Financial Management _Awareness and Knowledge_Part 2.pdf

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REGIONAL CAPACITY BUILDING HUB

2011

Module 2 – Financial Management Knowledge & Awareness Module

Spondored by:

Mission Directorate,JnNURM

Ministry of Urban Development (MoUD),

Prepared by:

Administrative Staff College of India (ASCI)



Module 2 – Financial Management

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

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Jawaharlal Nehru National Urban Renewal Mission

Regional Capacity Building Hub


Sponsored by:

Mission Directorate,JnNURMMinistry 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

http://www.asci.org.in/








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MODULE PREPARATION TEAM

• Prof. V. Srinivas Chary

Team Leader

• Prof. D. Ravindra Prasad


Editorial Advice, Guidance and Review

• Mr. D V Rao

• Mr. Sreekanth

• Prof. D. Ravindra Prasad


• Prof. T. Murali Mohan

• Miss. Eshwari Alla

• Miss. Priyanka Kulkarni

Content Contributions

• IDFC, New Delhi

Peer Review:





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COMPONENT DESCRIPTION

BACKGROUND

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 missioncities as well as across ULBs the states.

INTENDEDAUDIENCE(S)

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.

LEARNINGOBJECTIVES

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.

MODULEOVERVIEW/CONTENTS/STRUCTURE

This module provides an overall understanding of the key aspects pertaining tomunicipal 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.

MODULEDELIVERYOUTLINE

Awareness

Overview of

Municipal Accounting

Reforms,

Budgeting Practices and

Cost Recovery Mechanisms

Knowledge

Introduction to National

Municipal Accounts

Manual

Step by Step approach of

implementing DoubleEntry Accounting System

Overview of Municipal

Budgeting Practices

Overview of Resource

Mobilisation mechanisms

and Cost Recovery

Skills

Detailed

understanding on

Double Entry

Accounting

System to

Accounts

Professional and

other municipal

officials

MODULEDELIVERY

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.

SUPPORTINGMATERIALS

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

MODULEDELIVERY

Send your feedback on the material, how they can be improved to

[email protected]

MODULEPREPARATION

Centre for Urban Governance, Administrative Staff College of India

mailto:[email protected]







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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





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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

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





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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

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

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 ......................................... 452.2.14. Budget Reports......................................................................................................... 46





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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

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

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: ................................................................................... 732.3.6.18. Partnerships with other agencies:...................................................................... 73





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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

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

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 ................................................................................................................. 109d) Exactions .................................................................................................................. 110





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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. To ensure collection of revenues due to ULBs.

2. To present true picture of the financial position of the ULBs

3. To ensure utilisation of funds strictly in conformity with financial standards.

4. To ensure adherence to the budgetary provisions.

5. To prepare Budget Estimates and Administration Report.

6.

To detect misappropriation and misapplication of funds, frauds and errors7. 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

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 acloser 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 profit-

oriented and therefore nothing is mentioned about the performance or better utilization of

resources and/or savings.





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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 cash-based 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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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 Amount (Rs.)

Jan 1 Opening Balance 1,000

Jan 2 Purchase of stationery (150)

Jan 4 Water charges received 275

Jan 11 Shop room rent received 125

Jan 21 Street lighting electricity bill (50)

Jan 31 Closing balance 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

Amount (Rs.)

Date Description Receipt Payment

Jan 1 Opening Balance 1,000

Jan 2 Purchase of stationery 150


Jan 11 Shop room rent received 125

Jan 21 Street lighting electricity bill 50

Jan 31 Closing balance 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


In a double-entry system, the transaction would be recorded as follows:

Date Accounts Debit Credit

Jan 4 Cash a/c Dr 275

To Water charges a/c 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 Purpose

1 Income and Expenditure

Account

To determine the financial

performance of the ULB

2 Balance Sheet, ie.,

Statement of Assets andLiabilities

To assess the financial status of

the ULB

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 Accrual Basis of accounting

1 Statement of receipts and payments made

based on entries recorded in the Cash

Book

Income and expenditure account is

prepared.

2 Only one entry is made for a transaction

(either receipt or payment)in the books of

accounts

Two entries are made for each transaction

in the books of account

3 Receipts and payments represent theamounts actually received and payments

actually made

Income includes revenues actuallyreceived and receivable and expenditure

includes both payments made or payable

4 The receipts and payments statement

commences with the opening balance –

both cash on hand and cash at bank.

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

5 The difference between the two sides –

receipt and payment will indicate the cash

balance at the end of the period.

The difference between the two sides –

debit and credit – will indicate the net

surplus/deficit.6 The statement need not necessarily be

accompanied by a statement of assets and

liabilities

The system shall, necessarily, have the

Balance Sheet, ie 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 onspecific 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 beingused 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 isa 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 areincorporated.

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 shalldenote ‘Property Tax’

Under the Major Head Code 210 relating to ‘Establishment Expenses’, the Minor He adCode 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 collect ions 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.

2. Journal

book

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 recordedin 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

3. Ledger 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.

2.1.3.7. 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

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.

2. Cash/Bank

Payment

Voucher

A document prepared for recording payment entry in cash book.

3. Contra

Voucher

A document prepared for recording transactions involving deposit of cash

into bank, withdrawal of cash from bank or transfer of amount from onebank to another.





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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) Tax Revenue

2) Assigned revenues and compensation

3) Rental income from municipal properties

4) Fees and user charges

5) Sale and hire charges

6) Revenue grants, contributions and subsidies

7) Income from investments

8) Interest earned, and

9) 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)

Depreciation10) Prior-period items

11) Transfer to reserve funds.

Details regarding accounting records and procedure, accrued expenditure, treatment of pre-

paid 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 expensesj. 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 arealso 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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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 net-

worth 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 accountingprinciples 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.

