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.)

—
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

By Vishnu Prasad, IFMR Finance Foundation

This post and the next one look at the Karnataka Municipalities Act, 1964, which is the enabling legislation for the 74th Constitutional Amendment Act in Karnataka. The two posts look at 3 main features of the Act- functions, functionaries and funds. The current post speaks about the first two features.

Introduction

The Karnataka Municipalities Act, 1964 (KM Act) comprises 17 chapters, 380 sections and 13 schedules. The founding objective of the Act was to have a uniform law for the governance of Municipal Councils in the State, which were governed until then by seven different enactments. The initial Act aimed to govern both City Municipalities and Town Municipalities as the provisions were in most case common and it was seen as convenient to have a single enactment for both kinds of Municipalities. The Act was later amended in 1994 (Amending Act 36 of 1994) to bring it in conformity with the provisions of the 74th Constitutional Amendment Act (CAA), 1992.

While the City Municipal Councils (CMC), Town Municipal Councils (TMC), Town Panchayats (TPs) and Notified Area Committees (NACs) are governed by the KM Act, the larger City Corporations (CCs) are governed by the Karnataka Municipal Corporations Act (KMC Act), 1976. The Table below provides a category-wise breakup of ULBs in the state.

Functions

The KM Act mentions 23 obligatory functions, 2 special functions and 35 discretionary functions of municipal councils. The 23 obligatory functions contain most functions devolved under the 74th CAA (for more on this see our earlier blog post).

The 2 special functions are:

1. Providing special medical aid and accommodation for the sick in time of dangerous disease; and taking such measures as may be required to prevent the outbreak of the disease;
2. Giving relief to and establishing and maintaining relief works in times of famine or scarcity.

The 35 discretionary functions include specific functions like planting and maintaining roadside and other trees; taking statistics and granting rewards for information which may tend to secure the correct registration of vital statistics; maintenance of an ambulance service and broad functions like the promotion of public health or child welfare; provision of transport facilities within the municipal area and revival or promotion of cottage industries.

Functionaries

The Most important functionary at the ULB is the Municipal Council. Every municipal council is headed by the President and Vice-President. The Municipal Council consists of:

1. Councilors, elected by the people under their jurisdiction
2. Not more than five persons nominated by the Government from amongst the residents of the municipal area and who are,
• (i) Persons having special knowledge and experience in municipal administration or matters relating to health, town planning or education, or
• (ii) Social workers.
3. Members of the State Legislative Assembly, representing a part or whole of the municipal area whose constituencies lie within the municipal area
4. The members of the Council of States and members of the State Legislative Council registered as electors within the municipal area

In addition to the Municipal Council, ULBs also have a Standing committee that deals with the following subjects:

1. Taxation, finance and appeals;
2. Public health, education and social justice;
3. Town planning and improvement;
4. Accounts

Every municipal council has a Chief Officer who is appointed by the Director of Municipal Administration. The Chief Officer functions as the executive head of the municipal council. The duties of the Chief Officer include:

1. Taking prompt steps to remove any irregularity pointed out by the auditor
2. Reporting to the President, the Standing committee and the Municipal Council all cases of fraud, embezzlement, theft or loss of municipal money or property
3. Supplying any return, statement, estimate, statistics, account, or report or a copy of any document in his charge called for by the municipal council or the standing committee
4. Exercising supervision and control over the acts and proceedings of all officers and servants of the municipal council in matters of executive administration and in matters concerning the accounts and records of the municipal council

The powers of the Chief Officer include granting and issuing licenses and permissions which may be granted by the municipal council; suspending or withholding any of the issued license; receiving and crediting to the municipal fund all fees payable for licenses; entering (on behalf of the municipal council) into contracts and inviting tenders for the execution of any approved work.

A municipal council may also appoint one or more Health Officers whether temporarily or permanently, the officers being officers of the Department of Public Health.

The Director of Municipal Administration (subject to the control and orders of the Government) acts as the chief controlling authority in respect of all matters relating to the administration of the KM Act. For example, the Deputy Commissioner has the power to suspend the execution of orders of municipal councils if the order is deemed unlawful or is likely to lead to a breach of peace. The Director of Municipal Administration may also take steps to prevent extravagance in the employment of the municipal councils. In addition, the state government has the power to dissolve municipal councils under circumstances where the municipal council persistently makes defaults in the performance of the duties imposed on it or exceeds, abuses its power or refuses to carry out the directions given to it under the provisions of the KM Act.

(The entire act may be accessed here.)