Empowering Panchayats Through Own Revenue: Time to Unleash Local Fiscal Potential

The Panchayati Raj Division of NITI Aayog convened a National Workshop on 24th July, 2025 to address a foundational challenge confronting India's Rural Local Bodies (RLBs): how to enhance their Own Source Revenue (OSR).

- Saurabh Bandyopadhyay and Laxmi Joshi

While constitutional provisions empower Panchayats to generate and manage local revenue, the ground reality reflects a disconcerting reliance on grants, limiting the fiscal autonomy necessary for effective grassroots governance.

Despite the intent behind the 73rd Constitutional Amendment, which institutionalised a three-tier Panchayati Raj system, the implementation of fiscal devolution remains weak. Under Article 243G, Panchayats are entrusted with 29 subjects listed in the Eleventh Schedule, and Article 243H empowers State Legislatures to authorise Panchayats to levy taxes, duties, tolls, and fees. However, despite these enabling provisions, 95% of Panchayat finances still rely on intergovernmental transfers, rendering them financially dependent and operationally constrained.

Tamil Nadu's OSR Model: Incentivising Local Accountability

Among India's states, Tamil Nadu stands out for its robust OSR mobilisation despite ranking only third in India's Devolution Index. Property tax constitutes the largest share (34%) of Panchayat revenues, followed by professional tax and water charges (21% each).

A simple yet effective revenue mechanism requires a Rs. 1,000 non-refundable deposit and Rs. 30 per tap connection—a model that ensures affordability while promoting accountability.

Tamil Nadu has also introduced differentiated trade licensing, tailored to business size (nano to large) and rural/peri-urban distinctions. This adaptive policy approach reflects an understanding of local economic diversity. Further, peri-urban Panchayats are beginning to tap advertisement revenues, aligning with evolving spatial and commercial dynamics.

A major innovation has been the VP Tax Portal, launched in 2023, which digitises tax records and streamlines collection. This tool allows Panchayats to monitor arrears, boost compliance, and minimise leakages—marking a decisive shift toward financial transparency and institutional efficiency.