The financial performance indicators to be worked out are:

1.

Income Ratios2. Expense Ratios





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3. Net Income Ratios

4. Efficiency Ratios

5. Leverage Ratios

6. Investment Ratios

7. Liquidity Ratio

8.

Asset Ratios, and

9. 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. Allassets 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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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 accrual-

based 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.

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





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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

learning’s 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 people-

oriented 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. Serve as a control tool for the Municipality’s resources

j. Provide the citizens a written document, which plainly describes activities and

expenditures that will be undertaken during the next fiscal year.k. Serve as a short and long term planning tool

l. Serve as a day to day operations guide.

The Budget helps the ULB personnel to serve the citizens better while maintaining fiscalaccountability. It also provides a framework for conducting the day to day operations of ULB. Agood municipal budget is expected to play the following roles:

(1) A policy-making role in allocating resources between various categories of

infrastructure and services;





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(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 off-

budget 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) ProgramBudget, 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 forexpenditures and in the orientation of the budget: control, management efficiency, or planning.

Budget Type Characteristics CriteriaLine-Item Expenditures and revenues related to commodities Control

Performance Expenditures and revenues related to work load Management EfficiencyProgram Expenditures and revenues related to public goals Planning/Impact Zero-Based Budget starts from scratch or as if it were for a new

operationCost-effective delivery of public services

Outcome Related outcome with reference to input Outcome to input





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2.2.3.1. Line-Item Budget

The line-item budget is a financial document that lists how much the local municipality willspend 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 isappropriated to specific cost categories. While the simplest budget to prepare, the line-itembudget 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 Amount (Rs.)

01 Personal Services 1,00,000

02 Supplies 20,00003 Contingencies 10,000

Sub total 1,30,000

2.2.3.2. Performance Budget

A performance budget allocates money to various programmes within an organization but alsodetails the service level on which the budget is predicated. The service level is identified by theuse of performance measures. In addition to controlling costs, the primary orientation of theperformance budget is that of improving the internal management of the programme. Aperformance budget is illustrated as follows:Example of a Performance Budget

Road Maintenance/ Performance Measures Amount (Rs.)Paving Roads

Miles to pave: 10 milesCost per mile: Rs.4,00,000

Sub total cost 40,00,000

Resurfacing RoadsMiles to resurface: 5 miles

Cost per mile: Rs.1,50,000Sub total cost 7,50,000Total Road Maintenance cost 47,50,000

2.2.3.3. Program Budget

Program budget differs from the traditional line-item approach to preparing, reviewing, andpresenting 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 servicesand 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. Theemphasis of program projects is on the attainment of long-term local community goals.

Program areas are generally related to an organization’s 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 Amount (Rs.)

Public Safety

Fire Protection 20,00,000Police Protection 20,00,000Sub total 40,00,000

Leisure ServicesParks and Recreation 10,00,000

Library Services 10,00,000Sub total 20,00,000

TOTAL 60,00,000

Both the performance and program budget use indicators to measure financial and operationalperformance, but the budgets have a different focus. A performance budget emphasizesmanagement efficiency, whereas a program budget emphasizes the benefits that the localcommunity gains from municipal expenditures.

2.2.3.4. Zero-based Budgeting

Zero based Budgeting is a budgeting and financial management strategy to help policy makersachieve more cost-effective delivery of public services. "Zero based" budgets may be useful forlarge 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 itsfunctions or activities must be justified in the light of competing demands for funding. Suchbudgets focus on the flows of revenue and expenditure as experienced by the ULB. These areuseful in planning for the resources needed to meet routine and current obligations. Morebroadly, what we might term as the recurrent budget is the identification of all outlays expectedduring the current year except those related to long term debt payments. Therefore, this annualor operating or recurrent budget includes all expenses and asset procurements which wouldrequire funds from a single year's appropriations, grants or revenues.

2.2.3.5. Case Study: Zero Based Budgeting in Madurai

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 tobe received and incurred in terms of the six accounts they are maintaining – WaterSupply, Sewerage & Drainage; Road Development & Maintenance; Bustee Services;Commercial Projects; Solid Waste Management and the General Head. It is noteworthythat the Act way back in 1980 had envisaged a system of Fund Based Budgeting.





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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 onTaxation and Finance for approval. Once it is approved, the draft budget is placed for publicfeedback (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 detailedguidelines for preparation and presentation of ULB budgets. Although ZBB allowed forimproved financial and perspective planning, budget prepared till date have generally been veryrigid and fail to provide enough information for decision makers to allow for effective policy andresources 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.

New Concepts in Perspective Budgeting: For the financial year (2006-2007) MaduraiCorporation, as required by State directives, has prepared a biennial budget to allow for longterm 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 thenext 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 ensuringcontinuity of reform action, as well as perspective planning, though only mid-term and not long-term. Madurai Corporation, on the whole, has taken steps towards perspective budgeting, but islacking in its ability to use budget analysis as a tool for effective decision making inspite of usingthe 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 andobjectives 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 servicesmatching the expectations from citizens’ perspectives. As such, the implementation of Outcome

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’





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Budgeting assists in productive deployment of public funds matching the citizens’ priorities andpreferences.

The outcome budget approach inducts several improvements in the entire budget preparationprocess 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 withbudgeting, use of incremental budgeting, top-down budgeting approach, lack of performancemeasurement and monitoring and public oversight.

The real value of Outcome Budget lies in its utility as a policy tool to establish effective linkagewith allocation and disbursement of public funds on the basis of measurable performance. Thegoals of municipality in respect of being transparent and accountable towards citizens isfacilitated through use of Outcome Budgeting approach and dissemination of the budgeted andactual 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, servicecenters/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; andthe citizens’ satisfaction is ensured through meeting their outcome goals progressively yearafter 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 thebudget 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 theofficers 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 financialimpact on the KMC. In some cases the techniques of doing a zero based budgeting are also takenup. The budget is then discussed between the Mayor-in-Council, and the Mayor and the DeputyMayor take an active role in formalizing the budget. The budget is then placed before the fullhouse of Councilors for necessary adoption.

