.36 100.00
Source: Based on the budgets of municipal corporations
2.3.4. Municipal Expenditure

The expenditure incurred by the MCs can be broadly categorized into: (a) revenue expenditure and (b) capital expenditure. Further, revenue expenditure broadly comprises (i) establishment expenditure, (ii) administrative expenditure, (iii) operations and maintenance expenditure, and (iv) interest payments on loans; the capital expenditure comprises (i) expenditure on capital formation and (ii) principal repayment. The component of these major expenditure categories are shown in table 7 below.
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Table 7: Categorisation of Municipal Expenditures
Expenditure Category Establishment Expenditure Administrative Expenditure Operation and Maintenance Capital Expenditure Expenditure Items Staff Salaries, Allowances, wages, pensions & retirement benefits etc Rents, rates & taxes, office maintenance, communications, books & periodicals, printing and stationery, travel expenditure, law charges etc Power & fuel, bulk purchases, stores, hire charges, repairs & expenditure, maintenance and interest payments made on loans Buildings, water supply L& sewerage, energy/lighting, solid waste management, roads, bridges, culverts, causeways, health and sanitation, parks and recreation spaces, furniture & fittings, tools & plant, equipment etc., principal repayments of loans Miscellaneous expenses not accounted for in the above
Other Expenditure
Source: Budgets of Municipal Corporations
2.3.5. Composition and Trends of Municipal Expenditure

The composition of aggregate expenditure of the MCs, in terms of the above categories, and trends are shown in Table 8. Table 8: Composition and trends of Municipal Expenditure (percent to total)
S.N 1 2 3 4 5 6 Expenditure Component Establishment & Admn. Exp Operation and Maint. Exp Other Revenue Exp. Revenue Expenditure Capital Expenditure Other Expenditure Total Expenditure 1999-00 37.47 14.41 6.96 58.84 13.01 28.15 100.00 2000-01 37.24 14.45 6.33 58.01 11.94 30.05 100.00 2001-02 38.42 16.57 6.52 61.52 13.93 24.56 100.00 2002-03 35.53 14.20 5.02 54.75 10.78 34.47 100.00 2003-04 32.61 12.51 4.56 49.67 12.18 38.15 100.00 Avg. % 36.25 14.43 5.88 56.56 12.37 31.07 100.00
Source: Based on the budgets of municipal corporations
2.3.6. Property Tax

Property tax is levied by local bodies since ancient times. Lands and buildings were referred to as property on which tax was levied and it was primarily a local tax. The property tax was a British contribution to the Indian Administration. The Charter Act, 1793 authorized the presidency towns to levy taxes on buildings and lands at 5% of their annual rental value to meet the cost of scavenging, police and routine maintenance. The Government of India Act, 1919 envisaged a separate schedule of taxes exclusively reserved for local bodies and it included tax on buildings; and tax on services rendered such as water tax, lighting tax, scavenging tax and drainage tax.
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The average shares of different components in aggregate expenditure during the period of 2000-04 are shown in Figure 3. Among all the components of municipal expenditure, the expenditures on capital works, establishment & administration, and operations & maintenance assume importance. The establishment & administrative expenditure constituted 36.25 per cent of the aggregate total expenditure, during 2000-2004. Capital expenditure, which is an important component, constituted less than 13 per cent of the total expenditure, during the same period.
In Government of India Act, 1935, the schedule of local taxes was deleted and local bodies were brought under the purview of the provinces. The Act brought in effective federal structure and provincial autonomy. While federal structure was governance at the centre and the provinces; provincial autonomy was more popular rule. The local governments tax powers and service functions were left to the provincial governments. The Act however permitted the provincial legislatures to allot at its discretion any of the provincial financial resources to the local bodies. The provincial legislatures were delegating the tax powers to local governments. With the advent of Independence, the Constitution of India, 1950 maintained the same federal structure with more or less the same powers and responsibilities to the Centre (earlier federal) and States (earlier provinces). List II of the Seventh Schedule of the Constitution, which lists the powers and responsibilities of the States contain local government under item 5, and taxes on lands and buildings under item 49. Under this provision, all States have created local governments including municipalities and delegated the taxing power on lands and buildings to such local governments. Thus the local finance today has drawn the framework from state governments. All states in the country have transferred the taxing power on lands and buildings (properties) to local governments. It is the responsibility of local governments to levy and collect property tax. No doubt, the 74th Amendment to the Constitution in 1992 brought constitutional status to municipalities, and made the municipalities as institutions of selfgovernment. Yet, the federal structure of the Constitution is not altered. The local governments including local taxation have remained state subjects.
2.3.6.1. Property tax - local revenue

Property tax is the mainstay of local revenue in all countries. It is a specific tax and hence a very reliable source of revenue to local bodies over a long period of time. Property tax constitutes the single largest source of revenue to the urban local bodies (ULBs) in India. In spite of loopholes in the levy, assessment and collection in ULBs, this tax continues to be significant in the local tax revenues. This is evident from the fact that property tax forms about 25 to 30% of the total revenue of ULBs in different states in India. Any property tax system involves following Tax Base Tax Rate Tax Coverage Tax Collection
Tax Base The valuation of land and building is the base for property tax. Capital value basis refers to the expected sale price or market value of the property, whereas, annual rental value basis refers to the rent the property would fetch for year to year The choice of property tax base be it annual rental value or capital value or standardised area base tends to relate more to social and political processes or concerns. While different countries adopt different base for property tax assessment, it has been observed that outside India, there is definite preference towards capital value base of property tax. A municipal body may select a particular base for property tax but it should also be kept in mind
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that the purpose of property valuation is only to arrive at the relative value of properties at a given time and the property tax levied as a small percentage of the property value. A system of annually adjusting valuation must be inbuilt to index for inflation. Land is generally not being taxed in developing countries but it should be made part of tax base and should be taxed. Tax Rate There is no one way to factor the correct rate for property tax. What the tax should serve is to find out if it is paying the price for the services. If so then it is the reasonable or acceptable rate, if not corrections should be applied. Concentrating more on the proper valuation of property to avoid underestimation of the tax base and to levy tax at lower rates seems a better practice than to have high tax rates and narrow tax base. Tax Coverage Coverage is yet another very important component of any tax. Attempt should be made bring each and every property in property tax books. It also means capturing of changes effected to old properties. Comprehensive and systematic coverage of properties undertaken periodically not only brings buoyancy but also brings in equity in tax administration. Conventionally tax coverage was achieved through field survey by tax inspectors but recent innovation is to use GIS and IT technologies for tax mapping and to seek self-reporting from the property owners in a prescribed form. Tax Collection System Very important component of any tax system but one the most inefficient aspect associated with property tax in developing countries. Tax collection system consists of enforcement mechanism, stringent recovery provisions, penalty provisions which are found weak in most of the cases.
2.3.6.2. Rental Value Basis of Property Taxation:

The property tax system historically has used the concept of annual rateable value (ARV) as the basis of taxation derived from the British System of taxing rentals in a free market. Most of the municipal Acts define ARV as the rent at which the property might reasonably be expected to be let from year to year after allowances for certain deductions (such as cost of repairs, insurance, etc.). Service taxes are often also levied along with property tax; these service taxes include taxes for water, sewerage, street lighting, etc. As the concept of reasonableness is not defined, the base appears to be vague. Most ULBs do not have any guidelines for capturing the prevailing market rent, which would impart buoyancy and elasticity to this tax. In countries with reasonable rent as the base, property tax rates have become largely discretionary and such a situation has often led to corruption. Rental Value its implications Even though rental value has been an accepted basis for assessing properties, it has its deficiencies of implementation. Often, there is an absence of authentic data on rental market. In the absence of reliable data on rental market, rent estimation has become discretionary. Determination of ARV for rented buildings has several constraints. Rented buildings can be classified into three categories and the ARVs governed are shown in Table 9.
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Table 9: Categorisation of Rented Buildings and ARV S.No 1 Classification of Rented Buildings Those for which fair rent has actually been fixed under Rent Control Act Those that are within the purview of Rent Control Act, but fair rent has not actually been fixed under the Act. Those that are outside the purview of the Rent Control Act. ARV ARV is the actual fair rent fixed under Rent Control Act ARV is the fair rent fixable under Rent Control Act
Rent declared by owner or tenant
In respect of any building within the purview of Rent Control Act, the gross annual rent shall be the annual amount of fair rent fixed or fixable under the Rent Control Act. For the third category of buildings, ARV is based on the declared rent as evidenced by lease deeds or rental declarations of owner or tenant. Rent deeds often suppress actual rent paid with rent being collected in other forms like interest free deposits, undisclosed advances, partnership fees, charges for amenities and services. As regards owner occupied building, the rental value has to be fixed with reference to the prevailing rental values in the locality, and is generally an estimated hypothetical value. In addition, there are problems of assessing properties like educational and medical institutions, clubs and entertainment places, hotels and guest houses. In fixation of estimated rent, there is considerable discretion for the assessing authorities and estimated rents vary with different assessing authorities. Besides discretion and arbitrariness in estimating rental values, there is a considerable loss of revenue to ULBs.
The capital value based assessment is applied on the estimated market value or the current sale price of a property. Properties incapable of producing rent are to be taxed on cost or profit basis that resembles capital value. Some of the Municipal Acts have the provisions for capital value basis of taxation. The annual value is arrived at on the basis of estimated market value of land and cost of building at the time of construction or acquisition. Capital Value based system is most revenue productive system. The valuation of land and building can be undertaken separately allowing optimum use of land. Variation in value because of usage can be taken care of through rate differentials instead of multiplying or adding of the factor or scores. Capital Value based System, with proper safeguards help property tax systems to move away from the constraints of rent control. The system of assessment based on Capital Value has its own share of problems: In the absence of a free open market in land and property transactions, the purchase value of the property, particularly in metros, does not reflect the true use value of the property, but is more a speculative price.
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2.3.6.3. Capital Value Basis:

Hence there is a tendency to under report transaction prices, to escape stamp duty and registration. There is limited availability of a computerized data base of property transactions against which an objective assessment can be made. Assessing staff are not professionally trained valuers to make scientific assessments. Since the capital value is determined with reference to the date of acquisition or construction, the tax base gets frozen, and there is no buoyancy in the tax. This also leads to wide disparities and inequity in similarly placed properties assessed at different points of time. There is uncertainty in what category of assets in the property should be assessed (eg central air-conditioning systems, captive power generation systems).
2.3.6.4. Problems of current systems:

Both the systems have merits as well as demerits. The capital value basis of taxation, no doubt, yields more revenue, but it is rigid and difficult to arrive at the market value. The valuation needs more technical skills. On the other hand, though the rental value system is easy to administer, there is scope for flexibility and discretion. Partly on account of the inbuilt deficiencies in the assessment systems noted above, and partly due to poor administrative systems in place, the present property tax systems have the following problems/drawbacks: Scope for subjective assessments in a corruption-prone environment. Scope for excessive use of discretionary powers leading to possible collusion between the assessor and assessee. Non-transparency in the assessment process. Self-assessment is not possible, and the onus of annual assessment is on the local body which is required to issue notice of demand every year. Higher social costs due to litigation, and consequent delayed recovery of taxes. Lack of a systematic computerized database resulting in a large proportion of the properties being outside the tax net. Lack of efficient mechanisms for detecting and follow up on defaulters.
2.3.6.5. Property Tax Reforms under JnNURM

The weaknesses and deficiencies in the current system of property taxation in majority of the Indian states have not allowed full exploitation of the revenue potential of this tax. Property tax is one of the most under exploited tax instruments. To strengthen the financial autonomy of the local body a holistic reform of the property tax system is essential. The shortcomings referred above prompted the ULBs to attempt for reforms. There are many areas, which need reforms and they include levy, assessment, coverage, exemptions, collection, recovery, accounting and administration etc. Reform of the property tax systems is one of the mandatory reforms under Jawaharlal Nehru National Urban Renewal Mission (JNNURM). Reforms under property tax have
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to be undertaken in the methods of levy and collection of property taxes, with the broad objective of establishing a simple, transparent, non-discretionary and equitable property tax regime that encourages voluntary compliance Reform Components:
2.3.6.6. Reforms in Rate and Base Structure:

Tax Rate: Generally one months rent as property tax would be reasonable. The Act should provide for lower and higher limits for the rate of tax say 5% to 20%. Within the prescribed limits, the ULB should have the freedom to adjust the rate (without Government intervention/approval) such that the yield is at least sufficient to cover the cost of providing the basic urban services. It should be ensured that there is no intervention by the Government in this matter. In many municipalities to compensate for the unrealistically low and static assessed annual value, the rate of tax has been increased from year to year, reaching very high levels even an absurd 120%. Any high rate of tax results in resistance on the part of the citizen, and increased tendency for evasion. Elimination of Exemptions: In many states the Act provides for several categories of exemptions, which often gives a loophole in the tax structure for avoiding tax. The list of exemptions should be reviewed, and kept to the minimum. And sufficient safeguards should be built in to ensure that the provisions are not misused. Some of these are mentioned below: Places of Worship: Only that portion used for religious worship should be excluded. Portions put to residential, office and commercial use should be taxed. Agricultural Land: Farm houses should not be exempt. Lawns and gardens in the guise of agriculture should not be exempted. Only lands where actually an agricultural crop is cultivated should be exempt. Charitable Institutions: Only those institutions should be exempted which are tax exempt and are providing free service or at a nominal charge. (In many cases schools, colleges, other educational institutions, nursing homes and hospitals, etc. claim exemption on the ground of their being a registered society.) Even when these properties are exempt from tax, a service user charge could be levied to cover the cost of certain basic services being provided e.g, street cleaning, solid waste management, parking, etc. Slum settlements: A simpler form of tax or service charge could be levied per household per month, and the money so collected could be used to provide basic services in the locality in collaboration with community based organizations in the area.
2.3.6.7. Reforms in Valuation and Assessment:

The present system of assessment is not transparent and not capable of self-assessment. It rewards the unscrupulous and penalizes the honest tax payer. The Government of India has recommended adoption of a system which is formula based and capable of self-assessment.
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Different cities have tried out alternative approaches to introduce a self- assessment system. These may be a capital value based system, a rental value based system or a unit area system based on multiple factors. Given its local circumstances, each state/ULB shall decide which system is most suitable. It must be mentioned that JNNURM does not mandate that there should be a change in the system of assessment since this may take a couple of years to finalize and implement. The first priority should be for achieving full coverage of assessments within the existing system and full recovery of taxes. Whatever be the basis decided upon the system of assessment should a) be objective based on clearly enunciated parameters; b) be formula based so that it is capable of self- assessment; c) eliminate or at least minimize discretion at the field level; and d) be citizen-friendly. The unit area system is enunciated in more detail below.
Unit Area System:

