Maharashtra Finance Commission Proposes 27.3% Tax Devolution to Local Bodies

Maharashtra Finance Commission recommends 27.3 per cent tax devolution to local bodies

Mumbai, July 10

The existing 26.3 per cent devolution rate will be increased by an additional 1.0 per cent of SOTR. This combined fund will be split, with 55 per cent allocated to Urban Local Bodies and 45 per cent to Rural Local Bodies. Within these allocations, 5 per cent will be strictly reserved as performance grants and another 5 per cent for rural-urban transition management.

The FC officially submitted its final report for the five-year period commencing April 1, 2026. Guided by the maxim, "If it can be measured, it can be improved," the report highlighted deep-seated regional imbalances, persistent financial gaps and a structural dependence on state grants among the state's local bodies.

According to the report, Maharashtra remains the engine of the Indian economy, with its nominal Gross State Domestic Product (GSDP) for 2024-25 estimated at Rs 45,31,518 crore, accounting for a 14 per cent share of India's GDP. The SOTR grew significantly from Rs 1.64 lakh crore in 2020-21 to Rs 3.67 lakh crore in 2024-25. Despite strong revenue mobilisation, the state has transitioned from a revenue surplus in 2018-19 to a revenue deficit.

Total debt stock and contingent liabilities as a percentage of GSDP are steadily climbing, while committed expenditure, comprising salaries, pensions and interest payments, is projected to rise from 46 per cent in 2024-25 to 51 per cent in 2025-26. A critical vulnerability was noted in the state's borrowing profile, with 43 per cent of outstanding state securities due to mature between 2030 and 2033, creating a sharp repayment peak, the report said. Zilla Parishads (ZPs) and Panchayat Samitis (PSs) are heavily grant-dependent, generating only 10 per cent to 30 per cent of their receipts from their own sources.

Crucially, 60 per cent to 70 per cent of their total expenditure is absorbed by establishment expenses, leaving minimal room for development. Gram Panchayats show much stronger fiscal health, generating roughly 40 per cent of their revenue through independent property tax collections, with capital expenditure accounting for 38 per cent of their budgets. More than 63 per cent of Gram Panchayats in Maharashtra cater to populations of fewer than 2,000, raising serious questions about their long-term financial viability to maintain basic public amenities.

Municipal Corporations, excluding Mumbai, generate about 51 per cent of their revenue independently, whereas Municipal Councils and Nagar Panchayats depend on external grants for 70 per cent of their funds. Urban population and wealth remain highly concentrated in the western and coastal belts.

The Konkan division reports a per capita own revenue of Rs 1,01,798, while the lagging Amravati division registers just Rs 10,661 per capita. To bridge a persistent annual resource gap of Rs 8,217 crore in local body finances, the Commission has mapped out a series of high-impact structural interventions.

The Finance Commission has recommended reverting the collection of Profession Tax to local bodies, which has been centralised by the state since 1975. It has also recommended shifting the fund flow of Additional Stamp Duty and land-use premiums to an automated direct transfer mechanism through the Virtual Treasury to eliminate operational delays.

The FC has recommended that all Urban Local Bodies (ULBs) transition to a Capital Value (CV)-based property tax system within one year, linking compliance directly to performance grants. It has also proposed granting local bodies statutory authority to access the MahaTraffic App to recover pending e-challan traffic fines, allowing them to retain 20 per cent of the collections as untied service grants.

Further, it has recommended enacting a Maharashtra Local Bodies Fiscal Responsibility and Budgetary Management (MLBFRBM) Act to mirror state-level fiscal discipline at the grassroots level. It has also proposed preventing local bodies from overcommitting funds by placing a financial liability cap of 1.5 times their residual capacity on new administrative approvals. The Finance Commission expects that full implementation of these recommendations will address at least 2.6 per cent of the identified fiscal gaps through collection efficiencies and new tax assignments, empowering local self-governments to successfully fulfil public aspirations.

— IANS