Rolling Plan: KMC is considering adopting a rolling budget technique with 5 year vision plans tocome 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 basedoutcome/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 witheconomic 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 proposedcapital spending in each ward for the year. Hereby, the KMC is paving the way for social audit bythe citizens themselves. This is a positive step even though it could be improved in the future bymentioning the expected benefits and outcomes (kms of roads constructed, level of increase inwater connections etc). This would allow better social audit and monitoring against clearlydefined and visible benchmarks.





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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 theirdemandsand priorities for civic improvement, and influence through discussions and negotiations the

budget allocations made by their municipalities. Since 1989, budget allocations for publicwelfare works in Porto Alegre have been made only after the recommendations of publicdelegates and approval by the city council. Participatory budgeting has resulted in improvedfacilities for the people of Porto Alegre.

For instance, sewer and water connections went up from 75 percent of total households in 1988to 98 percent in 1997. The number of participants in the participatory budgeting process inPorto Alegre reached 40,000 per year in less than a decade, indicating PB’s ability to encourage

increasing citizen involvement. The success of people’s participation in determining the use of public welfare funds in the city of Porto Alegre has inspired many other municipalities to followsuit. So far, of the 5,571 municipalities in Brazil, more than 140 (about 2.5 percent) haveadopted PB.

The positive impact of PB is a noticeable improvement in the accessibility and quality of variouspublic welfare amenities in those municipalities that have adopted it. The participation andinfluence 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 ashortcoming 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 Expenditure

Ordinary/Revenue Receipts Ordinary/Revenue ExpenditureCapital Receipts Capital Expenditure

2.2.4.1. Expenditure

The expenditure incurred by a Municipality can be broadly classified into (a) RevenueExpenditure and (b) Capital Expenditure.

(a) Revenue Expenditure: Revenue expenditure can be defined as the outlay benefiting only thecurrent year. It is treated as expenditure to be matched against revenue. The following are thebroad categories of revenue expenditure.

1 Establishment Expenses

2 Administrative Expenses

3 Operations and Maintenance

4 Interest and Finance Expenditure

5 Programme Expenses

6

Revenue Grants and Contribution.





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The department heads based on their past experience and also taking into account the futuredevelopments estimate the expenditure for each of these heads. The revenue expenditure canbe broadly classified into two broad categories – Regular or Recurring and Non- Recurringexpenditures. For all recurring or routine expenditure, the department heads shall base theirproposals 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 balancepart of the year. For the non-routine expenditures, the functionaries shall base them on theobjectives set by the Municipality and the plans spelt out.

The Commissioner/Secretary of Municipality shall ensure that the budget proposals for routineexpenditures 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 expenditureare backed by proper justification. The department head shall ensure that the budget proposalsmade 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 capitalexpenditure incurred during the year can be either on account of the on going works, theexpenditure 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 headsshall also estimate the capital expenditure that may be incurred on other assets, movable orimmovable.

The department head shall however note that the budget proposals for capital expenditure arenot be based on what will be paid out during the year but will be estimated on what will beincurred during the year.

2.2.4.2. Receipts

The Receipts of a Municipality can be classified into (a) Revenue Receipts and (b) CapitalReceipts.

a. Revenue Receipts: The revenues drive the municipality’s 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 thegrowth 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 yeartrend can be used to estimate the revenue. The Revenue Officer shall also estimate thecollections during the budgeting year and the same shall also be part of the budget proposalestimation 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. Incase of revenue from municipal properties, the Revenue Officer can estimate the income bypreparing 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 Revenuesfor 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 arenot predictions for the future. The goal of budget is to tell what we need to know to takemeaningful actions in the present. Preparation of budget is more of a team work involving manyplayers and effective coordination between all of them is essential for preparing a meaningfuland timely budget that shall enable the Municipality to achieve its objectives. The responsibilitymatrix sets out clearly the roles and responsibilities of each of the players involved in thebudgeting exercise. An illustrative responsibility matrix is given below.

Illustrative Responsibility Matrix

Activity Responsibility

Convene initial budget meeting of key players including theMayor / Deputy Chairperson, and the Chairpersons of theStanding Committees concerned to decide the objectives forthe budgeting year.

Mayor / Chairperson

Preparation of Budget Calendar Deputy Mayor / DeputyChairperson with the assistanceof Commissioner/Secretary

Prepare the budget proposals estimation sheet and send it to

the department heads and implementation officers.

Accounts Officer

Coordinate and assist the department heads / implementingofficers in understanding the coding structure including thechart of accounts and help in preparation of budget

Accounts Officer

Department heads / implementing officers to complete andreturn the estimation sheets.

Department head /implementing officers

Consolidate and verify the budget proposals prepared by thedepartment heads.

Accounts Officer &Secretary/Commissioner

Prepare the draft budget proposals and check whether thebudget proposals reflect the objectives spelt out before thepreparation of budget

Standing Committees concerned

Convene a meeting of the concerned Standing Committees todiscuss the draft budget proposals before it is submitted to

Deputy Mayor / DeputyChairperson





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the Standing Committee for Finance

Preparation of budget by the Standing Committee Standing Committee for Finance

Placing of Budget before the Council Standing Committee for Finance

Approval of Budget 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 thebudgeting period. The objectives can be derived from the City Development Plan (CDP), if anyprepared. 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 shallinclude all the key players involved in preparation of Budget including the Mayor / Chairperson,the Deputy Mayor / Deputy Chairperson and the Chairpersons of the Standing Committeesconcerned. 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 thelocal 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 improvedgovernance.

