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State Governments generate their revenue from two sources, the first is the revenue generated through sources such as SGST, Tax on liquor for human consumption, property tax, stamp duty, excise duty on petrol and diesel, electricity duty etc and the second source is the revenue transferred by Central Government to State Government on the recommendation of Finance Commission. These sources include shares in central taxes, general purpose grants, and specific purpose grants.  As we all know, the condition of Local government in the past, but now the parameters are changing, and urbanisation is continuously growing especially the municipalities now they have sufficient economic power through which they are financially stable because of various supportive policies. Local Bodies also generate their revenue by own through user fees and property value etc and the revenue is transferred by the State Government and Central Government on the recommendation of the State Finance Commission. The government also make provision for Local Bodies to make them financially stable. In 1992 Central Government introduced two amendments in the constitution the first amendment was the 73rd amendment which was related to Panchayati Raj Institutions and the second was the 74th amendment which was related to Urban Local Bodies. Local self-government plays a crucial role in the delivery of social and economic services such as education, public health, housing, and urban development and in infrastructure like transport, power irrigation etc. Local Bodies are divided into two parts first is Rural Local Bodies (RLBs) or Panchayati Raj Institutions (PRIs) in rural areas and the second is Urban Local Bodies (ULBs) or Municipalities in urban areas. Panchayati Raj Institutions (PRIs) are further divided into three types 1. Gram Panchayat (GP) at village level 2. Mandal or Block Panchayat or Anchalik Panchayat (AP) at block level 3. Zilla 4 Panchayat (ZP) at the district level and Municipalities are also divided into three types 1. The Municipal Committee covers a population of 10,000 to 25,000 people. 2. Municipal Council covers a population of 25000 to 1000000 people. 3. Municipal Corporation covers a population of more than 1 million people.

Structure of Local Government

Finance Commission

The President of India constituted the Finance Commission under Article 280 in the year 1951. The Purpose of the Finance Commission is to allocate certain revenue resources between the Central Government and State Government. The Finance Commission also define the fiscal relationship framework between the Central and State Governments. The Finance Commission give recommendations on the sharing of taxes between the Central and State Governments and transfers general purpose grants and specific purpose grants to the State Government.

The Finance Commission aims to reduce the fiscal imbalance between the Centre and the States (Vertical imbalance) and between the states (Horizontal imbalance). The Formula for sharing revenue is decided by the Finance Commission every 5 years. It promotes inclusiveness. So far, a total of 15 Finance Commissions have been set up, 14 Finance Commissions have submitted their reports, and the 15^th Finance Commission is functioning. The 15th Finance Commission required Local Bodies Panchayati Raj Institutions (Rural Local Bodies) Gram Panchayat (At Village level) Block Panchayat (At block level) Zilla Panchayat (At district level) Municipalities (Urban Local Bodies) Municipal Corporation (Population more than 1 million) Municipal Council (Population 25000 to 1million) Municipal Committee (Population 10000 to 25000) 5 to submit two reports, first report with recommendation for the financial year 2020-21 and the final report with recommendations for the 2021-26 period.

State Finance Commission

The Finance Commission recommended the devolution of revenue sources between the Central Government and State Government through Tax and grants, but there was no provision for the devolution of revenue resources between the State Government and Local Government. Local Bodies did not have sufficient resources to meet their expenses. There is a huge difference between the expenses of the Local Bodies and the revenue generated by them. Local Bodies’ revenue resources are not enough for their expenses, so they have to depend on the States. To provide revenue to Local Bodies, the Central Government constituted the 73rd and 74th amendments, the 73rd amendment is related to Panchayati Raj Institutions and the 74th Amendment is related to Municipalities. The constitution introduced Article 243-I (1) and Article 243-Y (1) to assess the financial situation of the Panchayati Raj Institutions and Municipalities. These articles recommend to the Governor every five years how the revenue resources should be divided between the State and the Panchayati Raj Institutions and Municipalities. This includes taxes, fees, tolls, duties, as well as grants from the State's consolidated fund. The 10th Finance Commission Recommended that all the States should have a State Finance Commission to recommend transfers to the Panchayat and Municipalities from the State Resources.

