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THEME PAPER

operation and maintenance costs on the state and central renewal and to stimulate local
are added, the figure would government for transfers which economic development. The
jump to Rs. 5.92 million crore are grossly insufficient. They strategy applies a benefit
(HPEC 2011). have to depend on the grants for principle to public infrastructure
While the expenditure providing even their basic investment by developing a
requirements are high, the services. The ULBs in India are mechanism to capture the value
revenue generation of the amongst the weakest in the generated by the infrastructure
authorities is meagre. The world in terms of financial developments. VIF uses the
municipal revenue as a autonomy and fiscal capacity. future increase in the taxes, like
percentage of GDP has come The ULBs in India do not have increment in the property tax
down from 1.08% in 2007-08 to the right to impose any tax on due to the increase in property
1% in 2017-18 (Mohanty, 2016 their own. They also do not have values because of infrastructure
and ICRIER, 2019). The major the power of borrowing money development, to finance the
reason for the revenue to remain from the market individually as initial costs of these projects. As
stagnant has been the low the states fix the borrowing rate. an infrastructure development
buoyancy in the own tax They face a major mismatch in project is taken up, it will lead to
revenue receipts which is due to their finances and functions. a rise in the value of land and
a poor tax base, weak levy and Unlike the other countries where property and will also increase
collection of taxes at the ULB local bodies account for 20-30% the commercial activities in the
level. Also, the Indian of the total government area. All such increases in values
municipalities do not have any expenditure, ULBs in India will translate into an increase in
major source of raising “own” account for only 2-3% of the taxes. VIF mechanism captures
revenue. The property tax which combined expenditure and this increment in the taxation
remains the only major revenue revenue of the state and central due to value uplift to fund the
source with the local bodies is government. The continuous infrastructure itself. In the initial
highly unexploited. According falling share of own tax revenues phase, the value of the land and
to the Economic Survey of 2016- has put ULBs in various states at property in the project area and
17, major Indian cities hardly a high risk of maintaining their the impact zone is assessed and
collect 5-20 percent of their tax identity as the third tier of the calculated. This value is known
potential. While the condition of government financially (ASCI, as the base value. With the
ULBs was already in a dismal 2014, ICRIER, 2019). It is in this development/ construction
state, the introduction of GST context that we bring the activities, the value of the land
has further worsened the concept of VIF which can make starts rising. Such values
situation with the ULBs losing the ULBs self-sufficient. increase the tax base for
control of their major taxes like VALUE INCREMENT property tax and all other taxes.
octroi. The GST Council had an FINANCING (VIF) The development authority
opportunity to strengthen the Value Increment Financing (VIF) captures this increment in the
ULBs by providing them their is a financing mechanism being taxes because of the rise in value.
due share in the tax distribution used in several countries across In other words, as the total tax
system but the ULBs were the globe to meet investment value rises above a fixed
ignored while deciding the GST requirements. It is a flexible baseline, the tax on the
revenue shares. instrument for financing urban difference in the assessed and
new base value is captured. The
The ULBs are highly dependent development, expansion or

April 2021 Volume 22 No. 1- SHELTER 23