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 andplace before the concerned authorities. The Budgeting activity for next financial year shallcommence as specified in the municipal Acts. The following are various stages of Budget preparation and approvals.

Specimen Budget Calendar:

Activity Timelines for Completion

Mayor / Chairperson to convene a meeting of all key Budget

Players including the Deputy Mayor / Deputy Chairpersondepartment heads / implementing officers to initiate the budget process

October 31

Circular issued by Deputy Mayor / Deputy Chairperson forpreparation of Budget Proposals along with formats forpreparation of the same

November 10

Preparation of Budget Proposals by the department heads /implementing officers

December 25

Compilation of the Department Budget Proposals by the AccountsDepartment for perusal by Secretary

January 7

Submission of Budget Proposals by Secretary/Commissioner tothe Standing Committees concerned

January 15

Review of Budget Proposals by the Standing Committeesconcerned and submission of the same to the Standing Committeefor Finance

February 15

Preparation of Budget Estimates by Standing Committee forFinance and placing the same before the Council

March 7

Approval of Budget by the Council March 31

Copies of Budget to Government, the officer authorised byGovernment and Auditors

March 31





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2.2.8. Budget Execution

Budget execution refers to the stage of the budget process where resources are released tospending agencies to implement expenditure programmes. The budget execution processensures 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 thespending 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 thefinancial year. All expenditure during the year shall be regulated in accordance with theallotments made in the budget for the year. Sometimes, necessity may arise to take up activitiesthat are not estimated in the budget. In this situation an ULB will have option of seeking re-appropriation / 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 balancebelow 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 belowstatutory 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 bydifferent operating sections. While the individual entries in the Budget Watch Register are to bemade by the concerned staff in the Accounts Section, it is the responsibility of the Head of theAccounts Section to ensure that the Budget Watch Register is maintained upto date by postingall 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 Registerenables 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 allocationshall 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 expenditureis beyond the budgetary allocation, the bill will not be admitted unless there is re-appropriationof 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, thecumulative payments made till that date under the relevant budget head and the balanceavailable 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 followingdrawbacks:

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 anapproach simply accepts historical costs and financial experience. It does not examine costs,facts and financial innovations.

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

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 formeasuring and promoting accountability on part of service functionaries.

2.2.12. Budgeting in the New Accounting System





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Generally accepted principles of budgeting require budgeting system to be integrated with theaccounting system. Traditionally, the Municipalities were maintaining the accounts on cashbased single entry system of accounting. The budget was also prepared on the same lines. AsMunicipalities 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 theirbudget based on the new system.

Following details gives an overview of Budgeting in the new system focusing on the componentsof the budget in the new system, the coding structure and the budget reports generated in thenew 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, Fieldand Account Heads. These components are briefly described below.

Fund

1) A “Fund” is defined as an activity for which separat e 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, MosquitoEradication Programme, Immunisation, Accounts, Administration are examples of Functions of aMunicipality. 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. EngineeringDepartment, Health Department, General Section are some of the examples of Functionaries.Some of the Functions undertaken by these Functionaries would include Public Works byEngineering Department, Immunisation by Health Department and Administration by theGeneral 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 theExpenditure. The Budget proposals shall be prepared using the Account Codes as recommendedin the NMAM.

a. Assets – Assets represent the tangible / intangible rights owned by the Municipality orassigned / transferred to the Municipality and carrying probable future benefits. Land,Receivables like property tax receivables, Cash and Bank Balances and Advances toSuppliers / Contractors are all examples of Assets. The Municipalities shall budget thecapital expenditure proposed to be incurred in the budgeting period and also theadvances that may be given / received back.

b. Liabilities – Liabilities represent any amount owed by one person (in this case theMunicipality) 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) dueor 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 thebudgeting period.

c. Income – Income includes the money or money equivalent earned or accrued during anaccounting period, increasing the total of previously existing net assets and arising fromprovision of any type of services and rentals, including any grants/ contributionreceived 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 anaccounting 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 inthe 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 Budgeted Balance Sheet

3 Budgeted Income and Expenditure Statement

4 Budgeted Receipts and Payments Account

5 Summary of Function – Group Wise Budget

6 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 theconsolidated budget estimates shall be accompanied by the following subsidiary statements

7 Estimate of revenue income

8

Estimate of revenue expenditure9 Estimate of capital receipts





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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 forreceipts 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 theaccount heads. It is however recommended that the Municipalities prepare a Function wise andfield –wise budget. The advantage of this kind of budget is that the income or expenditure canbe tracked to the electoral ward which helps the elected representatives identify theexpenditure incurred on each ward and brings in transparency in governance. The followingare some of the features of budgeting in the new system

The Income is estimated on accrual basis. The actual amount receivable is estimated inthe 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 syst em, the spending shifts to a “function”

driven expenditure rather than a “department” level expenditure. This will help theMunicipalities and other stakeholders in identifying the expenditure incurred on anyspecific 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 Municipalityin planning for the future, fixing the priorities right and identifying the programmes andthe 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 animportant reform required for the attainment of the following larger objectives envisaged underJNNURM:

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 andoperation of appropriate budgetary mechanism to ensure that funds allocated for urban poorget spent on urban poor.

In response to this reform conditionality, states and ULBs have initiated processes (policyadoption) aimed at earmarking a certain percentage of the budget exclusively for the urbanpoor. 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 proportionof their budgets for provision of services to the urban poor. Andhra Pradesh State has givenpolicy direction to municipal bodies to allocate 40% of total budget for provision of services tothe urban poor. Though this is a step in the right direction it will be effective only when aappropriate 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 poorand other backward sections i.e., women and children, SC/ST. The Government of AndhraPradesh, 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 whilespending 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 themunicipal bodies. This is perhaps the first attempt to earmark budgetary expenditure for thesocially disadvantaged population in urban areas. The spending for these purposes should becomplimentary to the allocation of net funds for urban poor.