The 73rd and the 74th amendments of the Constitution of India provide – “243-I (1) The Governor of a State shall, as soon as may be within one year from the commencement of the Constitution (Seventy-third Amendment) Act, 1992 and thereafter at the expiration of every  fifth year, constitute a Finance Commission to review the financial position of the Panchayats and to make recommendations to the Governor as to:

I. the distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls, and fees leviable by the State, which may be divided between them under this part and the allocation between the Panchayats at all levels of their respective shares of such proceeds.

II. the determination of the taxes, duties, tolls, and fees which may be assigned to, or appropriated by the Panchayats.

III. the grants-in-aid to the Panchayats from the Consolidated Fund of the State.

“243-Y (1) The Finance Commission constituted under article 243-I shall also review the financial position of the Municipalities and make recommendations to the Governor as to:

I. the distribution between the State and Municipalities of the net proceeds of the taxes, duties of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them under this part and the allocation between the Municipalities at all levels of their respective shares of such proceeds.

II. The determination of the taxes, duties, tolls, and fees which may be assigned to, or appropriated by, the Municipalities.

III. The grants-in-aid to the Municipalities from the Consolidated Fund of the state (SFC Report) Here is the considerable divergence between the constitutional provisions regarding the setting up of the State Finance Commission by States and the working of SFCs on the ground. (SFC).

As per these provisions, it is the constitutional responsibility of the State Finance Commission (SFC) to determine the principles that should govern (a) the distribution between the state and the Local self-government(LSGs) of the net proceeds of taxes, duties, tolls and fees leviable by the state and the inter se allocation between different tiers of PRIs and ULBs; (b) the determination of taxes, duties, tolls and fees which may be assigned to or appropriated by the LSGs; and (c) the grants-in-aid from the Consolidated Funds of the state to LSGs. The SFC can also examine any other matter, which the Governor may refer to the commission in the interest of sound finances of the PRIs and the ULBs. Taking this constitutional provision into account, various states in India have constituted SFCs since the enactment of the 73rd Constitutional Amendment Act (Bishnu Prasad Mohapatra 2022).

Available information shows that 4 states have constituted their sixth SFC till date. 11 states have constituted their fifth SFC till date. Three states have constituted their fourth SFC and several states are still in their third and second SFCs. Uttar Pradesh has constituted the fifth State Finance Commission till now and Anand Mishra is the chairman of the fifth State Finance Commission of Uttar Pradesh.

Literature reviews are significant for the study as they are the platform of past research based on which present and future forecasts relating to any field or subject are carried out and help the researcher frame out the relevant scope for the study. These literature has been confined to the discussion of papers related to the State Finance Commission and fund devolution to Local Government, research articles and a thesis related to the study.

P Geetha Rani, (1999) studied the State Finance Commissions and Rural Local Bodies' devolution of resources. This paper attempts to critically review the recommendations of five State Finance Commissions: Kerala, Rajasthan, Karnataka, Punjab, and West Bengal, on fiscal devolution in Panchayati Raj Institutions.

Om Prakash Mathur and Sandeep Thakur, (2004) studied India’s Municipal Sector- A Study for the Twelfth Finance Commission (TFC). This study presents the fiscal performance of India’s Municipal Sector, in the different states. This paper also explains the recommendation of the Finance Commission of states (SFCs) on devolution for municipalities. It additionally suggests choices for the Twelfth Finance Commission (TFC) on exactly how it may add to enhancing the funds together with the performance of communities.

P. K. Mohanty, B. M. Mishra et al., (2008) studied Municipal Finance in India: An Assessment. This study examines the functioning of Urban Local Bodies (ULBs) in India and analyses the reasons for their differential performance concerning fiscal parameters and the provision of public amenities by using data from 35 Metropolitan Municipal Corporations. In view of the findings of the study and international experience in this regard, the study has made recommendations for improving the urban financial system in India.