The unit area system is a simple arithmetical system of calculation of property tax based on covered area of the building and the unit area value or unit area tax for the category (of locality or amenity, etc.) in which the premises is located through which it is possible for any citizen to self-assess his property tax and file his return form. (This could also be applied to vacant land). Grouping of localities: In the unit area value system the entire city has to be grouped into somewhat homogenous categories for specifying a unit area value. Such groupings could be done taking into consideration factors like average rental value, average capital value of land, quality of physical infrastructure, availability of social and market infrastructure, type of development, economic classes of occupants, etc. The factor(s) that should be considered should be decided by the ULB taking into consideration local requirements and availability of information. In Patna, the city is classified into three grades based on street size. In Ahmedabad, the wards are grouped into 4 broad categories mainly on land -value basis. In Delhi 2000 and odd colonies/localities have been classified into 7 categories taking into account ten different factors. In Hyderabad, the average rental value for each locality, for each type of use has been prescribed. Karnataka has been working on a capital value based system.
Municipal Valuation Committee: Whatever be the factors that are chosen for the classification, these must be clearly specified in the statute. Further, the process adopted should be objective, transparent and provide for a reasonable opportunity for the tax payers to file objections and be heard. To ensure this it is desirable that a Municipal Valuation Committee be appointed consisting of experts and persons experienced in urban administration, taxation, and representatives from the local body. The manner of constitution of this Committee, its functions, and the processes that will be adopted to ensure fair consultation with the citizens should be clearly laid down in the statute. (Since
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this process would take time the State may consider, at the first stage, to incorporate some guidelines in the Rules to ensure greater objectivity in assessment and minimize discretion at the field level.) Other factors for grouping of properties: Different multiplicative factors can be prescribed to adjust the location group-wise unit area value to individual premises level. These factors should also be clearly defined in the statutory frame work eliminating any scope for subjectivity. The factors that could be considered are: Structure: Pucca, semi-pucca, katcha Use: Residential, educational, medical, public purpose, industrial, office, commercial, recreational, hotels Age: On the basis of the year of construction Occupancy: Rented or self-occupied Street: On the basis of the category or width of the street on which the property is located
Unit Tax or Unit Annual Value: In a unit area system, one could either fix the tax per unit area for each group, as in the case of Ahmedabad and Patna. In this case: Tax = Unit Rate of Tax * Area. Alternatively, one can prescribe the annual value per unit area as in case of the Municipal Corporation of Delhi. In this case: Tax = URV * Rate of Tax * Area. The former has the advantage of being simple to understand and easy to apply. In the latter there is greater flexibility for raising and lowering the tax burden by simply adjusting the tax rate without altering the annual value. Another advantage is the scope for bringing in equity considerations into the tax structure by having a graduated rate of tax or different rates of tax for different types of properties. Owners with more built-up area or higher annual value can be taxed at a higher rate, or some lower cut-off covered area or annual value can be prescribed for levy of tax to give relief to poorer people. The annual value could also become the base for levying other taxes or user charges. Self-Assessment: In this system individual owners or any other person liable to pay property tax can easily determine their tax liability by calculating the tax as follows: Step 1: Note the base unit area value (per square feet, sq.ft. or square meter, sq.mtr) for the respective category of locality in which the property is. Step 2 Annual Value (AV) = Base unit area value (UAV) * Multiplicative factors (f1, f2, f3) etc.) * Covered Area (A) Step 3 In case the multiplicative factors for the different portions of the property are different then: Total AV = (AV of portion 1) + (AV of portion 2) + (AV of portion 3) + .
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Step 4 Tax = (AV x Rate of Tax) minus (rebate/concession applicable) Advantages of Unit Area System: The above system is objective, transparent, comprehensive and yet simple and equitable. It is capable of self-assessment. The parameters entering the assessment being clear and measurable there is minimum scope for discretion, and hence chances of litigation are reduced. Non Discretionary method - ARV: Attempts on reforms under property tax were initiated in 1990s. The first attempt in this area of reform was made in Patna Municipal Corporation and then followed Andhra Pradesh, Ahmadabad, Bangalore and some other cities. In all these places, the basis of tax has remained as annual rental value. The annual rental value of a property for levy of tax is derived from the estimated annual rent from the use of property. The estimated annual rental value, if no parameters are prescribed, leads to discretion and arbitrariness. To avoid discretion and arbitrariness, certain perceivable and acceptable parameters were identified and are implemented in few ULBs. The number of these parameters are to be kept as minimum as possible to avoid discretion to assessing authorities. Some of these parameters include (a) the location, (b) the nature of construction, (c) the nature of use, (d) Plinth area, (e) nature of occupancy, and (f) age of building Need for a Legal Framework: Unlike other taxes, property tax is direct and concerns with every house-owner in a municipality. Sales tax or service tax is an indirect tax and in many cases, it is included in the value of goods or services. Income tax concerns with a class of people whose income exceeds certain specific amount. Therefore, unlike those taxes, property tax need different approach, and should need absolute political and administrative support.
Property Tax Revision: Assessments are to be revised once in five years. For various administrative and other reasons, revision of taxes is not being done regularly. It should be ensured that revision takes place regularly once in 5 years or as per the timeframe prescribed under law.
2.3.6.8. Reforms in Property Tax Administration:

Proper administration of the property tax system is as important as improving the legal framework for the tax base. Administration includes functions such as provision of public information, identification of properties, timely reporting, record management and collection of
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Secondly, any levy of tax should be supported by legislation. It is therefore necessary that the reform should be supported by legal sanction. Legal process includes (a) amendment to the existing provision and making a provision that assessment of property tax is based on accepted parameters like location, nature of construction, usage of building, occupation and age of building etc. It is also necessary to de-link assessment with rent control law, (b) invoking secondary legislation, i.e., amendment of existing assessment rules or issuance of fresh rules and (c) issue of detailed administrative guidelines/ instructions.

taxes which include timely billing and efficient use of incentives and penalties. Unless all these administrative aspects are effectively addressed, a better property tax system under any tax base (rental, area or capital) will not be possible. Improvements in tax administration procedures in terms of identification, assessment, record management and collection are necessary. These reforms would need to include the following areas of property tax administration: Enhancement of Coverage Property enumeration and mapping; Records management; Public information; Revenue collection; Incentives and penalties; Self assessment; and Periodic updating of valuation.
2.3.6.9. Enhancing Property Tax Coverage:
Lack of an adequate database on the details of properties is one of the biggest deficiencies in most ULBs in India. Experience shows that the efforts towards improvement of the property tax base have always resulted in growth of tax revenues, even doubled in some of the cases. Improvements in tax base through periodic updating of property tax records should be given top priority by the ULB. The object of property tax coverage is to bring to book new properties into the tax net. Comprehensive and systematic coverage of properties undertaken periodically will bring in equity in tax administration. Coverage also represents the capturing of changes effected in old properties like additional construction, change of usage etc. Coverage is therefore one of the important measures in tax reform Two basic approaches can be used for this (a) self-declaration - where the tax payer is required to provide information; and (b) survey and inventory-where the taxing authority obtains information by field surveys. The information should include name and address of the owner, plot area, built-up area floor-wise, use to which property is put, the year of construction, the type of structure and details of assessment (if already assessed). It may be necessary to outsource this activity and engage a professional agency. Electronic database should be created from the updated property tax records. This field survey should be on a 100% basis and in subsequent years updated regularly through periodical surveys and inspections. To some extent, the system of self- declaration can be improved by penalties to induce compliance. To make the system more efficient it is necessary to supplement the self-declaration system by a complete property survey and mapping and a system of periodical field audits.
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Module 2 Financial Management 2.3.6.10. Property Enumeration and Mapping

The problem of identifying properties on a timely basis can be a major constraint for efficient administration of the tax. In this regard, proper enumeration of all properties using mapping technology is most helpful. Aerial photographs, remote sensing and Geographic Information Systems (GIS) can be used to map all the properties in a city. Different public departments are dealing with property owners and occupiers for such services as issuance of building and completion permits, water supply and service connections, shops and trade licenses, changes in ownership, etc. An information base common to all related departments through a state level network should be created. GIS should be used as an effective tool for decision making. The initial mapping exercise may be outsourced and carried out by a professional firm having adequate experience in this field. But in the long term it is recommended that ULB may set up a fully equipped urban mapping division utilizing modern GIS technologies and be manned by the trained staff. This would serve not only the Revenue Department but also other departments of municipality to generate various MIS reports.
2.3.6.11. Property Identification Code
It would be useful to introduce a unique number which would identify a particular property from the property database. This may be called the Property Identification Code (PIC). This code could locate the property uniquely in terms of ward, the colony and the block and perhaps floor or flat. The code so developed should be used by all the departments and other government agencies and form part of the statutory regulatory or revenue records. This would help in exchange of information by various authorities, both Central and state, and would help in preventing leakage of revenue. Necessary provisions should made in the Act for this purpose.
Changes in record management should be instituted to ensure the separation of records by area, co-ordination between valuations, an effective billing and collection process, improvement in record formatting and establishment of linkages among different departments through crossreferencing and computerisation of records.
2.3.6.13. Public Information

Introduction of innovations in the property tax system requires effective dissemination of public information. Respective ULBs should issue a special notice in the local newspapers, informing the public of changes being made in the property tax base. Senior officials should also explain the new system of tax assessment through interviews and announcements in the local newspapers and on television. Effective communication with the taxpayers is an important element in the successful implementation of any new scheme.
2.3.6.14. Self-Assessment Scheme
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2.3.6.12. Records Management

Self Assessment Scheme refers to a scheme where property owners can undertake a selfassessment of their properties on the basis of identified guidelines and submit the same to the concerned authority. SAS helps mop up revenues even from pending cases. With a view to educate taxpayers on this practice, advertisements can be issued in the local newspapers giving details of how taxpayers could calculate their property taxes themselves and pay on the selfassessment basis. A self-assessment proforma can also be printed and distributed free of cost by the ULB. The bottom line of any reform process should be whether the changes effected in the system will have potential future gains and whether the system is easily understood without being inherently complex. The valuation process should be simple both o the taxpayer and the tax collector. Under a self-assessment system the onus for filing property returns on a regular basis and paying the tax within a prescribed time schedule on the basis of the self- assessment should be on the owner. Failure to file the self-assessment should attract a penalty. Every owner shall be required to give information in regard to the change of status of his property by way of completion of structure/addition to the building, change of occupancy or use status or any other such event which shall have an effect of changing the property tax liability. Suppression of Information or Filing of Wrong Information: A system of self assessment does not absolve the ULB of its responsibility to ensure that all owners come under the tax net. Hence the need for the ULB to have an independent full property database, against which self assessments can be monitored. Where an owner does not give information in regard to his properties as required under the law or where he has furnished wrong information in his self-assessment, he should be liable for a penalty, a penalty, say 30%, on the amount of tax suppressed. The commissioner should have powers of suo moto assessment or revision in cases where a return has not been filed or the return filed by the owner is found to be defective. In all such cases the assessment would be finalized after giving an opportunity to the owner for being heard. Payment of Tax: It should be the responsibility of the owner to compute the tax due and pay the same according to the schedule of payment notified. A system of payment in quarterly installments could be considered. As an incentive for early payment an owner paying the annual tax within the first quarter could be given a rebate, say up to 15% on the tax paid. To facilitate payment, arrangements should be made for accepting tax through designated banks, collection by the resident associations/group housing societies, and online through municipality websites. Any amount due as tax and not paid within the time frame prescribed should attract an interest of 1 % per month for the period of non-payment of tax.
2.63.6.15. Service of notices/bills

The present practice of service of notices and bills through municipal officials should be dispensed once the self assessment system is introduced. In the ULBs where SAS is not introduced, the service of issuing demand notices may be outsourced, i.e., done through post or courier service. Public notice to be issued informing tax payers that notice/bills have been dispatched, and if anybody does not get demand notice/bill, it can be collected from office.
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2.3.6.15. Indexation:
With a view to provide buoyancy, and to take into account the rapid developments and increase in real estate values taking place, revaluation (re-assessment) and change of classification should be done every three to five years. However, often such periodic assessments, even when legislated, are postponed. And when assessments are revised after a large gap of time there is great resistance from the property owners on account of the steep increase in the tax payable. To get over this a provision should be made in the statute for indexation of the assessment on an annual basis tied to changes in the Consumer Price Index of urban non-manual workers or such any other suitable index Which captures changes in real estate (rental) values. This will provide the requisite buoyancy in revenue on a regular basis.
2.3.6.16. Improving Property Tax Collection Mechanisms:

Under tax administration, collection is a very important activity and the law provides various measures for collection of taxes, including distrait of properties, launching of prosecutions and filing of civil suits. However, in many ULBs, the collection efficiency of property tax is not satisfactory. Poor collection is a major constraint in increasing revenues from property tax. Policy, legal and administrative measures are required to improve tax collection. Without deviating from the existing statutory provisions, certain reforms are suggested to improve collections. They include: Incentives for prompt payment; Penal interest rate for arrears; Establishment of a large network of decentralised collection centres including the collection through identified banks; collections through e-seva centres Online payment Publication of names of non-paying taxpayers in local newspapers and entry gates of respective colonies; Publishing names of high-amount defaulters in local newspapers / internet Focus collection efforts on large defaulters and selective application of legal actions against them; an organised system for identifying defaulters; Provision of rewards to the top performers (collectors) and punishment to the nonperformers in ULGs. Preparation of Demand Collection Balance (DCB) statements in such a way so that targets are fixed as per specific groups of assesses; Disconnection of essential services Liberal in levy and assessment and rigid in collection Use ABC analyses for effective collections.
The best way to begin administrative reforms is by improving collections (Dillinger 1988). Hyderabad and Ahmedabad Municipal Corporations (AMC) in India have brought significant enhancement in their property tax revenues through improved collection mechanisms during the last decade. This additional revenue gave them an opportunity to introduce reforms in property identification and assessment procedures. The AMC has gone a step further in accessing the domestic market by building its debt servicing capacity on the basis of improved tax collections. There are two ways to enhance collection. The first is through an innovative
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scheme of incentives and penalties (carrot and stick) and the second is an ABC analysis as practised in inventory management.
2.3.6.17. Incentives and penalties:

Payment of tax is ones responsibility and if one pays tax in time, it is his duty and there is no need to provide any incentive to him. On the other hand, default in payment of tax needs check and deserves penalty. However, in order to improve recovery of tax, it may be considered to provide incentive for payment of tax within the permitted timeframe or in advance. Similarly, penalties may be imposed on belated payments.
2.3.6.18. Partnerships with other agencies:

To improve the efficiency of tax the municipality could also explore options to utilize the services of citizens welfare associations, banks or other agencies, including any private sector agency (a) to maintain and administer the property, assessment and collection data base, (b) collect the tax and deposit the same with the corporation, (c) carry out any other tasks for better administration of property tax as may be passed by a resolution of the standing committee.
2.3.6.19. Monitoring and Enforcement:
While most of the Acts have adequate provision for enforcement and collection of tax, the system in actual practice of monitoring tax returns and payment is woefully inadequate. Suitable strengthening of the enforcement processes and revenue intelligence mechanisms would yield higher realization of tax dues. A suitable system of incentives/disincentives to reward honest and prompt tax payers and penalize defaulters should be put in place. Any appeal to a higher Court of Law should be permitted only after the tax as assessed has been paid by the assessee, so that appeal is not used as mechanism for tax evasion or delay. Greater acceptance of reforms and better compliance can be accomplished by paying attention to the interface between the local administration and the citizen. Some areas are suggested below: Stakeholder Consultations: At every stage of consideration of the reforms and in the development and design of the new system, wide ranging consultations with all stakeholder groups is necessary to ensure that the reformed system meets the requirements of all groups, and is acceptable to them. The groups should include resident associations, market associations, groups of special users (eg, schools, hospitals), political leaders, media and officials implementing the system. Consensus Building: Once a system is designed getting necessary approvals at the municipal and government level, it would require a well thought out strategy for consensus building. Often resistance to change comes from officials, councillors and commercial property owners who have vested interests in the status quo. Formal presentations and informal consultations with opinion leaders and ways
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2.3.6.20. Citizen Interface Mechanisms:

to address their concerns are vital for successful implementation. In this, media can play an important role if they are coopted into the awareness building process from the beginning. Citizen Education and Awareness: During the period of design of the system citizens should be made aware of the reasons for the reforms, what is being planned and the advantages of the new system. Experience shows that citizens are not averse to paying higher taxes provided they feel that the new system is equitable and fair, is easy to understand and to comply with. And they have the confidence that the increased revenues will be invested to provide better services. It is very important that citizens should comply with the system. This requires dissemination of information and seeking public cooperation. It can be ensured through frequent meetings with Tax Payers Associations at town level and resident groups at locality level and they should be educated in the method of assessment, utility of municipal funds for improvement of town/delivery of services. The information can also be disseminated through press releases, press meetings, news items, handouts and other modes of communication. Once the new system is brought into force a series of brochures, pamphlets, newspaper articles simply worded should be brought and widely distributed to educate the citizens on their responsibilities and explain clearly the modalities of operation of the new system. Transparency and Easy Access to Information: The details of the returns as furnished by the owners and suo moto or revised assessments should be made accessible to any citizen, who wishes to see such information. It would be useful if this information is also accessible through the website of the municipality or copies made available at cost on request. Such details could also be made available to each resident association with reference to its residential locality. Any person who has reason to believe that the return filed by the owner does not portray the actual facts could then bring this to the notice of the commissioner. [This would be one useful channel of intelligence information on evasion] The property owner should also be in a position to get information on the status of demand and payment in respect of his property, preferably on line. Return forms, challans for payment, ready reckoner regarding rates, explanatory brochures should be available on the website and also at the ward offices. It is necessary that the entire process should be made transparent. The whole process of levy and assessment should be made known to people. It may be done through usual practices like press notes, handouts, advertisements etc. Instead of estimating the rental value on a hypothetical basis, the rental value has to be fixed by the municipality with reference to the parameters referred above, i.e., location, nature of construction and use of building. Even in this case also, the rental values cannot be fixed hypothetically or on a thumb-rule basis. It should be based on a scientific model. Fixation of rental value per month per sq. meter of plinth area is crux of the whole reform. It should be endowed with rationality, equity and fairness. To meet them, the best course of action would be:
organize sample survey of various categories of buildings in various locations,
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arrive at provisional rental values make a preliminary notification and call for objections/suggestions, and make final notification and publish it in newspapers and official gazette.
2.3.6.21. Grievance Redressal and Appeal:
Public grievances specific to property tax administration include (a) objection/revision/appeal petitions in tax matters (b) transfer of title/change of ownership applications. In tax matters, ULBs are flooded with various kinds of court litigation, which need to be minimized to bring improvements in tax administration. Necessary precautions should be taken at the initial stages of making an assessment by following due process of law. At present in many municipalities considerable numbers of appeals are pending in Court and it takes a long time for settlement. With a formula based self- assessment system as proposed it is expected that such grievances will be substantially reduced. To get over teething problems in the first year of implementation of reforms it may be advisable to appoint an Anomalies and Hardship Committee to hear grievances, objections and make recommendations for improvements/modifications in the system. Further the Act could provide for the designation by government of an officer to be the Grievance Redressal officer who could be approached by any citizen aggrieved by an assessment order of the commissioner. With a view to ease and expedite the appeal process it is recommended that a Municipal Taxation Tribunal be constituted to hear appeals against levy or assessment of any tax under the amended system. Citizen Friendly Systems: The property tax system as well as any associated forms, educational materials, manuals, and the payment and information systems should be designed so that these are easily understood even by a lay person, is citizen friendly and can be easily used by the common citizen. This definitely helps in greater acceptability and better compliance.
2.3.6.22. Training and Capacity building

Any reform, more so a finance reform attracts resistance from the implementers. It is therefore necessary that the implementers and the tax machinery in the municipality should be trained in the new process and be made motivators for the reform.
2.3.6.23. Recent Initiatives in Property Tax Reforms Case Studies

Case 1: Patna Municipal Corporation Patna Municipal Corporation Act defines the annual ratable value as being the gross annual rent at which the holding (building) may reasonably be expected to let from month to month or from year to year. In 1993, the assessment rules were revised. The basis of assessment as annual rental system has not been changed. The annual rental value was defined as the rent that a
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holding is capable of fetching over a period of one year. For finding out the rent fetching capability of a holding, an area-based assessment was introduced. Four perceivable and measurable criteria have been identified for arriving at the annual rental value. They are, (i) location of holding, (ii) use of building, (iii) type of construction, and (iv) carpet area. Location: Areas in the city were classified on the basis of (i) principal main roads, (ii) main roads, and (iii) all other roads not falling in either of the first two categories. The Corporation notified 24 principal main roads and 88 main roads. The rest are considered as other roads. Usage: Three categories of usage have been identified as (i) commercial/industrial (ii) residential, and (iii) others not falling under first two categories. Type of construction: The buildings are classified into three types and they are (i) pucca building with RCC, (ii) pucca building with sheet roof, and (iii) others. The Corporation has fixed rates of rental value per sq. m. of carpet area on the above criteria in a matrix of 3x3. (separately for 3 locations) as shown in Table 10. Rental Value (in rupees) per sq. m. of carpet area: (On principal main roads) Table 10: Criteria for Calculation of ARV in Patna S.No 1. 2. 3. Use construction Pucca with RCC Pucca with sheet roof Others Commercial/ industrial Residential Others
The Patna initiative during 1993 was local and through amendment of rules by the Corporation and it was not supported by any amendment to the Corporation Act. Secondly, the rental values were fixed on a thumb rule basis and no scientific exercise was made. However, the Act has been amended during 1996 and it was challenged in a court. The Hon Supreme Court upheld the amendment on the ground that the amendment was in the background of bringing in transparency in administration, and removal of harassment and official discretion. Case 2: Property Tax Reforms in ULBs of Andhra Pradesh Property tax is the main source of income to urban local bodies (ULBs) in Andhra Pradesh, and contributes about 20 percent of the total income of ULBs and about 50 percent of own revenues. Property tax is levied on all buildings and lands at a percentage of their Annual Rental Value (ARV). The components of property tax are (1) tax for general purpose, (2) water tax, (3) drainage tax, (4) lighting tax, and (5) conservancy tax. All ULBs levy property tax by a resolution of the council and the resolution specifies the rate of tax (percentage of Annual Rental Value i.e ARV) and the date from which tax is levied. Before
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passing a resolution, it solicits objections and suggestions from the public. The tax notification is published in official Gazette and local newspapers for information of public. In Andhra Pradesh, the incidence of property tax with the education tax and library cess levied under the relevant laws shall not exceed as shown hereunder. (a) Residential buildings (b) Non-residential buildings : : 25 percent of ARV 33 percent of ARV
Under the Municipal Acts (both municipalities and corporations prior to reform), the annual rental value (ARV) of lands and buildings shall be deemed to be the gross annual rent at which they may reasonably be expected to let from month to month or from year to year. However, in respect of a building, where fair rent has been fixed under Rent Control Act, the gross annual rent shall be the annual amount of the fair rent so fixed. In fixation of rent on the basis of hypothetical rent, i.e., the rent it would fetch in the open market, there used to be considerable discretion to the assessing authorities, resulting in large disparities in the amount of tax ending up in loss of revenue to municipality. In actual practice, it was difficult to arrive at a truly representative and accurate market rent, since rents for similarly placed buildings are themselves highly variable owing to various non-economic factors. It is this situation that has been the main cause for complaints of arbitrariness in the assessment of property tax and a demand for reform. The Government desired that the amount of discretion should be removed. Thereon, after intense consultations, it was decided in the year 1989 to introduce new method of assessment for taxation taking into consideration the measurable variables like (i) nature of construction of building, (ii) nature of usage of building, (iii) plinth area, (iv) location, and (v) age of building. To give effect to the above decision, municipal laws were amended in 1989. The objectives of the new method of assessment of property tax were: To evolve a scientific method in the assessment and levy of property tax incorporating the principles of equity, objectivity in fairness and simplicity. To fix the assessments uniformly for similar buildings used for similar purposes and situated in same locality. To reduce the element of discretion and to avoid arbitrariness in the assessment of tax. To simplify the procedure of assessment and to make it transparent. To de-link the Rent Control provisions from assessment of property tax.
Assessments of Taxes Rules were made on the basis of the above statutory provisions in 1990. The rules provide detailed procedure for determination of ARV and levy of property tax on buildings and lands. Location of building/Zoning The first step in the new system is to divide the entire municipal area into convenient territorial zones with reference to potential rental value for purposes of fixation of Annual Rental Value. As
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far as possible, the number of zones should be kept at the minimum (to avoid or minimize discretion). The division is based on the following factors:
Availability of civic amenities like water supply, street lighting, roads and drains. Proximity to markets and shopping centers. Proximity to educational and medical institutions. Proximity to banks, postal services and public offices Proximity to factories and industrial areas, and Such other relevant factors
Classification of buildings After division of municipality into territorial zones, the buildings situated in each zone are classified into the following 6 categories
RCC Posh buildings. RCC Ordinary buildings. Madras terraced or jack arch roofed or stone slabs or slate roofed buildings. Mangalore tiled roofed or asbestos roofed or G.I. roofed buildings. Country tiled buildings. Huts.
Nature of use of buildings After classification of buildings based on type of construction, they will be further classified on the nature of use into the following 6 categories.
Commercial purposes Industrial purpose Cinema theatres or places of public entertainment.
Fixation of Monthly Rental Values (MRV) The Commissioner shall conduct a sample survey of buildings and gather information relating to the prevailing rental values of various categories of buildings in various zones, and arrive at the average monthly rent per square meter of plinth area fixable for each category of building. After sample survey, the Commissioner prepares a notification containing division of the municipality into zones and the monthly rental values (MRVs) per square meter of plinth area for various categories of buildings in all zones. He publishes the notification in the District Gazette and the local newspapers as a Draft Notification and calls for objections and suggestions within 15 days from the date of publication of the draft notification. After due consideration of the objections and suggestions received from the public, the Commissioner issues a final notification (in Form A) dividing the town into various zones and
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Residential Shops/Shopping complexes Public use

showing the MRV fixed per square meter of plinth area for various categories of buildings and various usages in various zones (see Table 11). The final notification will be published in the District Gazettes and local newspapers for information of the public. The notification is town specific. Form A notification is a 6x6 matrix and would be in the following model. Each zone will have a separate notification. xxxxxxxx Municipality Form A Number of Zone: Description of Zone: Monthly Rental Values per sq. m. of plinth area in the zone Table 11: Monthly Rental Values according to usage and construction category Nature of Usage Category of Construction RCC Madras Mangalor Country Ordinar Terrace e tiled tiled y d In Rupees 6.50 5.50 4.00 3.00 27.00 21.00 16.00 12.00 16.00 16.00 10.00 14.00 8.00 7.00 6.00 14.00 14.00 8.00 12.00 6.00 7.50 5.00 8.00 10.00 5.00 8.00 5.00 5.40 4.50 7.00 6.00 4.00 6.00 4.00 3.00 3.50
RCC Posh
Huts
9.80 8.00 7.50
2.00 2.50 3.00
Allowances for repairs or on any other account The deductions allowed from the ARV attributable to the building in lieu of all allowances for repairs or on any other account are shown in Table 12. Table 12: Deductions by age of building S.No Age of the building 25 years and below Above 25 years and up to 40 years Above 40 years Owner occupied residential buildings Municipalities situated on the sea shore Deduction allowed 10% of ARV 20% of ARV 30% of ARV 40% of the ARV An additional 5% of ARV
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A. Residential B. Shops C. Public offices i) offices and banks ii) Hospitals, iii) Educational Instns. D. Commercial use i) Hotels, & Restaurants ii) Godowns E. Industrial use F. Cinema theatres
8.00 30.00 18.00 18.00 12.00 14.00
2.00 4.00 4.00 2.00 2.00 3.00
Vacant Land Tax: In respect of vacant lands, capital value of the land will be the basis for taxation. The capital value means the market value fixed by the Registration department for the purpose of registration. The property tax on vacant lands will be not more than 0.5% of the capital value of the land. Revision of Property Tax: Government issued instructions to all Municipalities to revise taxes under the new system with effect from 1.10.1993. All municipalities, under the leadership of respective Commissioners have revised the taxes. Orders of Andhra Pradesh High Court Certain Rate Payers Associations have filed Writ Petitions in the Hon High Court of Andhra Pradesh questioning the action of government and municipalities in introducing the new system of assessment of property tax and revision of taxes on the basis of new system. The High Court of Andhra Pradesh in their orders dated 29.12.1994 have upheld the action of Government in revising the taxes, but did not endorse the attempt to de-link annual rental value with rent control provisions, Orders of the Supreme Court Government made an appeal to the Hon Supreme Court on the orders of the High Court and the Supreme Court has allowed the appeal. As per the orders of the Supreme Court, adoption of fair rent determined or determinable under the provisions of Rent Control Act is not binding on the Commissioner and the provisions of Rent Control Act will not apply for fixation of ARV and to levy property tax. The Supreme Court also observed that the Act and Rules provided a complete code for assessment of property tax to be levied for buildings and lands. Impact The impact due to restructuring of property tax assessment is more pronounced in two areas: on the revenues of the municipality and tax payers acceptability. The revision resulted in increase of revenues under property tax from Rs.60.00 crores to Rs.95.00 crores in two years, a net increase of Rs.35 crores per annum, i.e., 58% the state w.e.f. from 1-10-1993. This is also reflected in increase of per capita income from Rs.45 to Rs.57 in. It is about 60% increase on residential assessments and about 90% increase on non-residential assessments The other advantage is the tax payers acceptability to the area based taxation. In spite of protests from the rate payers associations, the method, by and large, has become acceptable to the tax payers. Interestingly, the restructured model was upheld by the judiciary as well. The publication of rental values for various categories of properties based on use and location has brought more transparency into the tax administration.
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General Revision of Taxes from 1-4-2002 Taxes have been revised further in all municipalities duly following the procedure with effect from 1-4-2002. There was a significant increase in property tax due to general revision with effect from 1-4-2002. The following are the details: 1 2 3 4 Property tax demand before general revision Property tax demand after general revision Net Increase in property tax due to general revision Percentage of increase after general revision Rs.186.02 crores Rs.310.16 crores Rs.124.14 crores 66.73%
Case 3: Ahmedabad Municipal Corporation It is all-together a different model. The Bombay Provincial Municipal Corporations Act provides that the Corporation can levy property tax on buildings and lands annually at such rate per sq. m. of carpet area of the building. There is no rental value and rate of tax on rental value. The Corporation determines tax rates. For determining the tax rates, the buildings are classified into residential and non-residential. The Act prescribed minimum and maximum rates. While the minimum and maximum rates per sq. m. of carpet area for residential buildings are Rs.10 and Rs.40, the rates respectively for non-residential buildings are Rs.20 and Rs.80. The Ahmedabad Corporation however fixed a tax rate per sq. m. at Rs.10 for residential buildings and Rs.22 for non-residential buildings. Apart from residential and non-residential, 4 other factors are considered for fixing tax rate. The 4 factors are (i) location, (ii) age of building, (iii) type of building and (iv) occupation.
Age factor (F2): This factor is to provide depreciation and to fix lesser rate for aged building. The age of building is grouped into 4 bands, 10-20 years, 20-30 years, 30-40 years and above 40 years. The rate for each band is specified and decreases with age of building. Type of building (F3): The buildings are categorized into independent bungalows, row houses/tenements, apartments, buildings situated in village sites and buildings situated in slum areas. The tax rates for each of this description of buildings have been prescribed. Occupancy factor (F4): The occupant means the owner or tenant. If the occupant is tenant, the tax is two times of the rate.
This model has been introduced with effect from the year 2001-02
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Location factor (F1): The Corporation has been divided into 4 areas classified as A to D, and rates for each area are prescribed. The classification of the area is on the basis of market value of lands, the values of which are collected from the Stamps Department.