Further, the Government also directed reserving 5% of municipal funds for women andchildren, which is also perhaps the first attempt towards gender-budgeting and which isincreasingly being voiced to be implemented. The only vulnerable group for which earmarkinghas 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 ULB’s 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 forbooking 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 inslums. It ordered that the ULBs should make Council Resolution in this respect and indicate atimeframe 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 – couldbe utilized under a special BSUP Fund. However, for efficient and effective use of funds, therehas 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 earmarkingfor 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 PovertyAlleviation (UPA) Fund} within their municipal accounts and began to earmark certainamount/proportion of their funds as contribution to the BSUP/UPA Fund. These municipalbodies have started operating thesefunds through internal earmarking and supplementing withother 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 byearmarking 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 toUPA 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 minusrevenue expenditure. The net surplus funds of UPA Fund, the municipal budget allocation toUrban Community Development (UCD) department as well as the JNNURM funds of the ULBhave 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 ULB’s total annual expenditure, includingULB’s 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 inthe budget for improving quality of life of slum dwellers and the poor. The issues that may beconsidered 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 usingapportionments, separately on both (a) Revenue account (b) Capital account. From this it wasproposed to estimate the total budgetary estimate on service delivery for the urban poor onboth revenue and capital accounts. Revised budgetary expenditure can be prepared thereafterbased 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, andit started with examining budgets at macro level from the view point of their effectiveness onwomen. Gender Budgeting was started in Australia and began to gain increasing acceptance as atool 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 andmen differently. Budgets normally ignore the different socially determined roles andresponsibilities and capabilities of men and women.

Gender Budgeting is not a separate budget for women; rather it is a dissection of thegovernment budget to establish its gender-differential impacts and to translate gendercommitments into budgetary commitments (NRCUP 2007). The main objective of a gender-sensitive 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 in1974. The Eight Five Year Plan (1992-97) highlighted for the first time the need to ensure adefinite flow of funds from general development sectors to women. However, it did not make animpact 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

women’s related sectors”. It also directed that a special vigil be kept on the flow of earmarked

funds/ benefits through an effective mechanism to ensure women’s empowerment.

The Union Government of India has taken some initiatives towards gender budgeting though toa limited extent at national level. In the absence of non-availability of disaggregated data ongender related public expenditure, Gender Development Indices (GDI) approach has beendrawn in order to support better planning and programme formulation and ensure adequateallocation 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 andanalyse the same for meaningful planning and evaluation of policies for women’s

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 developgender profile, perform gender budget analysis and dialogue and debate with the stakeholdersin the ULBs and work out interventions that promote gender equity and participation in basiccivic 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 wherevarious departments prepare their individual budgets using certain broad criteria. Theseinclude management and performance levels and quality of service delivery, their capabilities,range, requirements, geographical reach and field realities. These are expressed quantitativelysing 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 incharge of the department. Suggestions for review or changes are made if required, followingwhich BIDS is finalized and a summary of this is prepared.

The Budget Committee, under coordination of the Chief Accounts Officer, reviews BIDS of eachdepartment. A final budget of the individual departments is drawn up, based on the discussionsand 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 theneed based budgeting, procurement planning & resource allocation for BMP. Following this aconsolidation 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. Thebudget 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, whichpasses 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 thePROOF Platform (discussed below). This process has now been in operation for over six yearsand has provided a sound rationale to the entire budget making exercise. This also allowsspending within the available budget lines.

PROOF Initiative

The PROOF campaign was a collaborative effort of four non-profit independent organizations inBangalore, in carrying out budget analysis/fiscal performance audit of BMP, and started in2002. 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 andexpenditure 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 abroad 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 2002-03. The initial focus was to assess implementation of the various programs approved in thebudget. The first step was to engage BMP in the process, to disclose their quarterly financialperformance and later to respond to the queries on the analysis of the financial statement. Aformat 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 thecampaign, 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 PROOFformat simplified the budget statement into four categories for revenue, capital, and fiduciaryreceipts and expenditures and a few selected major items. The model adopted for disclosurewas that of the Governmental Accounting Standards Board (GASB).

PROOF has been conceived of as a continuous effort, with quarterly assessments. Each year thecampaign has a ten-month time framework, ending with review of performance of the financialyear. 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 havebeen 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 toBMP to provide information.

Clearly, as an initiative to increase transparency and accountability in Municipal Corporationspending, the example of PROOF is probably one of the best in Indian scenario; other NGOs andcity 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 auguredwell for ensuring improved accountability in BMP spending, there are a multitude of issueswhich need to be sorted out before it can be taken to its logical end. Key issues include lowlevels of involvement of councilors; lack of capacity building of citizens; selectiverepresentations 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 majordecisions; 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 beaddressed in due course. However, the process has still not been fully institutionalized. There isa need to refocus and re-launch PROOF, aimed at increased participation, convergence withbroader 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 animportant 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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2.3. Revenue Improvement and Cost Reduction





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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 areMCs, 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 MunicipalRevenue (Rs.

In Crore)

Percentage of GDP at factor

cost

Revenue share of Municipal Revenue (as per cent of totalrevenue of )

State Govt. Central Govt. Combined State &

Central Govt.

1998-99 11,515 0.72 4.4 4.1 2.5

1999-00 13,173 0.75 4.2 4.4 2.5

2000-01 14,581 0.77 4.2 4.5 2.4

2001-02 15,149 0.73 4.1 4.2 2.3

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 wellas relative importance of revenue sources of municipal corporations varies across the States.