V. N. Alok, (2009) studied The Share of Local Governments in the Union Divisible Pool: An Option Before the 13th Finance Commission. This study indicates that local governments should consider sharing from the central divisible pool with the states. This will affect the fiscal devolution recommended to the states to correct the vertical imbalance. This study concluded that the 13th Finance Commission is not only able to play a positive role in fulfilling its mandate but also strengthen its fiscal capabilities for the empowerment of the citizens particularly the poor of the country.

Manish Gupta and Pinaki Chakraborty, (2019) studied The State Finance Commissions: How successful have they been in Empowering Local Governments? This paper reviews the State Finance Commission reports of the 25 states in India and examines the recommendation of SFCs and resource devolution from central to State and from State to Local Self-Government. This paper observed the huge variation in SFC devolution across States. This paper observed that despite the timelines of the legal provisions of the constitution, the State Finance Commission has been delayed in many States. States did not organise their SFCs periodically.

Abhijit Dutta, Madhabendra Sinha & Sudhansu Sekhar Mahapatra, (2021) studied a Critical Review of the Finances of Local Self Bodies of Sikkim in the Context of Finance Commission Provisions. This paper examines the extent to which Sikkim has been able to manage the Local self-government’s resources and discusses the developments of the financial positions of these local bodies of Sikkim. Managing and sourcing the finances of the local bodies on the recommendations of the Fourteenth and Fifteenth Finance Commissions had always been a challenge for the states. Local bodies are one of the major instruments of the state to reach out to the welfare activities of the state.

Bishnu Prasad Mohapatra, (2022) studied the State Finance Commission and the Devolution of Funds to Panchayati Raj Institutions in Odisha, this article argues that the recommendation of the State Finance Commission supported the finances of rural local bodies and the devolution of state resources to Panchayati Raj Institutions has been increased year by year. This article concluded that the working of the State Finance Commission and its recommendations have supported PRIs in better financial positions and made them capable of delivering essential goods and services.

M. Gopinath Reddy and Bishnu Prasad Mohapatra, (2022) studied the Finances of Panchayats and the Status of Own Revenues in Telangana State: A Critique. This article argues that the revenue resources of panchayats are not enough for their expenses and remittances from the state and central governments are the two main sources of income for these bodies. this article

suggests the devolution of more taxes to PRIs by the SFC to strengthen their revenues and share at least 10% of the state’s revenue to meet their expenses and to provide better goods and services in rural and urban areas of the states.

Research Gap

i. Though there have been many studies on the State Finance Commission in various states and their recommendations on allocation of funds to local governments but not much attention has been paid to the Uttar Pradesh State Finance Commission and revenue sharing between state and local bodies in Uttar Pradesh.

ii. The performance of the Uttar Pradesh State Finance Commission has not been examined or evaluated so far.

iii. The study is based on the Fourth State Finance Commission and covers a period from 2015 to 2020.

Research methodology refers to the systematic process of planning conduct and analysing research. It comprises the theoretical framework techniques and methods for data collection and interpretation that are used to gather and interpret information. The methodology of Research ensures validity reliability and reproducibility of findings. It serves as a blueprint to guide researchers in their search for knowledge and understanding within a specific field or discipline. The Revenue Resources of Local Government is evaluated in the present study and This paper will use secondary data sources and analyse the role of State Finance Commission in revenue sharing between States and Local governments. For the study, this paper will analyse and collect data from State Finance Commission Reports of Uttar Pradesh State. The study also uses secondary data from budget documents, Economic Surveys, Finance Departments and the Ministry of Panchayati Raj’s computerised database, reports, RBI reports on Municipalities, Uttar Pradesh Board for Development of Municipal Financial Resources, Report of the Comptroller and Auditor General of India (CAG) and existing studies. This study is based on the Fourth State Finance Commission and covers a period from 2015 to 2020.

Sources of State Government Revenue

There are mainly two ways of revenue resources of State Government, first is Own tax and non-tax revenue resources and second is share of states in central tax revenue and grants based on horizontal distribution criteria. States' revenue resources come from tax on income, tax on property and capital (land revenue, stamp, registration fee), Tax on commodity and services or SGST, tax on vehicle, entertainment tax etc.