Case 4: Bangalore City Corporation The Karnataka Municipal Corporations Act, which governs the Bangalore City Corporation, has been amended replacing the ARV system with Capital Value System (CVS). Though this has come into effect from April, 2002 in all city corporations, it is not fully implemented. Since CVS is not implemented fully, the current practice is assessment on gross annual rent at which the building/land may reasonably be expected to let from month to month or year to year. The rate of tax is 20% of ratable value on residential buildings and 25% of ratable value on nonresidential buildings. Earlier, properties were assessed on the basis of ARV. The ARV was defined as the gross annual rent at which the building or land may reasonably be expected to let from month to month or year to year. As there were no guidelines on what constitutes reasonable rental value, there was considerable discretion to assessing authorities. This lead to considerable loss to the Corporation also, and so, in the year 2000, the Bangalore City Corporation has introduced Self Assessment of Property Tax Scheme under which gross annual rent can be determined on the basis of 4 parameters.
Location of the building: On the basis of market value of land, the city is divided into 6 zones, Zone A to Zone E. Type of construction: Depending on the cost of construction, the buildings are classified into 5 types. - RCC roof /Madras terrace roof buildings, where cost of construction exceeds Rs.250 per sq. ft. - RCC roof /Madras terrace roof buildings, where cost of construction ranges between Rs.150 and Rs.250 per sq. ft. - RCC roof /Madras terrace roof buildings, where cost of construction is lower than Rs.150 per sq. ft. - Tiles and sheets of all kinds - Thatched house/hut Age of the building (depreciation factor): Depreciation is provided on a graded basis ranging from 10% for buildings of less than 5 years old to 70% for buildings above 55 years old. Status (occupation factor): The buildings are further classified into tenanted or selfoccupied. If the building is self-occupied, a rebate of 50% of ratable value is provided
Separate rates of ratable values for residential and non-residential buildings have been set. The rates set are per sq. ft. of built up area per month and the annual rate is considered for 10 months rate for purposes of tax calculation. Self-occupied concession is limited only to residential buildings. The rates of ratable values for residential buildings are also shown in Table 13 in the following.
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Table 13: Zonal Ratable Value according to Building category and Type of construction as well as its occupation Category and Type of construction (i) RCC roof /Madras terrace - cost of construction exceeds Rs.250 per sft (ii) RCC roof /Madras terrace cost of construction ranges between Rs.150 and Rs.250 per sft (iii) RCC roof /Madras terrace cost of construction lower than Rs.150 per sft (iv) Tiles and sheets of all kinds Use/ Occupation Tenanted Self occupied Zones A 5.00 2.50 B C D E Ratable values in rupees 4.00 3.60 3.20 2.40 2.00 1.80 1.60 1.20 F 2.00 1.00
Tenanted Self occupied
4.00 2.00
3.50 1.75
3.00 1.50
2.50 1.25
1.60 0.80
1.40 0.70
Tenanted Self occupied
3.50 1.75
3.00 1.50
2.50 1.25
2.00 1.00
1.20 0.60
1.00 0.50
Tenanted Self occupied (v) Thatched house Tenanted/self/ hut occupied
3.00 2.50 2.00 1.60 1.00 0.80 1.50 1.25 1.00 0.80 0.50 0.40 Rs.0.40, subject to a minimum property tax of Rs.100
Case 5: Municipal Corporation of Bhopal Madhya Pradesh Municipal Corporation Act provides the impost of property tax on the basis of annual letting value of land and building. The rate of tax is on a graded basis ranging from 6% to 10%. Along with property tax, other taxes and cesses, such as water tax, lighting tax and fire tax; and sanitary cess are added on in the tax bill. In 1997, the Act has been amended. While retaining the basis of tax as annual letting value, the method of determining is detailed. The annual letting value of any land and building is determined on the basis of square foot of built up area of building after taking into consideration the location, purpose for which it is used, and quality of construction of the building. The municipal limits are classified into different zones and specific rules are provided for zoning of areas within the municipal limits. As regards location, buildings are classified based on whether it is located on the main road, main market or interior roads. Usage of buildings are classified as residential, commercial and industrial As regards the construction, they are classified as (i) RCC buildings, (ii) buildings with roof made out of sheet and other semi-pucca or (iii) kutcha.
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Case 6: Corporation of Thiruvananthapuram In Thiruvananthapuram, the basis of taxation is Annual Rental Value. The annual rental value, as usual, was determined on the basis of reasonably expected rent from month to month or year to year. This provision is changed recently. While retaining the rental value as the basis for property tax, the method of determining it is changed. It is determined on the basis of location and certain parameters of categories of buildings. The city is divided into 3 zones. As regards building, 2 categories are identified. They are (i) location and (ii) type of construction. Under each category, certain parameters have been identified. For each parameter, different attributes are identified and points are given for each attribute. Table 14 shows the classification. Table 14: Points for buildings based on its category, parameter and attributes S.No 1. Category of Parameter building Location (i) Access grading Attributes Points 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 1 10
50-100 meters 100-150 meters 150-250 meters 250-500 meters 500 meters 1 km 1 km 2 km 2 km 4 km 2. Type of (i) Flooring construction Granite Marble Spartec tiles Mosaic Red oxide Cement Earthen Concrete above 100 mm width
(ii) Roof
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(ii) distance road side
- National highway - State highway - District road - Other PWD road - Corporation BT road - Corporation metalled road - Non metalled road - Passage/footpath No proper access from At road side

Concrete below 100 mm width Partly terrace and tiled Tiled with ceiling Tiled without ceiling Asbestos Partly tiled Thatched (iii) doors and High quality wood, i.e. teak, windows rose, mahagani Ordinary wood, i.e. anjali, jack wood Inferior quality/reuse (iv) Number of floors 5 floors and above 4 floors 3 floors 2 floors One floor (v) Number of bed 9 and above rooms in the house 7-8 5-6 4 3 2 1 (vi) bath Attached bath with marble flooring glazed tiles Mosaic Cement Separate pucca bath Separate kutcha bath (vii) sanitary Sewerage area convenience Septic tank (viii) electricity Centralized AC Ordinary Ac Just electrified (ix) water connection From government source From own source 8 7 5 4 3 2 1 5 4 1 10 8 6 4 1 10 8 6 4 3 2 1 8 6 5 3 2 1 10 5 8 7 4 5 3
The points as detailed above with reference to various attributes of parameters and categories (of buildings) are totaled and are graded with reference to the total points. Based on the grades (with reference to total points), the monthly rentals are notified for the 3 zones. The rentals range from Rs.1 to Re.13 per sq. meter as per the Table below; and the rate of tax is 18% of the ARV so notified. Table 15 shows the classification.
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Table 15: Monthly rents fixing according to zone and grade Grade A B C D E F Points > 80 61-80 41-60 21-40 10-20 < 10 13 10 8 7 5 3 Monthly rent notified per sq. meter (in rupees) Zone I Zone II Zone III 10 8 8 5 7 4 5 3 4 2 2 1
2.3.6.24. Good Practices practices in Self-assessment

Now that the method of assessment is rationalized and the rental values are notified together with method of calculation, self-assessment model is introduced in certain Corporations. Rental values and method of assessing the tax is notified and the property owners are allowed to assess their buildings by themselves and pay the tax along with assessment declaration. Bangalore City Corporation The property tax payable under self-assessment scheme is a two line formula-driven calculation depending on the location. Residential property Rental value = built up area*zonal rental rate fixed/sft/month*10; minus (-) depreciation Property Tax = rental Value*20%
Self-assessment is made mandatory. If no return is filed, or the return is found incorrect, the Commissioner can assess the property to tax after necessary enquiry. If return is filed in time and tax is paid on the basis of the return, there is a rebate of 5% of tax. If the return is not filed, Commissioner may levy penalty of 50% of tax assessed. If there is willful incorrect filing or wrong return, Commissioner may levy penalty up to 2 times of difference of tax assessed and tax paid on the basis of return. Municipal Corporation of Bhopal There is a provision to file a return declaring the property particulars with reference to the attributes of the property as per the classification and calculating the tax. If on verification, the difference of tax assessed and tax declared exceeds 10%, there is a provision for penalty up to
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Non-residential properties (5 categories, where allowance for 25% built up area is permitted) Rental value (1) = built up area (75%)*rental rate fixed/sft/month*10 Rental value (2) = built up area (25%)*1/2 rental rate fixed/sft/month*10 Total rental value = (1) + (2) above; minus (-) depreciation Property tax= Total rental value*25%

5 times of tax payable. If declaration is made and no tax paid, there is a provision of surcharge not exceeding 15% of tax. In case the returns are not filed or the returns filed are incorrect, the Commissioner can assess the buildings as per the provisions of the Act. Municipal Corporation of Hyderabad Under the scheme, the owners were to fill up a form giving property details like (i) Location of property, (ii) Plinth area, (iii) Type of building, (iv) Usage, and (v) Year of construction (for purpose of depreciation) and calculate the tax. The method of calculating tax has been detailed in the notice. Method of calculation Monthly Rental Value (MRV) = The amount is fixed in Form A notification with reference to location, type of construction and usage. The rate is per sq. m. of plinth area per month Gross Annual rental value = plinth area*MRV*12 Net ARV (for purpose of assessment) = Gross ARV depreciation at 2/3rd of gross ARV depending on the age of building Property tax= net ARV* 25% (for residential) and 33*(for non residential) The scheme provided for random scrutiny of 25% of self-assessment forms received. Those that have filed very low rent would be taken up for detailed verification. If no return is filed, the Commissioner can make the assessment following the parameters of the scheme.
2.3.7. Other ULB Taxes:

2.3.7.1. Vacant Land Tax:
This is a tax applicable on lands that have access to infrastructure such as roads, sewerage and water, but are kept vacant, primarily for speculation that would over time lead to windfall gains. This tax has not been extensively applied in Indian cities. Its non-application indirectly provides incentives to speculation in land and robs the city of revenues rightfully due to it since it has spent money on the provision of infrastructure. An urban local body would decide on the kind of lands that would attract this tax and the basket of tax items that would comprise the vacant developed land tax, such as road tax, sanitation and water tax. Obviously, since there is no property built on the land, there would be certain taxes that these lands would not attract, at least in full. A good way to decide on policy in regard to this tax would be to collect data on land price appreciation.
2.3.7.2. Octroi:
In States where octroi, an entry tax on commodities, is still levied, it has been a great supplement, fetching between forty to fifty per cent of all municipal income. But this is a levy that states are finding extremely difficult to continue and are under tremendous pressure to abolish it. Its leakages, the traffic snarls that it causes at city entry points and its allegedly retrogressive nature are some of the factors contended against it. Several of them already have
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abolished octroi and the alternatives brought in place are nowhere close to the kind of income that octroi had generated.
2.3.7.3. Advertisement Tax:

Advertisements can be a good source of revenue for cities. Such advertising, displaying goods or services, typically on busy roads and in high traffic areas, are also commonly known as billboards or hoardings. They present large advertisements to passing pedestrians and drivers. The locations that command high-density consumer exposure fetch handsome revenues. In the mega cities, a single advertisement space could annually fetch crores. Indian cities are also witnessing the onset of new forms of the mobile billboard industry. Spaces on sides of buses have of course been used for quite some time. But newer forms, such as vehicles parked in high visibility locations near convention centers and sporting venues and even on the side of roads have emerged. In Europe billboards are a major component and source of income to cities. In India cities have also started exploiting street light poles and median space. There have lately been concerns about road safety, visual pollution and environment. Hoardings have been accused of distracting drivers and causing accidents. In the United States, many cities tried to put laws into effect to ban billboards. Indeed, the negative impact of the overproliferation of signage is becoming quite evident in many cities. At the same time the outdoor advertising industry itself would soon realize that the existence of too many signs, some literally one in front of the other, is bad for business. Cities therefore require to set standards in regard to size, lighting and spacing of billboards.
2.3.7.4. Others: Sub Module : 2.3. Revenue Improvement and Cost Reduction
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The other taxes that cities in several parts of the country raise, apart from a general tax on properties, are a sanitation tax, a water tax and a sewerage tax. The water charges in several cities are alternately levied as a user charge and are metered so as to charge as per use. Many others impose a water benefit tax for undertaking new water projects and a sewerage benefit tax for implementing fresh sewerage projects. An additional sanitation cess is levied on large properties such as hospitals and malls that require specialized service provision by the municipal body. A tree cess, fire cess and a street tax are also some of the other taxes available in certain States. The first is for the plantation and upkeep of trees, the second for maintaining fire services, purchase of fire tenders and equipment and the third for the maintenance and provision of roads.
2.3.7.5. Advertisement Tax - Andhra Pradesh Experience:

Tax on Advertisements: Every person who erects, exhibits, fixes, retains upon any land, building, wall, hoarding or structure, any advertisement to public view shall pay advertisement tax to the municipality. Exemptions from payment of advertisement tax a) b) Notice of a public meeting Notice of an election

c) d) e) Notice of a candidate in respect of such an election Advertisement exhibited within the window of any building. Advertisement relating to trade or business carried on within the land or building upon which such advertisement is exhibited.
Procedure for obtaining permission of Commissioner: Written permission from Commissioner is required for erection of any advertisement. Every Advertiser desiring to display in advertisement shall apply to the Commissioner in advance before the advertisement is to be displayed in an application. The Commissioner may disapprove of an advertisement, among others, on the ground that its contents or the manner of its display are indecent or otherwise offensive to good taste or public sentiment. The Commissioner informs the applicant about tax payable on the intended advertisement if he approves the advertisement. The original of the application would be returned on payment of tax with instructions to incorporate the permission number and date in the advertisements. The Commissioner do not grant permission if the advertisement tax is not paid in advance. Erection of Hoardings at specified places: Commissioner is competent to identify the places for erection of hoardings on municipal sites. He also fixes the number of hoardings to be allowed on private properties. : Leasing out the right to collect fees: Commissioner may lease out the right to collect fees in respect of use of the above hoardings; and the regulations of the Lease are a) b) c) d) e) f) g) h) The lease shall be through auction or by calling tenders. Registered Advertisement Agents are entitled to participate in the bid. The period of lease shall not exceed three years. The lessee is empowered to collect fees on advertisements as per the notification issued by the Municipality The lease has to be approved by the Municipal Council. The lessee shall pay one third of the lease amount as deposit The lease amount shall be paid once in six months in the months of April and October. The lessee shall enter into an agreement and it shall be registered.
Display of advertisements in cinema halls: Cinema halls have to obtain prior permission from the Commissioner for display of the following advertisements, i.e., (a) Slides, (b) Advertisements shorts, (c) Trailer Films Prohibition and regulation of advertisement tax: a) The Council is competent to issue a notification prohibiting erection of advertisements at heavy traffic points or important road junctions or public parks, places of worship, historical monuments and in purely residential localities. b) The Council is competent to non-prohibited areas. regulate the erection of advertisements in
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c) Once a regulated hoarding has been allowed at any of the approved sites, all subsequent advertisements shall be required to confirm thereto in the matter of size, position, alignment etc., of their hoardings. d) The permissible sizes of each hoarding ranges from 10 x 4 meters to 2.5 x 2 meters to be erected in horizontal length and vertical height. e) Sign or sign-boards should be erected as per permission granted by Commissioner. f) Sky-signs may be removed or shifted to ensure public safety or convenience. g) All advertisements shall bear the permit number. Advertisements that do not bear the permit number shall be treated as unauthorized and shall be liable for removal. h) The Council is not responsible for the safety of any advertisement displayed on any public street or land. Registration of Advertising Agents: Persons who undertake the display of advertisements within the limits of any municipality on behalf of others shall enroll themselves as registered advertising agents by submitting an application to the Commissioner. Removal of unauthorized advertisements: Commissioner is competent to remove unauthorized advertisements after giving a notice to the owner concerned.
2.3.8. Non-Tax Revenues

