DMF ASSIGNMENT 2

DMF ASSIGNMENT 2
SUBMITTED BY | ADHITHY MENON E
ROLL NO. | TCR21MUP001
M3 MPLANNING

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1. STATE GRANTS AND SHARED TAXES OF LOCAL BODIES

Central Finance Commission (CFC) evolves a comprehensive framework for the distribution of the grants‐in‐aid
between states, including those for the local bodies

A capital grant is usually utilized for capital expenditure like purchase of land, building, equipment, facilities,
etc. The benefits of such expenditure are of an enduring nature and spread over an extended period of
time, such as road development grant.

The revenue grant is generally utilized for meeting recurring expenditure, the benefits of which usually expire
within the accounting year in which it is incurred. Revenue Grants are usually in the nature of a subsidy. Subsidies
are provided directly or indirectly for the provision of services such as water supply, disposal of sewage,
transporting and disposal of wastes, municipal transport, street lighting, hospitals and schools.

GRANTS IN INDIAN CONSTITUTION

Apart from distribution of taxes between centre and states, the constitution provides for mainly two types of grants‐
in‐aid viz. statutory grants and discretionary grants:

Statutory Grants

Article 275 makes provisions for statutory grants to needy states {not every state}. These are charged on
Consolidated Fund of India. Such grants also include specific grants for promoting the welfare of the scheduled
tribes in a state or for raising the level of administration.

Discretionary Grants

Under article 282, both center and states are able to make any grants for public purpose even if they are not within
their legislative competence. Since such grants are discretionary, there are no obligations to make such grants.
During the planning commission era, these discretionary grants were in fact bigger than statutory grants and that is
why planning commission had assumed very important role.

Other Grants

For initial 10 years, constitution had made special grants for Assam, Bihar, Odisha and West Bengal for promotion
and protection of jute industry

Shared Tax:
Tax sharing is the second important instrument of resource mobilization at the
Panchayti Raj Institutions level.
The basis of the levy of land revenue is agricultural land and the stamp duty of the rural areas‐ agricultural land‐is
tapped by the state leaving nonagricultural land and rural houses and building to the fiscal domain of the
Panchayati Raj Institutions.

2. MUNICIPAL FINANCE IN INDIA

Municipal finances are central to many new urban and local governance projects, as their strategic management
plays a critical role in ensuring long‐term sustainability of local services and infrastructure. Municipal finance can

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affect the nature and location of development. In some cases, municipal financial tools work in tandem with planning
tools, but in other cases the two have opposite effects.

In general, the effect of municipal financial tools in the nature, type and location of development is less understood.

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.

MUNCIPAL FINANCIAL
MANAGEMENT

PLANNING SOURCING UTILIZING & DISBURSING

REPORTING CONTROLLING

GOOD MUNCIPAL
FINANCIAL
MANAGEMENT

GOOD BUDGETING GOOD ACCOUNTING GOOD AUDITING

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Budgeting involves planning how resources are to be collected and distributed within/across activities. Budgeting
should be realistic and relevant and it must periodically receive feedback from the accounting function. The entire
budget exercise starts with setting up budgets and targets and ends with the taking of an action. Budgets are usually
set up in the light of experience after considering the changes that are expected to occur in the future. budgets
assume the optimum efficiency attainable

RECENT RENDS IN MUNICIPAL FINANCE

1. Fiscal decentralization

Transfer of financial responsibility from central governments to local governments forcing local governments to
deliver fund and increasing number of services

2. Emphasis on land and property taxation

3. Public‐private partnerships
Municipalities have turned to the private sector to deliver and fund public sector services through explicit public‐
private partnerships. The rationale for private involvement in the delivery of local public services is to improve the
efficiency and effectiveness of delivery
4. Accountability in budgeting
Increased accountability has meant that municipalities are making the effort to include the public in important
decisions on how revenues are raised and how funds are spent.
5. Improved financial management

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Increased participation on the part of the public, combined with limited resources at the local level, has increased
pressure on local governments for better municipal financial management.
Reforms to existing management practices and the introduction of new financial reporting techniques have resulted
in improved accounting methods and budgeting processes.
CASE STUDY