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Table 1b: Expenditure Significance of Municipal Sector

Year Municipal

Expenditure

(Rs. In Crore)

Percentage of

GDP at factor

cost

Revenue share of Municipal Expenditure (as per cent of

total expenditure of )

State Govt. Central Govt. Combined State &Central Govt.

1998-99 12,035 0.75 4.52 4.31 2.21

1999-00 14,452 0.82 4.60 4.85 2.36

2000-01 15,743 0.83 4.53 4.84 2.34

2001-02 15,914 0.76 4.22 4.39 2.15

Table 1: Revenue Sources of Urban Local Bodies in India

Revenue Head Sources of Revenue

Tax 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)

Revenue

Entertainment tax, surcharge on stamp duty, profession tax, motor

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 Municipal Corporation Major Taxes

Andhra Pradesh Hyderabad Property Tax, Profession Tax

Bihar Patna Property Tax, Profession Tax

Delhi Delhi Property Tax, Advertisement Tax

Gujarat Surat Property Tax, Octroi

Karnataka Bangalore Property Tax, Advertisement Tax

Kerala Kochi Property Tax, Profession Tax

Madhya Pradesh Indore Property Tax, Advertisement Tax





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Maharashtra Mumbai Octroi, Property Tax

Punjab Ludhiana Octroi, Property Tax

Rajasthan Jaipur Octroi, Property Tax

Tamil Nadu Chennai Property Tax, Profession Tax

Uttar Pradesh Varanasi Property Tax, Advertisement Tax

West Bengal Kolkata Property Tax, Advertisement Tax

Table 3: Sources of Major User Charges and Fees of Selected Municipal Corporations in India

1998-2002

State Municipal

Corporation

User Charge and Fees

Maharashtra Greater Mumbai Water Charges, Sewerage Charges, Building Licence

fees

West Bengal Kolkata Planning fees, Car parking fees, mutation fees

Andhra Pradesh Hyderabad Dangerous and Offensive Trade Licence fees, market

fees, slaughter house fees

Gujarat Surat Water Charges, Building related fees, betterment

charges

Karnataka Bangalore Betterment charges, building licence fees, penalty for

late tax payment

Orissa Bhubaneswar Building Licence fees, market fees

Tamil Nadu Chennai Building Licence fees, market fees, other licence fees,

parking fees

Uttar Pradesh Kanpur Building licence fees, market fees

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.

Table 4: Sources of Shared Revenues of Selected Municipal Corporations in India

State Municipal Corporation Shared Municipal Taxes

Maharashtra Greater Mumbai Non agricultural assessment tax,

entertainment tax

West Bengal Kolkata Motor Vehicles tax, entertainment tax

Karnataka Bangalore Entertainment tax, surcharge on stamp

duty

Gujarat Surat Entertainment tax

Tamil Nadu Chennai Surcharge on sales tax, duty on transfer of

property, entertainment tax

Andhra Pradesh Hyderabad Surcharge on stamp duty, profession tax,

entertainment tax





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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 grants-

in-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 revenuesources, 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 Revenue Component 1999-00 2000-01 2001-02 2002-03 2003-04 Avg. %

1 Tax Revenue 47.87 47.39 44.76 43.11 42.95 45.21

2 Non Tax Revenue 24.92 25.45 28.73 31.65 31.17 28.38

3 Assigned Revenue 2.78 2.92 3.23 4.12 3.59 3.33

4 Non Plan Grants 9.14 9.90 10.67 9.96 9.39 9.875 Other revenue receipts 10.29 7.41 4.65 4.82 4.53 6.34

Revenue Receipts 95.00 93.08 92.04 93.67 91.64 93.08

6 Plan Grants 1.75 1.34 3.07 2.26 3.58 2.40

7 Loans 2.08 4.04 3.08 2.14 2.35 2.74

8 Other capital receipts 1.17 1.55 1.80 1.94 2.43 1.78

Capital Receipts 5.00 6.92 7.96 6.33 8.36 8.36

Total Receipts 100.00 100.00 100.00 100.00 100.00 100.00

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 ExpendituresExpenditure Category Expenditure Items

Establishment Expenditure Staff Salaries, Allowances, wages, pensions & retirement benefits etc

Administrative Expenditure Rents, rates & taxes, office maintenance, communications, books & periodicals,

printing and stationery, travel expenditure, law charges etc

Operation and Maintenance Power & fuel, bulk purchases, stores, hire charges, repairs & expenditure,

maintenance and interest payments made on loans

Capital Expenditure 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

Other Expenditure Miscellaneous expenses not accounted for in the above

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, andtrends are shown in Table 8.

Table 8: Composition and trends of Municipal Expenditure (percent to total)S.N Expenditure Component 1999-00 2000-01 2001-02 2002-03 2003-04 Avg. %

1 Establishment & Admn. Exp 37.47 37.24 38.42 35.53 32.61 36.25

2 Operation and Maint. Exp 14.41 14.45 16.57 14.20 12.51 14.43

3 Other Revenue Exp. 6.96 6.33 6.52 5.02 4.56 5.88

4 Revenue Expenditure 58.84 58.01 61.52 54.75 49.67 56.56

5 Capital Expenditure 13.01 11.94 13.93 10.78 12.18 12.37

6 Other Expenditure 28.15 30.05 24.56 34.47 38.15 31.07

Total Expenditure 100.00 100.00 100.00 100.00 100.00 100.00

Source: Based on the budgets of municipal corporations

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.

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 anddrainage tax.





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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 government’s 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 self-

government. 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. Amunicipal 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 shouldserve 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 taxinspectors 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 Classification of Rented Buildings ARV

1 Those for which fair rent has

actually been fixed under Rent

Control Act

ARV is the actual fair rent fixed under Rent

Control Act

2 Those that are within the purview

of Rent Control Act, but fair rent has

not actually been fixed under the

Act.