The major items of Non-Taxes levied by ULBs include (a) User charges, (b) Fees from markets and slaughter houses, (c) Rents from shop rooms and buildings, (d) Building permission fees and betterment charges, (e) Various categories of licence fee, (f) Encroachment fees, (g) Parking fees, and (h) Miscellaneous items
2.3.9. User Charges

User charges are defined as charges levied for the use of a given service. It is possible to introduce user charges only in those circumstances when the principle of exclusion can be applied, at least in principle. In the context of ULBs, user charges can be levied on services like water, sewerage, primary solid waste collection, parks and playgrounds, education, health facilities, transportation, etc. It is very difficult to assign user charges for purely public goods. User charges are, therefore, used only for merit goods, keeping in mind users ability-to-pay and WTP for these services. The levy of user charges is suggested for three reasons: Important source of revenue available to augment the resources of ULBs. Enable authorities to provide services from a demand perspective. Promote discipline in the consumption as an instrument in preventing the misuse of services and help reduce abuse and over-use of services provided.
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Module 2 Financial Management 2.3.9.1. Present Practices in User Charges:

ULBs at present are levying two types of user charges. In the case of water supply, both fixed flat tariffs and varying volumetric charges linked to the level of consumption are in practice. Water tariffs in certain metros are as follows. Bangalore Year 2005 Domestic Rupees/KL 0-8000 litres 6.00 8001-25000 9.00 NonDomestic 0-10000 36.00 10001-20000 39.00 Chennai Year 2006 Domestic Rupees/KL 0-10000 2.50 11000-15000 10.00 NonDomestic Up to 500kl 35.00 Hyderabad Year Domestic Ind. Houses NonDomestic 0-15000 16000-30000
2007 Rupees/KL 90.00/month 8.00
6.00 8.00
In regard to cost recovery for wastewater management, the general practice is to levy sewerage charges at a flat rate or as a percentage of monthly water charges. The percentage generally varies from 10% to 25% of the monthly water bill. In the case of solid waste management, a monthly flat tariff framework is generally practiced. Increasing block structures or Incremental Block Tariff, wherein the relative tariff increases as consumption increases, is generally followed for recovering water charges. In the case of urban transport, reducing block structures are prevalent, wherein the unit rate decreases with increases in the distance of travel.
The ULBs/parastatals managing the delivery of any urban service are required to revise user charges in such a manner that, the income from user charges of a particular service recovers the full cost of O&M of the service. This is one of the mandatory reforms to be implemented at the ULB level by all the Mission cities under JnNURM. The implementation of this reform is critical to achieve self sustainability of services and for improving financial strength of ULBs. While its implementation does not require any additional financial expenditure and legislative amendments, political will is the essential and key element. The objectives for this reform are (a) establishment of linkages between asset creation and asset management through a series of reforms for long-term project sustainability and (b) ensuring adequate funds to meet the deficiencies in urban infrastructural services. ULBs need to commit to implement the efficiency improvement plans resulting in the progressive achievement of full O&M cost recovery of municipal services. While planning to achieve the O&M cost recovery, ULBs should ensure that the present inefficiencies in the services are not passed on to the customer. ULBs also shall protect the interests of vulnerable groups through lifeline tariff mechanisms and cross subsidies. The efficiency improvement plans should focus on (i) increase in coverage of users, (ii) reduction in losses (both commercial
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2.3.9.2. Mandatory reform under JnNURM:

and technical losses), (iii) improvements in method of measuring the service, and (iv) improvement in billing and collection efficiency. Since any service improvement plan would require reasonable time and capital to implement, hence, it would be imperative that the ULB commits to user charge reform with immediate effect and ensure recovery of O&M costs, including inflation, during the mission period.
2.3.9.3. Tariff Setting:

Setting rational user charges needs to balance the following four key objectives: O&M Cost Recovery - Most of the core environmental services require large initial investments apart from their huge recurring costs. Complete cost recovery in such projects may not be possible or may be possible only with government assistance. Therefore, at least O&M or variable costs should be covered by user charges. Cost recovery is the main purpose of user charges. It requires that, on aggregate, user charges recovered from consumers should produce revenue equal to the financial operating cost of the service. Moreover, the revenue stream should be relatively stable and should not cause cash flow or financing difficulties for the ULB. Economic Efficiency - Economic efficiency can be achieved by setting user charges equal to their relevant marginal costs. For example, in many cities the cost of bringing additional water is higher than the cost of supplying existing water, since the cheapest sources/options are developed first. Thus, when additional water is brought at higher cost, user charge rates should be adjusted to reflect this. Equity - If the primary objective of a user charge is to maximise revenue collections, then efforts need to be made to carry out WTP studies and to assess market conditions. The possibility of introducing variations in charges for different user groups and variations in relation to service costs and demands also need to be studied. Equity can be achieved when user charges treat similar customers equally, and that customers in different situations are not treated the same. This means that users pay monthly bills for services, which are proportional to the costs of providing the same by the ULB. Affordability - While the basic objective of user charges is to recover service costs, the charges levied should be affordable to the users. This principle requires the ULB to choose affordable service levels and ensure efficient service. Many times ULBs adapt lifeline tariffs for vulnerable customers, duly subsidizing the costs through cross subsidy mechanisms to address the issue of affordability. Willingness-to-Pay (WTP) measures the extent to which a consumer is prepared to accept increases in tariffs/charges for services. In order to ensure maximum cost recovery, the level of urban services offered needs to match user needs and affordability. As these two factors vary by income group in urban areas, any strategy for cost recovery must recognise the location differences in WTP. To ensure appropriate pricing and cost recovery of services, one must ascertain consumer preferences and understand consumer WTP for these services.
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Beside the above fundamental objectives, there are additional considerations involved in setting user charges, which are as follows: Resource conservation - User charges should serve the purpose of discouraging excessive or wasteful uses of public service, thus promoting the conservation of depleting resources. Acceptability - User charges have an inescapable political dimension. A successful user charge is one that is free from public criticism and not objectionable to political leaders. Simplicity, feasibility, and transparency - User charges should be simple and easy to understand for both users and ULB managers in order to avoid anomalies and disputes. Finally, there should be transparency in every aspect regarding the fixing, revision and implementation of user charges. Public disclosure is a key for ensuring transparency; the users should be provided with full information. Interest Groups Six interest groups are involved in taking decisions relating to user charges (Bahl and Linn, 1995). They are: Direct beneficiaries of a public service, would like to pay the least for the services consumed, provided they do not see a connection between the prices charged and the quality and quantity of services consumed. Those who are willing to support an efficient pricing strategy and even the crosssubsidisation of a service, which they themselves tend to consume more intensively than others. This group, generally, is small in a given context. The local politicians, tends to favour free provision of as many services as possible with government funding through budgetary means. This arrangement maximises their ability to provide patronage, at least as long as they have a say regarding where, to whom, or how the service is to be provided. The managers of public services, are likely to handle multiple and possibly conflicting objectives - to the extent that they are free from direct political pressure from either the beneficiaries or political actors. It is in their general interest to expand services as rapidly as possible in order to increase their influence, follow their political interest, and gain public approval. Higher-level organisations such as state and central government entities, frequently take interest in the prices ULBs charge for infrastructure services. International institutions that provide grants or loans and technical assistance to developing countries, have become an important part of the process of determining urban service charges in recent years. Institutional Arrangements The ways in which interest groups can influence the process of determining user charges depend on the institutional setting. One of the important factors which influences the structure and form of user charges is the fiscal relations between central, state and local governments. In
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some cases, urban infrastructure services, such as water supply, sewerage, waste water treatment, etc., are constructed by state or their instrumentalities, such as water authorities, water supply and sewerage boards, etc., and then handed over to the ULBs to operate and maintain. ULBs are obliged to operate the services and repay the capital investment to statelevel agencies from the user charges collected by them. In some other cases, ULBs are given grants to operate infrastructure facilities constructed and handed over to them by the state governments. While in the former case, ULBs are given the freedom to determine the user charges based on the local conditions, in the latter case, grants are given to ULBs by the state/central governments to meet the shortfalls in cost recovery. Fiscal Transfer Mechanism Another factor, which exerts great influence on user charge decisions, is the fiscal transfer mechanism. Fiscal transfers could be structured to provide incentives for initiating and practising full cost recovery by local governments. In addition to the above factors, which determine the political will to charge the services provided, institutional factors such as multi-agency provision of the service, absence of a functional budgeting system, and past pricing practices also affect the structure and form of user charges.
2.3.9.4. Tariff Policy Reform

Attributes A good tariff policy needs to address mainly four broad objectives: efficiency in resource allocation, equity, effectiveness (tariffs should be simple and enforceable), and allocation of productivity gains between producers and consumers. The main driving force in ensuring commercial viability of infrastructure projects is an appropriate tariff policy. Tariff policy basically relates to determining the base price of service delivery, tariff structure and periodic tariff revision. Base Price Ideally, the base price for urban infrastructure services, such as water supply, should be fixed to cover the incremental cost of providing the additional quantity/level of service. It will make revision acceptable in a wider interest of political and public support. It is also observed that factors such as the opportunity cost of using alternative delivery mechanisms, implicit productivity loss from no-project option, etc., are also used. However, in practice, base price revision is done through an exercise in which commercial and social objectives are balanced against political and institutional conditions prevailing in a given situation. Contingent analyses such as willingness-to- pay and willingness-to-charge are some of the common approaches used to determine base prices. One of the main issues experienced in tariff revision arrangements, used in some privatisation initiatives, is that they fail to share efficiency gains such as those derived from the privatisation process with consumers in the form of a reduction in tariff. This is largely due to a predetermined base price tariff structure. Since a base price is determined on the basis of
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interaction between the multiple objectives of consumers, politicians, urban managers and inter-government relations, consensus on a pricing policy usually determines the level of tariff increase. In this framework the opportunity to share the productivity gains with consumers through a reduction in utility price is remote. Unit Cost of Production In most urban infrastructure privatisation initiatives, tariffs are linked to the cost of production. The cost of production is worked out by using variables such as electricity consumption, cost of consumables, O&M expenses and the general consumer price index to capture the inflationary effect on the service price. These variables are weighed, either using subjective or objective weights, to determine the extent of price variation over the tariff revision period. Equity It is necessary that the tariff structure be such as to ensure affordability of services for lowincome consumers. Increased community involvement can help support this by linking the level of service provided to the communitys willingness and ability to pay. Expanding ser vice coverage will also increase affordability by allowing consumers to switch from high cost alternative suppliers, such as tankers and private vendors, to piped services. Where there is a need to continue support to poorer households, this can be achieved by efficiently targeting the neediest segment of the population. Regulator An important part of structuring tariff revisions is to establish a regulatory structure to protect the interests of both producers and consumers. In the absence of a regulatory body, this is being accomplished through structuring of the concession agreement to implement the tariff revision policy agreed to by public and private agencies. Concession agreements structure institutional frameworks for revising tariffs by setting up tariff revision committees and committees for redressing complaints. It is important to recognise that a regulatory framework should not only aim to control the monopolistic tendency of private producers, but should also ensure their financial viability. Enforceable and simple tariff collection and revision procedures are essential for the financial sustainability of infrastructure projects. Towards an Efficient and Equitable Price Structure Proper system of pricing of urban infrastructure services is important for financial viability as well as for efficiency in investment and distribution decisions and for ensuring equity and minimum life line rates for the low income groups. Towards these aims, the approach to pricing should follow some general rules, viz. First, depending on the service characteristics, it is essential to identify the appropriate structure of charges (tariffs). For example, for water, it would be useful three part tariffs, reflecting access and connection on one hand, and the use or consumption on the other.
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Second, it is necessary to estimate the marginal or average incremental costs for each of the identified dimension of the service. These costs must be adjusted to reflect the true market costs, especially of capital resources used for the service. Wherever possible and appropriate, identify the variations in costs across space (zones or regions), user groups (size of connection) or time (seasons). Third, assess the 'willingness to pay' for different dimensions of the service of different user groups through occasional special surveys. Identify the maximum affordability for service, especially amongst the low income groups. For other users identify the costs of alternative sources or modes of supply. Fourth, determine the initial tariff structures based on the average incremental costs and the willingness to pay of different user groups. Allow for the lower charges to ensure life line rates. For water services, it will be important to decide on the question of metering and adopt a suitable cross subsidization scheme.
2.3.9.5. Challenges to Achieve Full Cost Recovery

From sector analysis, it is clear that most utilities in the region face significant challenges related to tariff setting, human and institutional capacity, infrastructure development and financing. Principal challenges to achieving Full Cost Recovery (FCR) include: Revenues/Tariffs Most utilities have insufficient revenue to cover O&M costs and capital costs. With insufficient revenues, utilities lack incentives to extend coverage to the poor, promote water conservation, reduce NRW and properly manage meters and infrastructure. Low salaries, benefits and professional advancement opportunities prevent many utilities from attracting quality managers and technicians. Government employment policies often result in overstaffing at utilities. Operations and Maintenance Many utilities in the region make inefficient use of energy/fuel, lubricants and chemicals. For cash-strapped utilities, maintenance is a low priority, which can reduce the life of the asset. Poor maintenance often results in pipe leakages and high NRW. Capital Expenditure (Depreciation) Many utilities struggle to establish financial autonomy and prioritize capital projects. Utilities often do not consider inflation versus replacement costs for their operations and do not properly analyze the depreciation costs of an asset against the principal still due on their outstanding debt. Cost of Capital Financially strained utilities typically secure high interest loans and can only borrow funds if the government or some other institution guarantees the debt. Utilities do not pass rising costs associated with variable interest rates on to customers.
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General and Administrative Many utilities lack important internal controls, such as operating policies and procedures, as well as timely, accurate and transparent billing and accounts receivable records. Mismanagement of meter installation, maintenance, reading and billing and collection also contribute to inefficient operations. Government Relations
Many government offices do not fully understand the importance of FCR and how financially stable utilities can simultaneously increase service quality, extend coverage to the poor and promote customer satisfaction. With a better understanding of the benefits of FCR, governments are more likely to adopt, implement and enforce rationally based and fair water pricing tariff legislation.
Customer Relations
Users in the region too often assume quality water and wastewater services should be free or low-cost. Educating customers about the true costs of operating and maintaining quality water services is crucial for promoting FCR. Paying customers must understand that they are subsidizing illegal connections. Artificially low water bills may, in fact, serve as a disincentive for customers to pay, since they reinforce the notion that water services are low-cost commodities.
2.3.9.6. Preliminary Considerations