To address the fiscal stress, some ULBs began to resorting to borrowings in recent years,
 Housing and Urban Development Corporation
(HUDCO),
 financial institutions
 World Bank
 Asian Development Bank
Jawaharlal National Urban Renewal Mission (JNNURM) by the Government of India on 3rd December 2005 reflects
the recognition, at the Government of India level, of the need to support ULBs to improve infrastructure facilities
and basic services to the poor in cities and towns.
To perform these tasks, the urban local bodies must be financially sound and endowed with commensurate powers
to raise resources. However, while the Constitution specifies the expenditure responsibilities, it has not listed out
the sources of revenue of ULBs. Article 243X of the Constitution only stipulates that a State Legislature may, by law,
authorize a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such
procedure and subject to such limit; assign to a Municipality such taxes, duties, tolls and fees levied and collected
by the State Government for such purposes and subject to such conditions and limits; provide for making such
grants‐in‐aid to the Municipalities from the Consolidated Fund of the State and provide for the constitution of such
Funds for crediting all moneys received, respectively, by or on behalf of the Municipalities and also for the

withdrawal of such moneys there from, as may be prescribed by law .

CHINA MODEL

• China is one of world’s most decentralized countries with central govt. accounting just
20% of national budgetory expenditure in 2007
• Rest distributed subnationally
• Provincial‐ 18%
• Municipal‐20%
• Country & township‐40% (Wong,2013)

3. PROPERTY TAX
Entry 49 empowers the State governments to levy ‘taxes on land and buildings’ which has been devolved to the local
governments. Local governments have very limited autonomy in determining the base, fixing the States, and
enforcing the tax.
Property tax is the annual amount paid by a landowner to the local government or the municipal corporation of his
area. The property includes all tangible real estate property, his house, office building and the property he has rented
to others. Property Tax is one of the main sources of revenue for the ULB. Residential and Non‐residential
(Commercial) properties, situated within the limits of ULB, are assessed for tax. Based on such assessments, taxes
are levied on the property owners. The information regarding all the new constructions, existing construction, and

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modifications to the property, if any, are be provided by the Town Planning Department for making necessary
changes to tax assessment. The citizen has to register with the urban local body for taxation and assessments are
made based on the physical dimensions of the property and other parameters to assess the taxes to the citizen.
The Revenue section of the ULB/Municipal body is responsible for administration of property taxation for that
respective ULB.
Property tax is assessed for each property located in the limits of the ULB based on the Annual Rental Value and
the Taxation rate.
The Annual Rental Value of a property is calculated based on parameters like
 Plinth area,
 zonal location of the property,
 Residential/Non-residential status,
 age of the property,
 type of construction and other parameters applicable to specific situations.
The Town planning section of the ULB provides all the details of the property with reference to its physical status
and modifications.
Property tax is calculated by the municipal authorities in proportion to the assessed value of the property.There
are mainly three ways of calculating property tax:
Capital Value System (CVS): The tax is levied as a percentage of the market value of the property. This market value
is determined by the government and is based on the locality of the property. The market value is revised and
published yearly. Mumbai follows this system.
2. Annual Rental Value System or Rateable Value System (RVS):
Under this system, the tax is calculated on the yearly rental value of the property. This is not necessarily the actual
rent amount being collected; rather it is the rental value decided by the municipal authority based on the size,
location condition of the premises, proximity to landmarks, amenities etc. Examples of municipalities following this
system of property tax include Hyderabad and Chennai.
3. Unit Area Value System (UAS)
In this system, the tax is levied on the per unit price of the built‐up area of the property. This price is fixed (per square
foot per month) based on the expected returns of the property as per its location, land price, and usage, and is then
multiplied with its built‐up area. Municipalities like Delhi, Kolkata, Bengaluru, Patna and Hyderabad follow this
system for property tax calculation

4. CAPITAL INVESTMENT AND OTHER INITIATIVES FOR DEVELOPMENT FINANCING

CAPITAL INVESTMENT

Most important segments of the Indian financial system. It refers to all the facilities and the institutional
arrangements for borrowing and lending funds. It is concerned with the raising of money capital for purposes of

making long‐term investments .