Financial Sources of Local Government

The Uttar Pradesh Government aims to strengthen the finances of local bodies for promoting participatory democracy and grassroots empowerment, economic development at the grassroots levels and strengthening local governance. Strengthening the finances of the PRIs made them more capable of providing public services like healthcare, education, sanitation, and infrastructure. The revenue sources of local bodies are limited and could be classified into these categories.

1.  Tax and non-tax revenue

The Uttar Pradesh Panchayat Raj Act, 1947 and the Uttar Pradesh Municipalities Act, 1916

authorize a village panchayat and municipalities to collect levies and collection of several taxes, tolls and fees. The tax and non-tax revenue resources of Local Government consist of revenue that comes from property tax, house tax, professional tax, vehicle tax, latrine tax, tax

on the agricultural land, pilgrim tax on animals, drainage tax, tax on works of public utility and market fees, charges like land registration duty, water charges, sewerage charges, trade licencing fees, sewerage connection charges etc.

2. Transfer from the Central Government 

Revenue transfers from the Central Government through the Central Finance Commission are tax devolution, Local Government Grants, scheme-related grants, general purpose grants, specific purpose grants and other grants and Programme funds from Central Government schemes. UP Panchayats have received funds on the recommendation of the Central Finance Commission since 1996-97. Currently, as in SFC, funds received by Zilla Panchayats is 20%, kshetra panchayat’s 10% and gram panchayat’s 70%.     

3. Transfer from State Government

Revenue transfers from State Government to local bodies are broadly divided into two parts, a) through State Finance Commission transfers and b) Programme funds from State Government schemes. Under the SFC transfers, there are three key sources, namely, a) Devolution, b) Compensation and assignment of taxes, and c) Grant-in-aid. The devolved revenues are transfers from the state government to Panchayati Raj institutions as per the recommendation of the SFC for the implementation of various schemes and programmes (Mohapatra 2022). The assigned revenues are the assignment of taxes and fees from the state to local bodies and the grants-in-aid are part of both general and specific grants to local bodies (Mohapatra 2022).  

4. Other Sources of Finance- Bonds, Loans, and borrowings.

 Analysis of the Uttar Pradesh’s Revenue Transfer to Local Bodies

Uttar Pradesh is the most populated state in India with over 200 million inhabitants. Uttar Pradesh is the fifth largest State in the country in terms of size and spans an area of 2.41 lakh square Kilometres. There are 59095 PRIs and 652 ULBs in the State.  In RLBs, there are 75 Zilla panchayats (ZP), 826 Kshetra Panchayats (KP), 58194 Gram Panchayats (GP) and in ULBs there are 17 Municipal Corporations, 198 Municipal Councils and 437 Municipal Committees. SFC devolution depends on Some criteria and weights that were given Finance Commission every five years.

 Table 1: Criteria and Weights for Allocation of Local Bodies Grants by the State Finance Commission 

Parameter	Municipalities  (Weight%)	Panchayat  (Revenue%)
Population	40	50
Area	5	10
SC/ST	10	10
Per Capita Income	15	-
Establishment Comfort backwardness index	10	-
Integrated development backwardness index	20	30

Source: A Report Card of State Finance Commissions, Ministry of Panchayati Raj 2016

 

Source: Ministry of Panchayati Raj database

As per the data presented in Table 2, the fourth State Finance Commission recommended the transfer of ₹13,97,853.46 lakhs to PRIs (₹1,164,842.26 lakhs for Gram Panchayats and ₹233,011.197 lakhs for Kshetra Panchayats) under these heads from 2015-16 to 2019-20. It is further revealed that in 2015-16 the amount under GP was 16.57 % of the total amount Which increased by 8% of the total amount in 2019-2020 and in 2015-16 the amount under KP was 17% of the total amount Which also increased by 8% of the total amount in the year 2019-2020.   