Based on the several findings and analysis, the following preliminary considerations were developed for promoting FCR through improved policy measures and capacity-building. These considerations may be useful more generally for national and local governments, and utilities operating in the region. National Level
Adopt a National FCR Policy: Countries should consider adopting full cost recovery policies that address issues of affordability and extend access to the poor. Any adopted policy should include a reasonably detailed outline of costs to consider, including depreciation and cost of funding, when determining the revenues required to achieve FCR. Utilities should not follow these policies rigidly, since affordability concerns should be addressed in tariff setting (cross-subsidization), or if absolutely necessary, through specific government subsidization of connecting and possibly providing water to target lower income customers. Establish an Independent Regulatory Body: Given the difficulties many surveyed utilities face in obtaining tariff adjustments, an entity that is not subject to political pressure should be responsible for completing tariff reviews and adjustments. This entity should (1) provide the necessary expertise and authority to evaluate a utilitys financial performance, and (2) work to protect consumer interests and needs.
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Local Government Level
Develop Quantitative Performance Targets: Regardless of whether or not a regulatory body is established, local governments should consider developing quantitative performance targets to evaluate utility performance. Performance indicators and ultimate targets should be realistic, achievable and understandable to all parties involved. Initially, since efficiency data on utility performance is limited, local governments could negotiate the indicators and targets with utilities and measure performance on a periodic basis (e.g., year-to-year). Over the longer term, the performance indicators could also be used to compare performance with other utilities.
Existing data, such as financial statements, could provide initial benchmarking information necessary for setting performance indicators. Utilities that achieve these performance indicators, in turn, should be rewarded with more autonomy, including offering bonuses for management and employees. Utility Level
Tariff Review Measures: When applying for a tariff review approved by local governments, utilities should address the concerns of both local governments and the public. The list below provides an illustrative menu of options for utilities to consider: Advocate Affordability and Tariff Increase Issues Together: Address issues of affordability in proposing the tariff increases. This strategy will address a primary concern of governments and councilors in granting a tariff increase. Analyze Unserved Population Rates: Consider conducting a survey on how much the unserved population has to pay for water. In areas where alternative sources of water are not available, the unserved often have to buy water from vendors and pay from 7 to 35 times more per cubic meter than those served with piped water. Arguably, if tariffs are increased, the utility will have the ability to expand service to the unserved. When resources are not available to conduct a survey, the utility may be able to rely on results from surveys conducted in other similarly situated towns. Examine Other Arguments to Support FCR Tariffs: Highlight backlogs in service delivery and the governments inability to fund the backlog, and explain how a tariff increase could address these financial shortcomings. While backlogs in service delivery can be construed as a weakness, it could also strengthen the argument for FCR tariffs. Express Tariff Increases in Easily Understandable Terms: Express the implication of the tariff increase in the usual terms (e.g., 20 percent increase, or 30 cents/cubic meter), as well as in new terms, such as cost per liter or kiloliter. Maintain Regular Communication with Local Government: Utilities should consider maintaining regular communication, written and/or verbal, with local governments on the status of water supply service and potential problems. When reporting financial information, for example, utilities must address concepts of depreciation and its importance in repayment of principal on loans, and the funding of additional capital projects from internally generated funds (e.g., asset replacement). Emphasize Strong Leadership and Management: Based on the survey findings, successful utilities depend on strong management and leadership (attitudes and professional background), which in turn require competitive recruitment, commensurate salaries and incentives (career path and planning incentive pay
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schedule). To increase the pool of qualified candidates, successful utilities should consider recruiting water utility managers from both inside and outside their organizations. Such recruitment strategies tend to make the profession of water utility managers more attractive, since career advancement is not limited to promotion within a particular utility.
Develop Customer-Oriented Services: Utilities should consider emphasizing customer-oriented service strategies such as increase in no. of connections, billing and collection practices, improvement in metering etc. Establish a Medium-Term Business Plan: Successful utilities typically gauge their financial viability and improvement by developing and following a medium term business plan. To stay on track with the business plan, utilities should consider relying on accurate record keeping, accounting and IT, as well as careful analysis of capital investment. Including the ratemaking authorities in the business plan process will emphasize the importance of achieving FCR and may facilitate an increase in rates. Adopt Cost-Cutting Measures: To reduce costs, utilities should consider implementing strategies such as reduction in physical and other losses, power costs, personnel costs, chemical costs etc. Adopt Procedures to Promote Transparency: Transparent and independently verifiable information is critical to all stakeholders. For employees, this issue becomes even more important as the utilities adopt incentives. For investors, this (audited) information will reduce uncertainty and therefore the cost of financing and encourage increased investment. For ratepayers (customers), transparency and reliable information will facilitate efforts to increase tariffs to levels that are required to achieve FCR. For governments/regulators, accurate information provides a clear method for determining proper rates. It is critical that the parties responsible for taking the steps to attain transparency and independently verifiable information do not fear negative consequences in the short term.
2.3.9.7. Steps to implementing the reform

Implementing user charge reforms involves not only recovering cost incurred on provision of service, but also achieving or ensuring economic efficiency (efficient investment allocation and distribution systems), equity and affordability (minimum lifeline rates). The following broad principles/steps should be followed while implementing user charge reforms: The first step in implementing user charge reform is to understand the real costs of operations and maintenance for each service. The ULB should attempt to ring-fence all the related costs pertaining to a specific service with clear demarcation in capital and revenue accounts. This permits the identification of the real costs for O&M so that the unit costs, which need to be recovered from the users, can be assessed for the respective service. On establishing the unit costs of O&M for providing a service, the ULB, as necessary, shall set principles for cross subsidization to ensure, simultaneously, affordability and cost recovery. Assess the different user groups ability to pay for different services through occasional surveys and establish affordability levels, especially among low-income groups.
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It is always recommended to ensure volumetric pricing wherein the user is charged based on consumption. However, in the absence of measurement systems, a simple telescopic flat tariff system can be followed until the measurement systems are in place. In the case of services like waste management, the user charges are flat tariffs only. On determining the tariff structure, including cross subsidies and inflationary trends, the ULB shall prepare a progressive tariff rationalization plan for ensuring recovery of total O&M costs by the year 2012. While preparing the tariff rationalization plan, care should be taken to commit to progressively improving efficiencies by reducing losses and improving customer services, which can significantly reduce the tariff impact on the users. Reducing commercial losses primarily by improving management efficiency by way of improving billing and collection systems would require minimal time and capital investment. However, reducing physical losses would require some investments, which need to be planned and budgeted for. Tariff increases due to natural inflation shall preferably be automatic and should be implemented at least annually by way of automatic annual indexation. Any increase beyond normal inflation shall be carefully planned, and agreed among the council and with citizen groups. If the cost of collecting a charge, say every month, exceeds the amount collected, an alternative charging mechanism shall be determined either by way of integrating with an annual tax or by other means.
2.3.9.8. Provisions for Water Charges in Andhra Pradesh

A municipality has to so far as the funds at its disposal admit, provide a sufficient supply of water fit for the use of the inhabitants. Water charges have to be paid as per the rates and the conditions stipulated in the water supply bye-laws made by the Council. Water charges shall be recoverable in the same manner as in the case of property tax. The supply of water is classified under the following categories. a. Supply to residential buildings b. Supply to residential hostels c. Supply to shops, commercial establishments, restaurants, eating houses, theatres and places of public amusement or entertainment d. Supply to industrial undertakings e. Supply to non-residential buildings not falling within the scope of category b,c, or d. A Municipal Council has to take a provisional decision for fixation/revision of water charges and issue a draft notification calling for objections / suggestions for fixation/revision of water charges. Thereafter the Council has to consider the objections / suggestions received and finally fixes/revises the rates. After taking a decision in this matter, the water supply bye-laws are to be made/amended in draft and submitted to Government or any authority authorized in this
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behalf for approval of water supply bye-laws. After getting the approval, final notification has to be issued fixing/revising rates of water charges for information of the public. Rates of water charges: Generally, water charges are categorized as (a) Residential - unmetered, (b) Non-residential like hotels, restaurants etc. - through meter connections, and (c) Bulk supply to industrial units. In addition, Water supply donations are collected to defray the capital cost of water supply schemes. The rates in operation for water supply in Corporations and Municipalities (Andhra Pradesh) are as follows Municipalities Residential Commercial (General ) Donations Donations OYT Metered connections Corporations Residential Donations Residential Donations Residential (OYT) Metered taps
From Rs. 30/- to Rs.100/- per tap per month From Rs. 250/- to Rs. 700/- per tap per month From Rs. 2000/- to Rs. 10000/- per connection From Rs. 5000/-to Rs. 30000/- per connection From Rs. 8/- to Rs. 25/-(per Kilo Litre)
From Rs.60/- to Rs.90/- per tap per month Rs. 6,000/- per connection : Rs. 10,500/- per connection From Rs.12.50 to Rs.25.00 (per Kilo Litre)
a. The ULBs are realizing only 40% of the Operations & Maintenance cost of water supply from user charges, and there is a marked deficiency in the maintenance of water supply system. filteration plants, and pump sets. b. Pipe lines are not being replaced in several places though they outlived their utility. c. The ULBs have defaulted in paying electrical charges The Operation and maintenance costs of water supply should include 1. Salaries of waterworks staff 2. Electrical consumption charges
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Government have been issuing instructions to the municipalities and municipal corporations to revise water charges and make the water supply system self sufficient with the water charges and the response is under various levels of compliance. There is an immediate need to fix water charges in such a manner to enable ULBs to realise the Operation and Maintenance cost in full and to pay the interest on loans taken under water supply from the users of water supply for the following reasons:

3. Cost of consumables 4. Cost of replacement of pipelines and other material 5. Repair to pump sets, motors and other water supply and electrical installations Collection of other fees/charges for supply of water: As discussed earlier, in addition to water charges, Water Supply contribution (Donation) is collected to meet the capital cost of providing water supply. Connection Charges like (i) Road cutting charges, (ii) Supervisory charges and (iii) Advance monthly water charges for 3 months
2.3.10. Other Non Tax Revenues:

2.3.10.1. Fees from Markets and Slaughter Houses
ULBs maintain markets and slaughter houses for the convenience of the public and collect fee for use of markets and slaughter houses. The right to collect fees in the markets and slaughter houses would be generally leased out by the municipalities and it shall be effected by public auction. Sale Notification: The Commissioner prepares a draft notification where right to collect fees in market and slaughter house is proposed to be leased out by the Municipal Council. The notification has to be approved by the Council. The draft notification consist the following conditions for lease of markets and slaughter houses. i. The rates of fees to be collected in the market and slaughter house is indicated
ii. The authority of selection of lessee vests in the Municipal Council
o o
Security deposit to be paid before taking part in the auction Solvency certificate by an officer not below the rank of Tahsildar in case of landed property or by Commissioner in the case of house property in the town.
iv. Where the period of lease is one year, the lessee shall deposit one fourth of the lease amount. The balance of the lease amount shall be paid in equal monthly installments within a period of nine months commencing on the 1st April of every year. vi. The lease deed shall be executed and registered vii. If any installment due under the lease is not paid within one month, the Commissioner shall reports the matter to the Council which is competent to terminate the lease and order its management departmentally Auction of the leasehold right : After approval of draft notification by Council, it would be published in the District Gazette and in the newspaper for information of public. The Commissioner conducts the auction subject to the conditions stipulated in the sale notification. After completion of the auction, Commissioner places before the Council a list of bids received at
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iii. To participate in the auction, the following conditions have to be fulfilled

the auction together with a recommendatory note. Normally the Council accepts the highest bid. Registration of Lease Deed: After approval of the bid by the Council, the Commissioner shall enter into a written contract with the approved bidder. A lease deed shall be executed and registered at the cost of the lessee incorporating all conditions of lease set forth in the sale notification. Departmental Management of Markets: Whenever there is no lessee for whatever reason, the market or slaughter house is managed departmentally and the fees in respect of the use thereof shall be collected by the municipal staff or staff engaged for the purpose by means of tickets printed and supplied by the Commissioner.
2.3.10.2. Rent from shop rooms and buildings

The lease of buildings or the terraces of buildings, shops or godowns and of land belonging to municipality would be effected by public auction. The Commissioner prepares a draft notification for sale of lease of shop rooms or buildings setting forth the terms and conditions as in the case of sale of right to collect fees in markets and slaughter houses and places before the Council for approval. After approval of the said notification, the lease of buildings or shop rooms shall be effected by public auction which shall be conducted by the Commissioner. The sale notification will be published in the district gazette and newspapers for information of public. The bids at the auction will be placed by the Commissioner before the Council and the Council normally accepts the highest bid for right of use of the shop room. Conditions of Lease: The right of leasing out the buildings, shop rooms, among others, is subject to the following conditions.
2) The Council may also in exceptional circumstances and with prior sanction of Government renew the lease at a rate not less than 15% over the existing lease. 3) The Council with the prior sanction of Government or the Government may dispense with public auction and allot shop or shops to any institution on rent which shall not be less than that which the adjoining shops of the same or similar accommodation in similar circumstances usually fetch in public auction. 4) 15 percent of the shops and stalls shall be reserved for allotment to the members of scheduled castes without normal channel of public auction at 50% of the rent of adjacent shops or stalls leased out in public auction or Rs.2.50 per square foot whichever is less. For this purpose, the District Collector sponsors members belonging to SCs.
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1) The council may renew the lease for a period of three years at a time without conducting public auction, if the present lessee agrees to renew the lease in his favour at an amount which will be at 33 1/3 percent above the earlier rent or the prevailing market rental value of such shops whichever is high.