ARV is the fair rent fixable under Rent

Control Act

3 Those that are outside the purview

of the 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 bethe 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 inestimating rental values, there is a considerable loss of revenue to ULBs.

2.3.6.3. Capital Value Basis:

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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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 betweenthe 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 underJawaharlal 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 month’s 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 annualvalue, 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 leviedto 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 beenprescribed.

• 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 adoptedto 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 easilydetermine 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 port ion 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 measurablethere 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.

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.

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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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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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 CodeIt 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 helpin preventing leakage of revenue. Necessary provisions should made in the Act for this purpose.

2.3.6.12. Records Management

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 cross-

referencing 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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Self Assessment Scheme refers to a scheme where property owners can undertake a self-

assessment 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 self-

assessment 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 theresident 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 whenlegislated, 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 non-

performers 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 one’s 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 paidby the assessee, so that appeal is not used as mechanism for tax evasion or delay.

2.3.6.20. Citizen Interface Mechanisms: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 thereformed 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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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 thereforms, 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 usefulif 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 annualrental 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 Use construction Commercial/

industrial

Residential Others

1. Pucca with RCC

2. Pucca with sheet

roof

3. 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 : 25 percent of ARV

(b) Non-residential buildings : 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 territorialzones 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. Residential

Shops/Shopping complexes

Public use

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, theCommissioner issues a final notification (in Form A) dividing the town into various zones and





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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

Posh

RCC

Ordinar

y

Madras

Terrace

d

Mangalor

e tiled

Country

tiled

Huts

In Rupees

A. Residential 8.00 6.50 5.50 4.00 3.00 2.00

B. Shops 30.00 27.00 21.00 16.00 12.00 4.00

C. Public offices

i) offices and banks 18.00 16.00 14.00 8.00 7.00 4.00

ii) Hospitals, 18.00 16.00 14.00 10.00 6.00 2.00

iii) Educational Instns. 12.00 10.00 8.00 5.00 4.00 2.00D. Commercial use

i) Hotels, &

Restaurants

14.00 14.00 12.00 8.00 6.00 3.00

ii) Godowns 9.80 8.00 6.00 5.00 4.00 2.00

E. Industrial use 8.00 7.00 7.50 5.40 3.00 2.50

F. Cinema theatres 7.50 6.00 5.00 4.50 3.50 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 forrepairs or on any other account are shown in Table 12.

Table 12: Deductions by age of building

S.No Age of the building Deduction allowed

25 years and below 10% of ARV

Above 25 years and up to 40 years 20% of ARV

Above 40 years 30% of ARV

Owner occupied residential buildings 40% of the ARV

Municipalities situated on the sea shore An additional 5% of ARV





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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 payer’s 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 payer’s acceptability to the area based taxation. In spite of

protests from the rate payer’s 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 Property tax demand before general revision Rs.186.02 crores

2 Property tax demand after general revision Rs.310.16 crores

3 Net Increase in property tax due to general revision Rs.124.14 crores

4 Percentage of increase after general revision 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.

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.

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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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 non-

residential 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 self-

occupied. 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

Use/

Occupation

Zones

A B C D E F

Ratable values in rupees

(i) RCC roof /Madras

terrace - cost of

construction

exceeds Rs.250 per

sft

Tenanted 5.00 4.00 3.60 3.20 2.40 2.00

Self occupied 2.50 2.00 1.80 1.60 1.20 1.00

(ii) RCC roof

/Madras terrace -

cost of construction

ranges betweenRs.150 and Rs.250

per sft

Tenanted 4.00 3.50 3.00 2.50 1.60 1.40

Self occupied 2.00 1.75 1.50 1.25 0.80 0.70

(iii) RCC roof

/Madras terrace -

cost of construction

lower than Rs.150

per sft

Tenanted 3.50 3.00 2.50 2.00 1.20 1.00

Self occupied 1.75 1.50 1.25 1.00 0.60 0.50

(iv) Tiles and sheets

of all kinds

Tenanted 3.00 2.50 2.00 1.60 1.00 0.80

Self occupied 1.50 1.25 1.00 0.80 0.50 0.40

(v) Thatched house/ hut

Tenanted/self-occupied

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. Theannual 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 withroof 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 Category of

building

Parameter Attributes Points

1. Location (i) Access grading - National highway 9

- State highway 8

- District road 7

- Other PWD road 6

- Corporation BT road 5

- Corporation metalled road 4

- Non metalled road 3- Passage/footpath 2

No proper access 1

(ii) distance from

road side

At road side 10

9

50-100 meters 8

100-150 meters 7

150-250 meters 6

250-500 meters 5

500 meters – 1 km 4

1 km – 2 km 3

2 km – 4 km 2

1

2. Type of

construction

(i) Flooring Granite 10

Marble 9

Spartec tiles 8

Mosaic 7

Red oxide 6

Cement 5

Earthen 1(ii) Roof Concrete above 100 mm width 10





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Concrete below 100 mm width 8

Partly terrace and tiled 7

Tiled with ceiling 5

Tiled without ceiling 4

Asbestos 3

Partly tiled 2

Thatched 1

(iii) doors and

windows

High quality wood, i.e. teak,

rose, mahagani

5

Ordinary wood, i.e. anjali, jack

wood

4

Inferior quality/reuse 1

(iv) Number of floors 5 floors and above 10

4 floors 8

3 floors 62 floors 4

One floor 1

(v) Number of bed

rooms in the house

9 and above 10

7-8 8

5-6 6

4 4

3 3

2 2

1 1

(vi) bath Attached bath with marble

flooring

8

glazed tiles 6

Mosaic 5

Cement 3

Separate pucca bath 2

Separate kutcha bath 1

(vii) sanitary

convenience

Sewerage area 10

Septic tank 5

(viii) electricity Centralized AC 8Ordinary Ac 7

Just electrified 4

(ix) water connection From government source 5

From own source 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 Points Monthly rent notified per sq. meter (in rupees)