Demand ‐ private sector manufacturing industries, agriculture sector, trade, and the Government agencies
Supply ‐ individual and corporate savings, banks, insurance companies, specialized financing agencies and the
surplus of Governments.
Indian capital market is broadly divided into the gilt-edged market and the industrial securities market- Gilt‐edged
market – is the market for government securities or securities guaranteed by the government including treasury

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bills and bonds‐ The Industrial securities market refers to the market for shares and bonds of the existing companies,
as well as those of new companies.
The Financing for Development process is centered around supporting the follow‐up to the agreements and
commitments reached during the three major international conferences on Financing for Development
 Monterrey, Mexico in 2002
 Doha, Qatar in 2008
 Addis Ababa, Ethiopia in 2015
The Addis Agenda provides a new global framework for financing sustainable development, which supports
implementation of the 2030 Agenda, including the SDGs. The agenda aligns all domestic and international resource
flows, policies, and international agreements with economic, social and environmental priorities. It incorporates all
the SDG means of implementation targets into a comprehensive financing framework and serves as a guide for
further actions by governments, international organizations, the business sector, civil society, and philanthropists.

The Sustainable Development Investment Partnership (SDIP) is a global neutral platform of 42 public, private, and
philanthropic institutions with the shared ambition to scale finance for the SDGs and overcome the barriers
hindering private investments in emerging and developing countries. As a joint initiative of the World Economic
Forum and the Organization for Economic Co‐operation and Development (OECD), SDIP’s mission is to address the
systemic challenges that prevent the mobilization of capital needed to achieve the SDGs.

5. DEVELOPMENT IMPROVEMENT FINANCING AND VALUE CAPTURE FINANCING

Value capture is a type of public financing that recovers some or all the value that public infrastructure generates
for private landowners. It seeks to enable States and city governments raise resources by tapping a share of increase
in value of land and other properties like buildings resulting from public investments and policy initiatives, in the
identified area of influence.

How does it work?

Value capture financing (VCF) works on the conviction that public policy and infrastructure projects typically lead to
improvement in the quality of housing, jobs access and transportation, yield other social benefits, and lead to the
emergence of important commercial, cultural, institutional, or residential developments in the influence area. This,
in turn, leads to an appreciation in land value in the neighborhood.

The VCF process comprises 4 key steps:

VALUE CREATION : Public regulations, policies and investments lead to creation of value
VALUE REALIZATION BY PRIVATE OWNERS : For instance, the investment made by a developer fetches a bigger
monetary value when he sells housing units along a metro corridor planned by the government than he would have
without the project
VALUE CAPTURE : It involves the government and private owners agree to a sharing mechanism for the value
captured
VALUE RECYCLE : The resources collected are ploughed back in other parts of the city to create fresh value

The different instruments of VCF are:

 Land Value Tax
 Fee for changing land use

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 Betterment levy
 Development charges
 Transfer of Development Rights
 Premium on relaxation of Floor Space Index and Floor Area Ratio
 Vacant Land Tax
 Tax Increment Financing,
Zoning relaxation for land acquisition and Land Pooling System.
Traditional resource mobilization through direct sale of land, the most fundamental asset owned and managed by
States and Urban Local Bodies is an inefficient form of resource mobilization. This innovative mechanism could also
be used by for investing heavily in building national highways, railway projects, power generation and port
infrastructure development.
Ministry of Urban Development is working to develop a comprehensive VCF framework so that it can be used
efficiently and optimally across the country as a method of financing infrastructure and enhancing the finances of
urban local bodies.

Value capture methods can be used in an area or can be specific to a project. Area‐based value capture attempts to
capture the basic appreciation of the value of the area because of infrastructure development, while project‐based
value captures the appreciation of land and building values in influence of the project. The area of influence
determines the geographic extent of immediate positive impact of project investments.

Area‐based application of Value Capture is best suited for urban areas. The area could be a locality, city, or a larger
planning area. On the other hand, project‐based value capture can be used for projects being implemented by
Ministries/Departments/ Agencies of the Government of India. Some examples are given below.

