How Panchayats Falter In Collecting Revenue

In 1992, India moved towards greater distribution of powers to rural local bodies (RLBs) by granting constitutional status to panchayats for them to function as institutions of self-government. All Indian states (except Mizoram, Nagaland and Meghalaya) are supposed to empower RLBs to collect various taxes and user charges through their respective Panchayati Raj Acts. India has over 250,000 gram panchayats, 6,500 block panchayats and 600 district panchayats, according to recent government estimates.

Source: National Institute of Public Finance and Policy

During 2017-18 to 2021-22, 78% of own source revenue (OSR) was collected by gram panchayats across India, followed by 10.6% at the block level and 11.2% at the district level. Gram panchayats are legally assigned more “taxable” functions where tolls, fees, user charges, etc. can be levied. The other two tiers--block and district panchayats--have either not been authorised for tax collection by several states, or contribute far less compared to gram panchayats.

Between 2020-21 and 2023-24, only district panchayats from Uttar Pradesh and West Bengal were collecting certain taxes, as per an April 2025 report by the National Institute of Public Finance and Policy (NIPFP), which studied eight states--Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Odisha, West Bengal and Uttar Pradesh. Moreover, only West Bengal’s block panchayats were levying their own taxes.

Since both block and district panchayats are the administrative wings of state governments, they have very limited financial resources whose use is decided by the local MLA (member of legislative assembly), said H.K. Amar Nath, associate professor at NIPFP.

Revenue streams and Finance Commission guidelines

The 15th Finance Commission (FC) awarded more than Rs 2.8 lakh crore to RLBs during 2021-26--60% as tied grants, and 40% untied amount to be used for needs under 29 subjects (education, agriculture, rural housing, social welfare, etc.) listed in the 11th Schedule, the exceptions being salaries and other establishment costs.

“Due to their nature, tied grants can only be spent on designated sectors (water supply, sanitation, etc.), which not only restricts discretionary spending but also hinders the ability of gram panchayats to address unique local needs or experiment with innovative solutions,” said Avani Kapur, founder-director of the Foundation of Responsive Governance (ResGov).

Further, structural constraints and non-participatory planning tend to sideline community voices when preparing panchayat development plans, as IndiaSpend reported in August 2025.

The Standing Committee on Rural Development and Panchayati Raj has recommended a solution to this: where tied grants cannot be fully utilised (as for example in a village already “saturated” in water or sanitation infrastructure), gram panchayats should be allowed to reallocate unspent tied funds as untied grants. “This would both improve fund utilisation and permit more genuine bottom-up decision-making,” Kapur said.

Own source revenue is the income generated by a government or a public entity from its internal resources. Empowering gram panchayats to generate their OSR involves assigning certain taxes, user charges and common property resources (CPRs).

“For example, when one buys a piece of land or property, they must pay a stamp duty and registration fee. From this, a certain portion has to be shared with RLBs in some states,” Amar Nath explained. The collection of entertainment tax and profession tax works similarly, although the extent of the revenue shared varies from state-to-state. “These are called assigned taxes.”

User charges include fees and fines, rents and royalties, and auction income--charges that are linked to various services (water supply, sewage facilities, solid waste management, etc.) provided by RLBs. “Out of these, the major revenue source is water supply,” said Nath.

Lastly, CPRs typically include revenue from fisheries, minor irrigation projects, sale of firewood or forest residue, and auction of gram panchayat land, dry waste sales, etc.

Southern states fared better, state finance commissions almost defunct

The standing committee report mentions five states and Union territories (UTs)--Goa, Puducherry, Kerala, Andhra Pradesh and Gujarat--that have provided “proper empowerment” to panchayats for collecting OSR. It’s not that other states have not done this, but the extent and effectiveness vary significantly.

The empowerment that the committee is referring to depends on whether states have constituted their State Finance Commission (SFC), defined what taxes can be collected locally, and issued rules to operationalise collection, said Mallika Arora, senior program associate at ResGov.

Jharkhand’s panchayati raj act lists taxes but lacks rules for collection, Arora said, adding that the state is only now releasing its first SFC report, even though setting up of the fifth SFC became due in 2014-15 across India. “Madhya Pradesh, currently on its fifth SFC, has directives for tax collection but uses outdated rates, limiting revenue potential,” she added.

Although SFCs play a vital role in recommending transfer of resources from state governments to RLBs, Nath claimed that they are “almost defunct bodies”. They are often not constituted on time and struggle with inadequate infrastructure, operational capacity and data collection. This ultimately leads to poor quality reports and unsatisfactory implementation of crucial recommendations, according to a working paper published by NIPFP.

While southern states such as Andhra Pradesh and Karnataka had “substantial” OSR collection during 2017-18 to 2021-22, Madhya Pradesh, Uttar Pradesh and Odisha showed “meagre” collections for the same period of study, NIPFP’s analysis of MoPR data estimated.

In fact, Uttar Pradesh and Madhya Pradesh received a share of over 95% from the centre and state to make up for their “miniscule” OSR generation, as per the NIPFP study. While every gram panchayat in Uttar Pradesh had zero OSR collection between 2020-21 and 2023-24 (except Jalabpur Gudal, which only collected sanitation user charges in 2023-24), gram panchayats in Madhya Pradesh did not levy professional tax despite clear provisions and criteria for the same under their State Panchayati Raj Act.

When it comes to property tax, Karnataka had the highest per capita collection, followed by Maharashtra and Andhra Pradesh. Odisha and Uttar Pradesh’s State Panchayati Raj Acts have not empowered gram panchayats to collect property tax.