Zone I Zone II Zone III

A > 80 13 10 8

B 61-80 10 8 5

C 41-60 8 7 4

D 21-40 7 5 3

E 10-20 5 4 2

F < 10 3 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%

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%

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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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 allegedlyretrogressive 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 over-

proliferation 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:

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)

Notice of a public meetingb) Notice of an election





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c) Notice of a candidate in respect of such an election

d) Advertisement exhibited within the window of any building.

e) 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) The lease shall be through auction or by calling tenders.

b)

Registered Advertisement Agents are entitled to participate in the bid.

c) The period of lease shall not exceed three years.

d) The lessee is empowered to collect fees on advertisements as per the notification issued

by the Municipality

e) The lease has to be approved by the Municipal Council.

f) The lessee shall pay one third of the lease amount as deposit

g) The lease amount shall be paid once in six months in the months of April and October.

h) 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 regulate the erection of advertisements in

non-prohibited areas.





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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 feesand 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, healthfacilities, 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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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 Chennai Hyderabad

Year 2005 Year 2006 Year 2007

Domestic Rupees/KL Domestic Rupees/KL Domestic Rupees/KL

0-8000 litres 6.00 0-10000 2.50 Ind. Houses 90.00/month

8001-25000 9.00 11000-15000 10.00 8.00

Non-

Domestic

Non-

Domestic

Non-

Domestic

0-10000 36.00 Up to 500kl 35.00 0-15000 6.00

10001-20000 39.00 16000-30000 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.

2.3.9.2. Mandatory reform under JnNURM:

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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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 chargeslevied 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 cross-

subsidisation 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 ULB’s 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 state-

level 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 pre-determined 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 low-

income consumers. Increased community involvement can help support this by linking the level

of service provided to the community’s willingness and ability to pay. Expanding service

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, includingdepreciation 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 utility’s

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 to35 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 government’s 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 implementingstrategies 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 toattain 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 occasionalsurveys 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 From Rs. 30/- to Rs.100/- per tap per month

Commercial (General ) From Rs. 250/- to Rs. 700/- per tap per month

Donations From Rs. 2000/- to Rs. 10000/- per connection

Donations OYT From Rs. 5000/-to Rs. 30000/- per connection

Metered connections From Rs. 8/- to Rs. 25/-(per Kilo Litre)

Corporations

Residential From Rs.60/- to Rs.90/- per tap per month

Donations – Residential Rs. 6,000/- per connection :

Donations – Residential (OYT) Rs. 10,500/- per connection

Metered taps From Rs.12.50 to Rs.25.00 (per Kilo Litre)

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:

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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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 feefor 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 indicatedii. The authority of selection of lessee vests in the Municipal Council

iii. To participate in the auction, the following conditions have to be fulfilled

o Security deposit to be paid before taking part in the auction

o 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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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.

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.

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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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 roomsGovernment 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 non-refundable 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 theCommissioner. 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 forrevision 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 fixingthe 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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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.

Nature of local authority Authority for levy of

Surcharge on Transfer Duty

Rate on market

value of

property

1 Gram Panchayaths Section 69 of Andhra Pradesh

Panchayat Raj Act, 1994

5%

2 Municipalities Section 120 of Andhra

Pradesh Municipalities Act,

1965

5%

3 Zilla Parishad Areas in

Andhra area (Non-

Panchayat and

Non-Municipal)

Section 110 A of Madras

District Boards Act, 1920.

5%

4 Zilla Parishad Areas in

Telangana area (Non

Panchayat and Non-

Municipal)

Nil Nil

5 Municipal Corporation of

Hyderabad

Section 261 of the Hyderabad

Municipal Corporation Act,

1955

5%

6 Secunderabad Cantonment Section 60 of Cantonment Act,

1924

5%

The classes of instruments on which duty is leviable are as follows:

Municipal Corporation of

Hyderabad

Sale, Exchange, Gift, Mortgage (with possession) of

immovable properties.

Secunderabad Cantonment Sale, Gift & Mortgage (with possession)

of immovable properties.

Gram Panchayats and Municipal

areas & ZP area in Andhra region

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 registrationand 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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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: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.

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

street lighting

Huge backing

Lack of funds for

investment

Insignificant recovery Declining O&M levels

Insufficient institutional and

financial capacity

Roads linked to human health,

environment, congestion/noisepollution and quality of life





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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

Sanitation Poor coverage of safe

sanitation wide-gap

Poor maintenance

Poor recovery

Almost nil treatment

Shortage of Public funds

Insufficient public/municipal

institutional capacity

Enormous potential of Private

Sector including community Linkage with environment, human

health and productivity

Solid Waste

Management

Low collection ratio

Almost insignificant

treatment

Lack of municipal staff

Abnormally low recovery

Shortage of public funds

Linkages with environment (Air,

water), health and productivity.

Cost effectiveness with private

sector involvement

Existence of community potential

Community Services,

community centres,buses, bus stops,

parking places, market

places, shopping

centres

Wide gap

Limited resources (bothphysical and financial)

Declining Maintenance of

assets

Private sector potential

Recovery potential Efficiency in the O&M

Role in the productivity,

environment, quality of life and

health of community

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 ULBsto 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 aswell 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 hasa 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 themonthly 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.

2.3.13.4. Good Practices - Improved Cost Recovery

(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 enhancedthe bill collection efficiency to 99%.





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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 overtwo-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 project’s success lies a well-

planned 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 cost-

cutting 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 playerin 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 project’s 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 utility’s 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

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