• Ministry of Railways for high‐speed rail projects and expansion of railway network through SPVs.
• Ministry of Road Transport and Highways for the phased implementation of the Indian National Expressway
Network.
• Department of Industrial Policy and Promotion for setting up of Special Economic Zones (SEZs) and
industrial corridors such as the Delhi Mumbai Industrial Corridor (DMIC).
• Ministry of Power for setting up power generation plants.
• Ministry of Shipping for projects requiring significant land resources such as cargo terminals.

Example: Recently, the Government of Karnataka decided to create a dedicated fund for investment in mass transit
systems by using VCF methods, such as premium FSI, levying fees for change of land use in vicinity of project etc.
Specifically, provisions have been made for levying a betterment tax equal to one‐third of the increase in value of
the land. Similarly, the Government of Maharashtra is also levying 1% surcharge on the Stamp Duty to fund vital
important Urban Transport Projects related to MRTS such as Metro Rail, Monorail, and Bus Rapid Transport System,
Freeway, Sea‐link, etc.

WAY FORWARD

The Policy Framework provides a generic pathway to capture a part of the increased value by investment made by
Central/State Governments and their agencies and the ULBs. The components of the Framework are different for Area‐
based, and Project based interventions. The types and mix of VCF methods which can be applied to an area or project will
depend on the State environment and local context.

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The VCF policy framework aims to encourage and enable States/ULBs and Central Government Ministries and their
agencies to use appropriate VCF methods for generating resources from new and existing infrastructure projects in both
urban and non‐urban areas.

DEVELEOPMENT IMRPOVEMENT FINANCING

Development improvement financing

• Financing for improvement

• Bonds
• Certificates of indebtedness
• Property tax
• Local general fund
• Infrastructure replacement reserve fund
• Storm sewer improvement districts
• Urban and rural service districts
• Tax abatement
• Tax increment financing
• Funds for specific purposes
• Waterworks systems
Development financing instruments/tools‐

1)LAND DEVELOPMENT FINANCING

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Instruments in developed nations:

‘Own revenue’ surpluses of municipalities on a ‘pay‐as‐ you‐go’ system‐for urban infrastructure. Capital grants of
central/state govt. Local user charges, benefit charges & benefit taxes. Borrowings from financial institutions. Private
sector partnerships. SPVs‐special purpose vehicles‐user charges,govt.
Value capture instruments
Instruments of development financing adopted internationally. Based on ‘growth pays’ & ‘exacerbaters
pay’principles. Tools require developers to undertake construction of public infrastructure facilities needed for new
growth.
Innovative ‘in‐kind’ mechanisms such as
• land readjustment,
• land consolidation,
• land pooling
These instruments promote planned development & urban expansion

2)DEVELOPER EXACTIONS

Form of landuse regulation that requires Land developer or builder to contribute towards on‐or off‐site
infrastructure facilities needed for new development

3)DEVELOPMENT IMPACT FEES

Are scheduled charges applied for new development to generate revenue for construction or expansion of capital
facilities located outside boundaries of new development(off‐site) that benefit the contributing development. U.S‐
levy impact fees to finance new development.

4)DEVELOPMENT CONTRIBUTIONS

Used by Australia to fund urban infrastructure. Legally enforceable instruments 3 forms

1. Contribution in kind‐land gifted to govt.by developer
2. Work‐in‐kind‐developer constructs & hands over
3. Monetary charges‐ financial contribution towards land acquisition for public use

5) EXTERNAL DEVELOPMENT CHARGES

HUDA (Haryana Urban Development Authority)‐ levies External development charges (EDC). Includes charges for
water supply, sewers, drains, roads, colleges, stadiums, fire stations etc.

6) LAND READJUSTMENTS/CONSOLIDATION

Countries that used it successfully‐ South Korea‐ land readjustment, Taiwan –land consolidation
EXAMPLE

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Town-planning scheme(TPS) in Gujarat is an excellent example of inclusive & self‐financed planned urban
development. Landowner gets back proportionately reduced developed land contributing for reservations for
public use & sale component to meet infrastructure costs.
Magarpatta Township Model
Pune, maharashtra‐gives a fine example of how rural farmers can be made partners in process of planned urban
development. Creating world‐class, self‐contained township
based on:
• Walk to work
• Walk to school principle
• Market based financing instruments for infrastructure
Includes:
• Equity financing &
• Debt financing

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THANK YOU

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