5) The Council may lease out vacant sites belonging to it for a period not exceeding five years dispensing with public auction in special cases with the prior approval of the Government. 6) The Council may lease out the fishing rights in the tanks other than fresh tanks belonging to it in favour of Fishermen Cooperative Societies or Scheduled Castes or Scheduled Tribes Cooperative Societies engaged in fishing operations as may be notified or approved by Government without conducting auction for a period of three years. The lease amount shall be fixed basing on the average income realised for the past three years and also in consultation with Director of Fisheries.
2.3.10.3. Good-will auction of shop rooms
Government accorded permission to Councils (Andhra Pradesh model) for construction of shopping complexes in vacant lands with good-will amount raised through public auction and leasing them out on monthly rental basis. For this purpose, the Council fixes a reasonable lease period, normally five years, and monthly rent and put to public auction the amount of nonrefundable deposit amount (goodwill). The bids at the public auction shall be placed before the Council for acceptance of the highest bid. Prior sanction of the Government sanction has to be obtained for construction of shop rooms on goodwill auction. The goodwill amount has to be collected in four convenient installments. The other general conditions for lease of shop rooms shall apply in the case of the shop rooms constructed on goodwill basis. In respect of shop rooms which have already been constructed, they can also be leased out on goodwill basis. In this case also, the Council will fix a reasonable lease period (generally five years) and monthly rent and put to public auction the amount of non refundable deposit (goodwill). After due publicity, public auction will be conducted by the Commissioner. The bids at the public auction will be placed before the Council. Ordinarily, the Council will accept the highest bid.
2.3.10.4. Building permission fees

A Municipal Council issues a notification specifying levy of building permission fees for construction of various categories of buildings. The notification may contain the following items. 1. Planning fees 2. Betterment charges 3. Security deposit in case of Apartments 4. Rain water harvesting scheme (RWH) charges 5. Municipalities in UDA area a. Plinth area charges b. Open area charges The building permission fee, betterment charges and other items are intended to ensure planned development of the ULB. The Commissioner places proposals before the Council for revision of the above categories of fees and charges periodically keeping in view the cost of
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regulating the construction of buildings and betterment charges needed for provision of civic amenities in the layout areas.
2.3.10.5. Trade licence fees

A Municipal Councils issues a notification to the effect that no place within municipal limits shall be used for any or more of the purposes specified without the licence of the Commissioner and subject to the conditions specified therein. The notification shall be published in the district gazette and in newspapers for information of public. The council is competent to fix the fees for every licence or permission on such units and at such rates. Basis for fixation of Licence Fee: A licence fee for carrying on a particular trade or industry shall not be regarded as a form of tax. The following principles should be kept in view while fixing the licence fee. 1. the cost of issuing the licence 2. the cost of inspecting the premises to see whether they are suitable for the purpose proposed. 3. the subsequent cost of inspecting the premises to see that they are being used properly and that the conditions and restrictions imposed are observed. Sanction of licence: The owner of every place covered by the notification applies to the Commissioner for a licence for the use of such place for such purpose. Applications for renewal of such licences shall be made not less than thirty days before the end of every year. Applications for licence for places to be newly opened shall be made not less than thirty days before they are opened. The Commissioner may grant or refuse to grant or renew such licence by an order subject to such restrictions and regulations as to supervision and inspection as he thinks fit. Every licence for trade expires at the end of the financial year.
2.3.10.6. Encroachment fees

Every Council issues a notification fixing the rate of encroachment fee for various temporary encroachments. The Town Surveyor and town planning staff submits list of encroachments by 30th April of every year. The Commissioner inspects all encroachments and classify them as objectionable or unobjectionable from public health, safety and traffic point of view. Objectionable encroachments would be removed and unobjectionable encroachments would be licensed temporarily after collecting fee. . The list of unobjectionable encroachments shall be entered in a register with the amount of fees payable. Demand notices would be issued to all encroachers to pay encroachment fee within the 15 days from the date to service of the notice. Action would be taken to remove the encroachments if the fees is not paid within the stipulated time.
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Module 2 Financial Management 2.3.10.7. Parking fees

Road margins and street margins vested in the Council can be leased out by the Commissioner for occupation for a temporary purpose. The right of collecting fees for parking of vehicles on certain important road margins can be put to public auction as in the case of markets. For this purpose, the Commissioner prepares a draft notification for approval of Council with the following terms and conditions. 1. List of road margins to be identified for parking. 2. The extent of road margins to be used for parking. 3. Parking fees to be collected. 4. The period of the right of collection of parking fees. 5. Security deposit to be paid at the time of auction. 6. Solvency certificate to be produced at the time of auction 7. Payment of three months parking fees (if lease is for one year) to be paid in advance after acceptance of the bid. 8. Payment of balance amount in nine equal installments. 9. Execution of agreement after acceptance of the bid. Auction of the Parking Fees: The draft notification after approval, shall be published in the District Gazette and in newspapers for information of public. The Commissioner would conduct auction subject the conditions stipulated in the notification. After completion of auction, Commissioner places before the Council a list of bids received at the auction together with a recommendatory note. Normally the Council accepts the highest bid. Registration of Lease Deed: After approval of the bid by the Council, Commissioner enters into a written contract with the approved bidder, a lease deed executed and registered at the cost of the lessee incorporating all conditions of lease set forth in the sale notification.
2.3.10.8. Miscellaneous non-tax items

The following are the minor non-tax items collected in ULBs. 1. Fees for issue of Birth & Death certificates 2. Fees for extract of records. 3. Sale of sweepings / compost 4. Revenue from avenue trees 5. Magisterial fines 6. Sale of forms 7. Amount realised from unserviceable material 8. Burial ground charges 9. Guest house charges
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2.3.11. Duty on Transfer of Property

In Andhra Pradesh, a duty on transfer of property is levied in the form of surcharge on the duty imposed by the Indian Stamp Act, 1899, on certain instruments of transfer of property, under various Acts governing local bodies, as follows:
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Sl. No. 1 2
Nature of local authority
Authority for levy of Surcharge on Transfer Duty Section 69 of Andhra Pradesh Panchayat Raj Act, 1994 Section 120 of Andhra Pradesh Municipalities Act, 1965 Section 110 A of Madras District Boards Act, 1920.
Gram Panchayaths Municipalities
Rate on market value of property 5% 5%
Zilla Parishad Areas in Andhra area (NonPanchayat and Non-Municipal) Zilla Parishad Areas in Telangana area (Non Panchayat and NonMunicipal) Municipal Corporation of Hyderabad Secunderabad Cantonment
5%
Nil
Nil
Section 261 of the Hyderabad Municipal Corporation Act, 1955 Section 60 of Cantonment Act, 1924
5%
5%
The classes of instruments on which duty is leviable are as follows: Municipal Corporation of Hyderabad Secunderabad Cantonment Gram Panchayats and Municipal areas & ZP area in Andhra region Sale, Exchange, Gift, Mortgage (with possession) of immovable properties. Sale, Gift & Mortgage (with possession) of immovable properties. Sale, Exchange, Gift, Mortgage (with possession) and perpetual leases of immovable properties.
Procedure for collection: In the Municipal Corporation of Hyderabad and in Secunderabad Cantonment, the duty is collected in cash by the Registration Officer at the time of registration and remitted to the credit of the Corporation or Cantonment as the case may be on the following working day, deducting 5% towards collection charges. In rest of the areas, it is collected by means of stamps. The Registration Officer allocates the duty to the local authority concerned in the ledger and a quarterly statement is sent to the District Registrar concerned, who authorizes the Treasury for payment to the respective local bodies deducting 5% towards the collection charges for the Registration and Stamps Department. The duty collected on behalf of Gram Panchayats should be allocated to the said Panchayat, Panchayat Samithi and Zilla Parishad in the ratio of 3:1:1 vide Rule 7 of A.P Gram Panchayats (Duty on Transfer of property) Rules, 1965.
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Recently, the Sub-Registrars have been empowered to authorize Treasuries for payment of Transfer Duty to Local Bodies.
2.3.12. Other Land-based Instruments of Cost Recovery

The Property Tax revenue even if tapped fully has to have its own limitations and would not fulfil the overall requirements of municipal services. It is in this sense that a search for additional instruments that can enhance the value-added role of municipal services becomes inevitable. Given below are such instruments applied as innovative tools in some cities in India, USA, Brazil, Colombia and elsewhere: a) Betterment levy b) Valorisation charges c) Impact fee d) Exaction
a) Betterment levy
Betterment levy is intended to recover the cost in the provision or improvement of infrastructure. Under this instrument the full cost should be recovered on the basis of unit area rates fixed on the grounds of size, structure, location and use. This instrument should be applied for the improvements taken up at a large number of unauthorised properties. This is widely used in the countries of Latin America and South East Asia.
b) Valorisation
Valorisation is used to recover partial increase in the land values as a result of public investment. The determination of valorisation charges is done in the same manner as in the case of betterment levy. However, it requires perfect information of the real estate market. This may be used for areas taken up under environmental improvement such as flyovers, bridges infra-city-expressways to reduce congestion, air pollution, noise pollution, road accidents, etc. This is used by cities in Latin America and the United States.
c) Impact fee
Impact fee is used by cities in the United States to recover the additional burden on existing municipal infrastructure and to provide for future infrastructure resulting from new development. The impact fee can be used to recover costs for schools, police, library, fire service, water, streets, highways and other services. It is to be charged on new developments in such areas which are already occupied, for example, vacant plot or changes in the Floor Space Index (FSI). This has to be recovered from the developer and should be linked with the development permission itself.
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Module 2 Financial Management d) Exactions

Exactions are used to link the provision of certain municipal services with the development permission under which the developer has to provide the services such as, capital works pertaining to road pavement, street lighting, solid waste collections, bus terminals, community centres, etc. As in United States, while involving the private sector in the land development at the neighbourhood level, exactions can be used among cities of Asia and Africa. The four instruments suggested above will require suitable provision in the Municipal and Town Planning Acts. The complete listing of properties and development of property details as part of Property Tax information would, to a large extent, provide the necessary base for betterment levy and valorisation. In sum, there is substantial scope to streamline the Property Tax administration to improve the performance of Property Tax. In order to ensure vertical growth of the Property Tax, a series of legal and administrative initiatives are further required. Besides these initiatives, there exist quite a few additional instruments that can also be applied to tape the value-added role of municipal services.
2.3.13. Cost Reduction

2.3.13.1. Public Private Partnerships:
The first objective of PPP is to improve the efficiency of ULBs in capital utilisation and service operations. The second objective is to inject large-scale investment into the urban infrastructure and service sectors through tapping capital markets. Another objective is to introduce technical and managerial expertise and state-of-the-art technologies into the sector. Since demand for urban infrastructure is highly differentiated by time, purpose, price and quality, in contrast to the uniform supply that characterises most government services, success of private sector participation will depend on its capability to capitalise on the diverse customer base and differential demand for urban services. Table 1: Function-wise Issues and Need for Partnerships Function Issues Need for Privatisation Municipal Roads and Huge backing Insufficient institutional and street lighting financial capacity Lack of funds for investment Roads linked to human health, environment, congestion/noise Insignificant recovery pollution and quality of life Declining O&M levels
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Traditionally, PPP is understood as a concept, which involves the public and private sectors working in co-operation and partnership to provide infrastructure and services. It is one of a range of alternative structures that fall between conventional procurement through public ownership and full privatisation. Instead of the public sector procuring a capital asset by paying for it in full up front, the effect of a typical PPP structure is usually to develop a single standalone business, financed and operated by the private sector.

Municipal Water Supply Low supply High leakages/poor O&M Poor quality water Insufficient access to poor Low recovery Linkages with Environment, Health and Quality of Life Linkages with Productivity (Industrial/Business requirements and productivity of poor) Low availability of funds for O&M and investments with municipal sector and other public institutes Wide scope for community potential Shortage of Public funds Insufficient public/municipal institutional capacity Enormous potential of Private Sector including community Linkage with environment, human health and productivity Shortage of public funds Linkages with environment (Air, water), health and productivity. Cost effectiveness with private sector involvement Existence of community potential Private sector potential Recovery potential Efficiency in the O&M Role in the productivity, environment, quality of life and health of community
Sanitation Poor coverage of sanitation wide-gap Poor maintenance Poor recovery Almost nil treatment safe Solid Waste Management Community Services, community centres, buses, bus stops, parking places, market places, shopping centres Low collection ratio Almost insignificant treatment Lack of municipal staff Abnormally low recovery Wide gap Limited resources (both physical and financial) Declining Maintenance of assets
2.3.13.2. Energy Audit:

Urban Local Bodies spend significant amount of energy and incur expenditure in servicing the population. The Municipal Energy Efficiency projects offer tremendous opportunities to ULBs to optimize energy usage and reduce energy expenditure and improve services. The basic objective of such project is to improve the overall energy efficiency of the ULBs which could lead to substantial savings in the electricity consumption, thereby resulting in cost reduction/savings for the ULBs. The financing of the required investments is proposed to be met by sharing the resultant savings in the electricity bill of the ULBs The major energy loads in a municipality are typically the water pumping systems, street lighting, sewage treatment and handling, and electricity distribution. Municipal buildings such as offices, hospitals, schools also contribute to the high municipal energy bills. Therefore, the following systems would be targeted during the municipal efficiency audit:
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a. Street Lighting b. Water Pumping c. Sewage Pumping In order to take the concept forward and to measure the actual savings in power consumption, it is necessary to first establish a base line of energy consumption, which would act as a reference point. Thus, as a first step it would be necessary to undertake the energy audit of the ULBs. The energy audit would involve studying configuration of the existing systems and its operations and the consumption and cost of electricity. Based on the energy audit, appropriate projects can be recommended that would lead to reduction in energy consumption. A cost benefit analysis would also be presented, which would enable the ULBs to decide on whether or not to implement the recommended energy efficiency solution.
2.3.13.3. Case Studies Energy Audit