Karnataka also leads the states in terms of assigning functions to panchayats, releasing and spending SFC grants on time, and having sufficient staff capacity, according to the Panchayat Devolution Index released by the MoPR. Maharashtra and Uttar Pradesh made it to the top five, Gujarat and West Bengal were rated as ‘high performing’ states. ‘Medium scoring’ states included Andhra Pradesh, Madhya Pradesh and Odisha.

Although property tax, water tax and license fees dominate OSR streams, CPRs remain largely untapped, with only 18% of gram panchayats utilising them, the NIPFP report found. Overall, gram panchayats located in the districts in the South performed better, followed by those located in the West and East, with the top 10 gram panchayats with the highest per capita income being mostly from Karnataka, Andhra Pradesh, Maharashtra and Gujarat.

Gram panchayats with higher amounts of grants were able to raise more revenue than the ones that received a lesser amount. “Wherever gram panchayats have efficiently utilised grants, there has been provision of proper roads, drainage, street lighting, solid waste management, drinking water supply and so on. If you are giving services, people are willing to pay. This is what has come out of our research,” Nath said.

Large variations in finances, accountability and capacity enhancement across states

Despite the autonomy given to panchayats, major mismatches between functions and revenue powers explain why most gram panchayats are unable to collect various taxes and user charges.

Firstly, many gram panchayats are not provided with guidelines on the method of levy and assessment of property tax or user charges. “For example, they must have clarity on the rate at which they are supposed to levy water connection charges from each household. It is the block panchayats’ responsibility to specify gram panchayats’ monthly expenditure on providing water supply. This is what I call hand-holding, which is lacking in most states except Andhra Pradesh, Karnataka, and Maharashtra to a certain extent,” explained Nath.

Secondly, gram panchayats face the persistent challenge of staff shortages and low technical capacity. For instance, it was found that a single secretary manages multiple gram panchayats in Uttar Pradesh. In most states, on average, there were only two staff funded by the state government; the other staff mostly depended on untied grants or OSR, according to the NIPFP report.

“While this reflects a degree of self-sufficiency in covering the day-to-day operational costs, in many gram panchayats we have seen that salary expenditure consumes such a large share of the budget that little remains for expenditure on administering various government programmes such as MGNREGS and Swachh Bharat Mission,” said Arora of ResGov.

Additionally, since commercial activities in rural areas mostly take place from residential buildings, several gram panchayats were unable to distinguish between property tax on houses and commercial activities due to lack of training. “If they can collect property tax properly, they can fund 90% of their staff salaries only from property tax. If they add to it water charges and license fees from commercial shops, they could pay some money for developmental activities also,” Nath added.

Thirdly, while the collection of license fees on commercial establishments is the domain of gram panchayats in other states, they are collected by the district panchayat in Uttar Pradesh. “Moreover, it auctions the responsibility of fee collection to another agency without defining how much they should collect,” Nath said.

He gave another example of water supply, which is managed by the Public Health Engineering Department in Madhya Pradesh, Odisha and West Bengal. With the centrally sponsored scheme Jal Jeevan Mission being administered by a state-led department, gram panchayats in these states are not in a position to levy water connection charges.

“In such a scenario, if you go and collect user charges from citizens, they say that they never asked the gram panchayat to give them a tap and so why should they pay,” he explained. In fact, three in four gram panchayat officials cited villagers' unwillingness to pay taxes as a significant hurdle, as per a 2022 NCAER study that analysed OSR trends across 23 states.

Fourthly, upon detailed mapping of activity transfer to RLBs for additional revenue from CPRs, it was found that only Uttar Pradesh and Karnataka have delegated activities with regard to 29 themes, while coastal states like Maharashtra and Odisha--which have a competitive advantage over marine life--have not mapped activities with regard to fisheries.

Moreover, CPRs have not been handed over to gram panchayats in many states, including Karnataka, wherein the revenue from sale of forest residue, fruits and other yield from trees growing on government land is collected by the revenue or forest department.

“Therefore, state governments must stop involving special purpose vehicles or other departments in order to enhance gram panchayats’ capacity to collect OSR,” Nath said.

Lastly, despite the 15th FC’s estimation of high potential in terms of collecting house/property tax in rural areas, most states have not focused on it due to a combination of reasons.

“Politically speaking, property taxes are often kept low to avoid voter backlash. There is also a lack of awareness and to some degree trust, both among panchayat leaders and citizens. This feeling that it's “sarkaar’s” duty to provide us services--so why should we pay for it,” Kapur of ResGov explained.

She also mentioned administrative and technical constraints, including lack of updated property records, inadequate staffing and digitisation of assessment and collection, weak and outdated valuation systems, and poor enforcement.

Low OSR collection increases panchayats’ dependence on transfers from higher levels of government, diminishing the intent of the 73rd Amendment which sought to establish Panchayats as self-governing institutions rather than mere implementers of higher-level schemes. “Reliance on grants tends to stifle local accountability and innovation in financial management, potentially reinforcing a “dependency trap”, said Kapur.

As already recommended by successive finance commissions and standing committees, working on capacity building for revenue administration, state reforms to devolve staff and revenue sources along with clear guidelines, and increasing use of technology could improve tax collection, she concluded.

IndiaSpend reached out to officials in the panchayati raj and finance departments in Uttar Pradesh, Madhya Pradesh and Odisha for comment on the overdependence of panchayats on central and state grants, how states are planning to improve the quality of their rural local bodies’ own source revenue generation, whether measures are being taken to ensure panchayats levy prescribed taxes, and what efforts are underway to enhance gram panchayats' staff capacity and training. We will update this story when we receive a response.

Kashish Kapoor, a former intern with IndiaSpend, contributed to this report.

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