In Uttar Pradesh State Finance Commission has submitted five reports till now and funds are being transferred to the Municipalities under the recommendations of the State Finance Commission. The ratio of financial transfer recommended by four State Finance Commissions and accepted by the State Government is given below in Table 3.

Source: Financial Scenario of Municipality in Uttar Pradesh

The Uttar Pradesh Government Provide financial assistance to Local Bodies and other institutions. The financial assistance provided to local bodies during the period 2016-20 is presented in Table 4.

Table 4: Financial Assistance by State Government to Local Bodies

Institutions	2016-17	2017-18	2018-19	2019-20
Panchayati Raj Institutions (Zila Parishad and Gram Panchayat)	7572.31	10096.44	16209.80	12517.71
Urban Local Bodies (Municipal Corporations and Municipalities)	1002.05	1208.46	3081.35	9059.97
Total	8574.36	11304.90	19291.15	21577.68

 Source: State Finances Audit Report 2020-21

Table 5: State Finance Commission Grants to Local Bodies

Fourth SFC Devolution
Particulars	2015-16	2017-18	2018-19	2019-20
Urban Local Bodies	5462.43	6939.92	7312.50	8700.00
Panchayati Raj Institutions	4070.65	4631.25	4875.00	5800.00
Total	9533.08	11571.17	12187.50	14500.00

Source: Comptroller Auditor General Reports 2016 & 2021

Apart from the transfer of SFC to the Rural Local Bodies and Urban Local Bodies the State Government has provided financial assistance to Panchayati Raj Institutions and Municipalities for implementation of various schemes in the states. In the Fourth SFC the total grant provided to Urban Local Bodies was 28,414.85 crore and for Panchayati Raj Institution was 19,376.9 from 2015 to 2020.                                   

Recommendation of SFCs to Local Bodies In Uttar Pradesh

 State Finance Commission plays a key role in Strengthening the finances of local bodies.  An important strategy of the Uttar Pradesh Government is to promote participatory democracy and grassroots empowerment, economic development at the grassroots levels and strengthen local governance. Presently, out of the total divisible pool in total net tax receipts of the state, 60% is being offered to Municipalities/ULBs as well as 40% to Panchayati Raj Institutions (PRIs). Uttar Pradesh's first state finance commission was for the awarded period 1996-97 to 2000-01. In 1^st SFC the recommendation for tax devolution was 10% of the state's total tax revenue to local bodies in which 70% to urban local bodies and the remaining 30% to rural local bodies. Uttar Pradesh's second state finance Commission was for the awarded period 2001-02 to 2005-06. In the 2nd SFC, the recommendation for tax devolution was 12.5% in which a 7.5% share should go to municipalities and 5% to panchayats. Grant-in-aid ₹1.5 crore was provided for it equipment and MIS needs ₹45,00,000 for the directory and Commission has not recommended any grant to PRIs. Uttar Pradesh 3rd State Finance Commission was for the awarded period 2006-07 to 2010-11. in the 3rd SFC, the recommendation for tax devolution was 15% of the state’s tax and non-tax revenue to the local government but accepted only 12.5% of net tax revenue for devolution by the State Government. Grant-in-aid ₹15729.95 crore provided for infrastructural needs Rs 119.25 crore for the midday meal scheme, one one-time grant of ₹42.12 crore and an annual recurring grant of ₹28.45 crore for two construction of library and information centre. Uttar Pradesh 4th State Finance Commission was for the awarded period 2011-12 to 2015-16. In the 4^th SFC, the recommendation for tax devolution was 15% of net own revenue but accepted only 12.5% of net tax revenue for devolution by the State Government and for the Grant-in-aid there was no recommendation in the 4^th SFC. Funds devolved under the recommendation of SFC to the panchayats are utilised for the maintenance of assets owned by panchayats but there are delays in the constitution of the State Finance Commission in Uttar Pradesh. State Government aggravate it by not constituting it even at the expiry of every fifth year. SFC reports are also delayed due to the absence of reliable data relating to local governments and unreasonable time assigned by the state to SFCs to submit their report. (Manish Gupta 2019)

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