Case Study Energy Efficiency Projects in ULBs, Gujarat The Urban Development Department (UDD) of the State of Gujarat has been taking a pro-active approach to improve infrastructure and services provided by Urban Local bodies (ULBs) across the State and is considering improving the energy efficiency as one such initiative in this direction. The Department has authorized the Gujarat Urban Development Company Ltd. (GUDC) for Energy Efficiency Projects in all ULBs in consultation with IL&FS Ecosmart Ltd. the project will be undertaken in Nirmal Gujarat and Gujarat Municipal Finance Board will provide the fund of Rs. 2 Crore for carrying out Energy Audits in 161 ULBs. The Memorandum of Understanding was signed between GUDC & IL&FS Ecosmart Ltd. for technical assistance as well as investment in Energy Saving Programmes in the State. As per the draft preliminary audit report for 10 ULBs, estimated minimum saving potential for water pumping is 15% and for street lighting it is 20% which sum up to an extent of Rs. 1.2 crore savings per annum against the annual energy bill of Rs. 6.2 crores for 10 ULBs. The saving potential for 159 ULBs is estimated at Rs. 20 crore per annum. Case Study - PPP for Street Lighting and Energy Conservation, BANGALORE, Karnataka Bangalore has involved a Private Energy Service Company to introduce advanced technologies for energy management in street lighting system. Street Lighting system in towns and cities has a potential to reduce power consumption through use of advanced technologies for energy management. The project was undertaken by Bangalore Development Authority at the Outer Ring Road (ORR) with the objective of developing innovative mechanisms to substantiate energy management and improve urban street lighting infrastructure. Prior to the initiative, despite having the energy meters the monthly energy bills were not made as per the tariff, based on actual readings leading to erroneous, inflated or deflated billing. The energy bills for non metered circuits were based on the connected load of the circuit and the monthly operating hours. There were no periodic checks to alter or regulate time settings to
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switch on/off lamps leading to extra lighting hours. Also, there was no mechanism to check the power theft from the lines meant for street lighting supply, causing revenue loss to both ULB and the Utility. Lack of proper energy usage data prevented the ULB to plan for future energy requirements and to achieve efficient energy distribution. As a part of the initiative, the roles and responsibilities were clearly defined for Bangalore Development Authority, Energy Service Company (ESCO) and the Service Provider. While BDA gave necessary sanctions to implement the energy saving project for the street lighting system of ORR, all the required finances were raised by the ESCO to fund the project. The company Elpro Energy Dimensions Pvt. Ltd provided energy saving equipment, installed, commissioned and also provided the proof of concept at the initial stages of the project. Some of the features of this equipment include energy saving through remote switching on/off, dimming control of lights during night time, power conditioning, remote energy metering and power theft monitoring. The project resulted in huge annual energy savings, centralized monitoring of all street lights, decreased labor costs, decreased capital expenditure on lamps and fittings, decreased contract charges and better monitoring by contractor. The street lighting project at ORR for BDA has generated energy savings to the tune of 40-45% monthly, fulfilling the objective of the project i.e. energy savings. In addition, BDA project for improving energy efficiency also reduced the demand for the thermal based grid power and lead to reduction in emission of greenhouse gases. Increasing energy efficiency will assist ULBs in expanding infrastructure and improving services for public. Similar projects can be replicated in many other towns and cities and thus reduce energy consumption up to at least 30 percent, leading to reduced emission of greenhouse gases.
(A) National BANGALORE - Karnataka The Bangalore Water Supply and Sewerage Board (BWSSB) responsible for the supply of drinking water, conveying, treating and disposal of sewage to the silicon valley of India Bangalore city, has achieved 99% bill collection efficiency with the adoption o f latest technologies. The board had successfully leveraged Information Technology for the last five years such as implementation of SCADA and Telemetry, developing Geographic Information System (GIS) of Water Supply pipelines and Sewerage lines of the entire city, maintenance and updating of the same by an independent management system, Computerization of Revenue Billing and Collection, spot billing system with hand held computers, Payment of Water Bills through unmanned KIOSK working 24 x 7 hours, Water Auditing to control Leaks, computerized and consolidated all accounts in Central Office, usage of LAN-WAN to facilitate transfer of data pertaining to revenue billing, connections to the poor through effective communication strategy. These initiatives resulted in significant cost savings and also enhanced the bill collection efficiency to 99%.
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2.3.13.4. Good Practices - Improved Cost Recovery
NAGPUR - Maharashtra Developing Innovative Measures to Reduce Unaccounted for Water As part of its effort to achieve cost recovery, Nagpur Municipal Corporation (NMC) has developed several innovative measures to reduce unaccounted for water. Motivated by the requirement to augment revenues, NMC came out with innovative idea of unearthing illegal water connections by using the same plumbers who fixed these in the first place. The corporation declared a time-bound programme aimed both at regularizing illegal water connections and also applying a universal metering policy. The incentive of Rs 100 for every illegal connection motivated about 200 plumbers. With insignificant expenses of about Rs 0.2 million as incentives for plumbers and a minimum amount spent on publicity drive, the programme achieved regularization of about 25,000 (71%) connections within a short period of four months. There was significant and evident increase in revenue generation. The simplified and rationalized procedures, transparency, accountability of the corporation and the participatory mechanisms adopted have generated enormous citizen co-operation and revenue to the corporation. MUMBAI - Maharashtra Policies for Achieving Full Cost Recovery Brihan Mumbai Municipal corporation has implemented a variety of strategies to achieve cost recovery, including targeted efforts to reduce non-revenue water by adopting various water conservation measures, strong management policies governing operations and maintenance, strong accounting and financial statements and public outreach programs to stay informed of both community and business needs. The corporation has also adjusted the tariff structure in order to meet the rising cost of water provision, although it retains the historically complex pricing regime. Since 1995 -1996, the total revenue income has doubled while the expenditure has increased by 1.5 times. In order to improve the cost of recovery (today: 80%), the centralized computerized billing is being decentralized at the ward level. These measures ultimately increased transparency and accountability of the corporation to their customers. ANDHRA PRADESH The Social / Affordability Dimension of Full Cost Pricing Compared to other cities, Indian cities do not enjoy high levels of access to both water supply and sanitation. Central to the issue of affordability are high connection charges and low willingness to pay for water services. Connection charges often represent the greatest barrier to affordability of water services for the unconnected poor, while customer willingness to pay remains low in areas with intermittent water supply and poor water quality. To tackle these affordability issues, the government of Andhra Pradesh decided to extend individual connection to BPL families at Rs.1200 with the option to pay the cost in twelve equal installments. About one lakh eligible BPL households applied for individual connections under the scheme and over two-thirds of the applications were sanctioned by the local bodies and four-fifth got installed.
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This initiative has enhanced image of the local body, less scope for pilferage and illegal connections, improved operational efficiency, reduced expenditure on adhoc arrangements and more importantly increased the revenue of the local bodies. ALANDUR Tamil Nadu Community Response Energizes work Alandur, a municipality in a residential suburb of Chennai, had initiated underground sewerage system through Public Private partnership. This is first of its kind in Asia with 100% cost recovery. Though the concept had faced resistance in its initial phases due to lack of adequate public awareness and other bureaucratic problems, it achieved its target through extensive awareness campaigns and newspaper advertisements. The residents, who essentially belong to the middle class and slum dwellers, contributed to the cause in the form of payments for getting individual sewerage connections. Of the total cost of Rs. 34 crores, the public contribution amounted to about Rs. 11 crores (about 32%). At the heart of the projects success lies a wellplanned communications strategy that has evoked a strong and positive community response. This unconventional project, financially supported by the beneficiaries, emphasized the fact that the services can be improved where there is strong political commitment coupled with effective communications, transparency and partnership with community based organizations. AHMEDABAD - Gujarat Cost cutting initiatives of the Corporation Realizing the importance of and benefits from cleanliness, Ahmedabad Municipal Corporation (AMC) and the government officials determined to clean up the city and ensure better living conditions for the citizens. To accomplish this task, AMC took several precautionary and curative steps, as required and also encouraged private participation. As per the Mandatory Directions under Municipal Solid Waste rules 2000, the corporation has taken seven cost cutting steps such as prohibition of littering of waste from the streets, primary collection of waste from the doorstep, daily street sweeping, abolition of open waste storage sites, transportation of waste in covered vehicles, processing of waste by composting or power generation and disposal of non-biodegradable waste at the engineered landfills. These initiatives led to 50% cost saving to the corporation. RUDRAPUR- Uttaranchal Strategies for Improved Management and Cost-Cutting Measures Rudrapur Nagar Palika, marked by rapid industrial and commercial growth started contracting out solid waste management services. This PPP initiative enabled the local body in providing better services to the citizens and at the same time made considerable savings through costcutting mechanisms. This is a service contract between the municipality and the private contractor. Local body provides all the logistics required for the waste disposal and collection. After experimenting with PPP strategy the results unearthed the potential of the private player in providing public services and the citizens are much more delighted then ever before. It has
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also resulted in the savings of up to Rs. 1.2 lakhs per month for the ULB, as each permanent employee salary was about Rs. 5000 per month. Moreover, the private contractor does not have to make any investment and he would continuously provide the services. SURYAPET Andhra Pradesh The path towards improved cost recovery The effective implementation of Municipal Solid waste Management Rules, 2000 by the Suryapet Municipality, the first grade municipality in Andhra Pradesh, has emerged as a sustainable model for the smaller and medium towns and had earned revenue to the municipality. The critical factors to the success of this initiative are complete implementation of door to door collections and penalizing those who litter waste on roads and drains. The third has been removal of all community bins thus making the town dustbin free. These cost cutting measures has laid a path to the projects success. The micro level planning, training imparted for motivation of staff, public awareness, participation programmes gave exemplary results. Moreover, the enforcement of levying fine on commercial establishment throwing garbage on streets and drains has been the most critical factor and is equally responsible for success of the initiative. It is probably the only municipality, which earns money by selling the recyclable materials and has been able to provide additional employment to the urban poor women. (B) International Experiences INDONESIA Optimizing Tariffs through Effective Relationships with Local Government The Medan Water Utility recognized that it needed to develop strong relations with and garner support from both the local authorities and local community through negotiations and awareness raising campaigns. Recognizing the political challenges associated with tariff increases, the utility first offered to provide the government free water service for places of worship and public facilities in the community. The utility also employed creative tariff restructuring by maintaining the tariff per unit for low-income users, while reducing the size of the consumption block. These changes allowed low-income users who maintained a consumption at or below basic needs (10 m3 per month) to enjoy the same tariffs, while those who consumed above that amount paid higher tariffs. To raise awareness in the community and minimize public opposition to the proposed rate increase, the utility invited customer representatives to tour the water processing facility and learn about the costs associated with operating the water supply system. The utility also offered seminars on water conservation and efficiency. In the end, due to strategic negotiations with the government and its public awareness campaigns, the Medan Water Utility was able to obtain a justified and reasonable tariff increase in 2003. Phnom Penh - CAMBODIA Institutional Restructuring to Improve Cost Recovery
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The turn-around story of the Phnom Penh Water Supply Authority (PPWSA) is quite remarkable, since this utility was able to transform its lagging operations and achieve cost recovery over a ten-year period from 1993 to 2003. The numbers speak for themselves: service coverage expanded from 25 percent to 85 percent; the staff/connection ratio decreased from 22 to 4; water supply availability rose from 10 hours a day to 24-hour service; the number of connections increased from 26,881 to 120,000; physical water losses scaled back from 72 percent to 16 percent; the collection ratio improved from 48 percent to 99 percent; and financially, the utility moved from being heavily subsidized to achieving full cost recovery. PPWSA attributes its success to a combination of both external and internal factors and strategic interventions. Critical external factors included support from the government, donors and unconnected citizens in revising the tariff structure. Internal factors consisted of a fundamental change in the utilitys culture to treat personnel equally, major management reorganization and increased emphasis on staff training and decentralized decision-making. MALAYSIA, PHILIPPINES and VIETNAM Strategies for Improved Management and Cost-Cutting Measures Without the promise of significant future tariff increases, many utilities in the region have achieved improved cost recovery by adopting cost-cutting measures. Core strategies include reducing physical water losses by repairing leaks and installing high quality pipes and meters, as well as improvements in operational efficiency through reduced power, labor and chemical costs. Other strategies include improving internal management practices and procedures. In addition, some utilities have improved efficiency by establishing robust accounting, record keeping and billing procedures, or by creating new staff incentives and strengthening customer relations. MALAYSIA Establishing Strong Accounting, Record keeping and Billing Procedures The Penang Water Supply Corporation has instituted several measures to strengthen cost recovery, including improving strong record keeping, accounting and billing procedures, as well as management practices. In particular, over the last several years, the utility has improved its collection rate to 98.2 percent by metering all connections and imposing a strict disconnection policy for defaulters. On the management side, by establishing a universal employment policy, setting staff performance goals and encouraging teamwork, the utility has increased worker efficiency and reduced staff turnover to less than five percent per annum. The average length of service at the utility ranges from 15 to 20 years. Finally, Penang has aggressively tackled the problem of NRW by constituting a committee to oversee, evaluate and approve the use and installation of high quality piping materials. By 2010, the utility aims to reduce its current NRW levels from 20 percent to 15 percent. VIETNAM Improving Customer-Oriented Services and Staff Incentives
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For Hai Phong Water Supply Company, improving customer services, upgrading existing infrastructure and creating staff incentives are central to achieving full cost recovery. Several years ago, the utility faced a number of challenges, including intermittent water supply, aging water supply infrastructure, no devices for measuring water use and poor customer service. As a first step to address these difficulties, the utility organized public awareness campaigns to educate the public about water treatment processing and the importance of water conservation. The utility also conducted customer interviews and annual customer satisfaction surveys to evaluate its performance and assess customer needs. On the technical side, the utility upgraded its system by installing meters and high quality piping. The utility also made a number of management improvements (e.g., develop annual business plans) and policy changes to upgrade service levels (e.g., install house connections within 15 days). To create strong staff incentives, the company allocates 28 percent of profits into a reward fund for distribution when staff members develop innovations and successfully implement efficiency improvements. Additional monies, approximately $2,300, are added to this fund if the utility achieves a one percent decrease in NRW. Conversely, a one percent increase in NRW results in a $320 reduction from this fund. OECD Countries The Social Dimension in Water Pricing OECD countries enjoy high access levels to both water supply and sanitation with 85 percent of the population or more connected to water supply, while in many Asian cities, the percentage is less than 50 percent. Hence, while in the OECD ensuring that water services remain affordable for the population is the main concern, in Asia, it is to provide access to centralized water services to a greater share of the population. Within OECD countries, water prices continue to rise due to costs of increasing pollution and regulation. As a result, many OECD countries implement social measures to ensure water remains affordable to the public at large and to extend access to poor unserved populations. These social measures include progressive social tariffs like IBTs, targeted assistance for water to the poor through income assistance and vouchers, payment assistance loans and debt repayment plans, cross subsidization between different users and prohibition of water disconnection. Asian countries should consider similar strategies in their efforts to expand service. One key consideration is connection fees, which can be 20 times more than the annual cost of water for an average family. For example, connection fees in Asian cities range from $13 in Kuala Lumpur up to a staggering $87 in Phnom Penh. The upfront payment to connect to water systems is acceptable, but only if it does not go beyond the inclusion of customer-specific costs (e.g., billing, metering, payment collection).
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REGIONAL CAPACITY BUILDING HUB

Module 2 Financial Management

Knowledge & Awareness Module

Prepared by: Administrative Staff College of India (ASCI)

Module 2 Financial Management

Module 2 Financial Management

Sponsored by: Sub Module : 2.1 Municipal Accounting Reforms

Administrative Staff College of India (ASCI)

Module Prepared by: Administrative Staff College of India (ASCI)

Module 2 Financial Management

MODULE PREPARATION TEAM

Module Prepared by: Administrative Staff College of India (ASCI)

Sub Module : 2.1 Municipal Accounting Reforms

Module 2 Financial Management

MODULE OVERVIEW/CO NTENTS/ STRUCTURE MODULE DELIVERY OUTLINE

MODULE DELIVERY SUPPORTING MATERIALS MODULE DELIVERY MODULE PREPARATION

Additional supporting material is given in a CD enclosed with this module.

Module Prepared by: Administrative Staff College of India (ASCI)

Sub Module : 2.1 Municipal Accounting Reforms

Module 2 Financial Management

Contents of the enclosed Compact Disc (CD)

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Sub Module : 2.1 Municipal Accounting Reforms

Module 2 Financial Management

2.1.3.7. Accounting documents........................................................................................ 21

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2.2.4.2. Receipts ............................................................................................................... 39

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2.3.6.8. Reforms in Property Tax Administration: .......................................................... 68

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2.3.10.3. Good-will auction of shop rooms ................................................................... 104

Module Prepared by: Administrative Staff College of India (ASCI)

Module Prepared by: Administrative Staff College of India (ASCI)

Sub Module : 2.1 Municipal Accounting Reforms

Module 2 Financial Management

Sub Module 2.1 Municipal Accounting Reforms

Module Prepared by: Administrative Staff College of India (ASCI)

Sub Module : 2.1 Municipal Accounting Reforms

Module 2 Financial Management

2.1 Municipal Accounting Reforms

2.1.1.1. Need for updating municipal accounts

2.1.1.2. Current scenario Sub Module : 2.1 Municipal Accounting Reforms

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Module 2 Financial Management

2.1.1.3. Advantages of cash basis of accounting

2.1.1.4. Disadvantages of cash basis of accounting

2.1.1.5. Continuance of the system

2.1.2. Accrual Based Double Entry Accounting System

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Module 2 Financial Management 2.1.2.2. Single entry Vs Double entry

Amount (Rs.) 1,000 (150) 275 125 (50) 1,200

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2.1.2.3. Advantages of double entry accounting system

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Module 2 Financial Management

2.1.2.4. Accrual based accounting system

2.1.2.5. Benefits of accrual based accounting system

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Module 2 Financial Management

2.1.2.6. Cash basis Vs Accrual basis of accounting

2.1.2.7. Fund basis of accounting

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