By Vishnu Prasad, IFMR Finance Foundation

Continuing from our earlier post that looked at the function and functionaries of the Karnataka Municipalities Act, 1964, this post looks at the Funds facet of the Karnataka Municipalities Act, 1964, which is the enabling legislation for the 74th Constitutional Amendment Act in Karnataka. The posts are part of our Municipal Finance blog series.

Funds

The Figure below provides a break-up of what taxes, fees and other forms of own revenue generating cess or duties, municipal councils can impose under the Karnataka Municipalities (KM) Act.

Under the KM Act, the State government and the municipal council have the power to suspend or prohibit the levy of ‘objectionable’ taxes. However, the council’s order to reduce, suspend or abolish a tax is subject approval by the State government. Additionally, the State government may also require the municipal councils to impose new taxes.

Property Tax

Property Tax is the single largest source of own revenue for most ULBs. The KM Act specifies the property tax that shall be levied for different classes of buildings and land:

1. Commercial building at such percentage not being less than 0.5 percent and not more than 2 per cent of taxable capital value¹ of the building
2. Residential building and buildings other than commercial- 0.3 to 1 per cent of taxable capital value of the building.
3. Vacant land under 1000 sq. meters- 0.1-0.2 per cent of taxable capital value
4. Vacant land 1000-4000 sq. meters- 0.025-0.05 per cent of taxable capital value
5. Vacant land above 4000 sq. meters- 0.01-0.02 per cent of taxable capital value

The Act also specifies that the property tax levied should be enhanced by 15 percent once in every three years (commencing from 2005-2006).

Property tax cannot be levied on certain types of land and buildings like places set apart for public worship, choultries, ancient monuments, charitable hospitals and dispensaries, hospitals and dispensaries maintained by railway administration, burial and cremation grounds, government lands set apart for free recreational purposes etc.

Municipal Fund

The Municipal Fund of a ULB is composed of money received by or on behalf of the municipal council by virtue of the provisions of the KM Act. Money can be taken out of the municipal fund beyond what has been specified in the budget only for specific purposes like the acquisition of land, construction, maintenance, repair for the purpose of obtaining supply of water, providing the supply of electricity, establishing slaughter houses or places for the disposal of night soil or sewage or carcasses of animals, for drainage works, providing mechanically propelled transport ,setting up of dairies or farms for the supply and to promote the health, safety or convenience of the inhabitants

The municipal council can deposit any surplus funds at interest with a government savings bank, or with the sanction of the state government in any scheduled bank or a central co-operative bank in the State or in public securities².

A municipal council may borrow money with the previous sanction of the Government from the Government or from any bank, corporation or person, money required for constructing any work of a permanent nature or for acquisition of land. In such cases, the State government will specify conditions regarding security, the rate of interest and repayment.

Budget and Auditing

The Chief Officer has to present the budget of the municipal council on or before the fifteenth of January each year with detailed estimates of income and expenditure for the ensuing financial year. The budget estimate needs to make allowance for the following:

1. Suitable provisions for all services mandated by the KM Act
2. Payment of interest and principal on loans for which the council is liable
3. All payments due to the State government (for public works carried out by the State government and contribution towards expenses of Karnataka Municipal Administrative Services)
4. Allow for a balance that it is required to meet establishment charges covering three months

The State government holds the power to modify the budget in order to bring it in compliance with the provisions of KM Act.

The law also requires that the account of the council be audited every year and an audit report submitted. The audit report should contain:

1. Every payment which appears to be contrary to law;
2. The amount of any deficiency or loss which appears to have been caused by the gross negligence or misconduct of any person;
3. The amount of any sum received which ought to have been but is not brought into account by any person, and
4. Any other material impropriety or irregularity in the accounts

(The entire act may be accessed here.)

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1 – The taxable capital value of the vacant land shall be equivalent of fifty percent of the market value guidelines of properties published of the land notified by the Government under section 45B of the Karnataka Stamp Act, 1957.
2 – “public securities” are defined as,—
(a) securities of the Government of India,
(b) securities of the Government of Karnataka, or of any other State Government,
(c) debentures or other securities for money issued by or on behalf of any local authority in exercise of the powers conferred by a law in force in the State, or
(d) a security expressly authorized by any order which the Government makes in this behalf