Long read: How Panchayats Falter In Collecting Revenue

Tax collections in India – both direct and indirect – are throttling off at an alarming rate. This is likely to become a major issue as we approach the Union Budget in February 2026. Priya Verma’s article in IndiaSpend is interesting in this broader context because it helps us understand why nearly 80 years after Independence, the Indian state still hasn’t figured out a way to collect taxes efficiently at its most granular level of governance:

“India has over 250,000 gram panchayats, 6,500 block panchayats and 600 district panchayats, according to recent government estimates… Despite the 14th and 15th Finance Commissions’ recognition of the need for rural local bodies to become more efficient in revenue collection, panchayats’ own income fell 10.5% between 2017-18 and 2021-22, dropping to just Rs 59 per capita, as per a Ministry of Panchayati Raj’s expert committee report, leaving panchayats heavily reliant on Union and state government grants. These grants, in some cases, make up to 95% of panchayats’ income,”

So why are panchayats so poor at collecting taxes? The first reason is that in many states the necessary legislation has not been expedited which allows panchayats to collect tax:

“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)…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).”

Secondly, the way the Centre allocates funds to the rural local bodies (RLBs i.e. panchayats) ties the funding to specific local uses. So if the RLB does not want to use the money for said use (or cannot use the funds for the stated purpose), it cannot reallocate the money to some other purpose. This has meant that over time, RLBS have become mere supplicants just waiting for money to be doled out rather than building local administrative capacity for both collecting and spending money:

“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”
Thirdly, only 5 states have defined properly what own source revenues (OSRs) panchayats are allowed to collect, what rates these taxes can be collected at and what rules & regulations are required to collect these taxes:

“The expert 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…

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.”

And finally the panchayats suffer from the shortage of skilled staff who can efficiently and effectively the task of collecting revenues and then spending them:

“…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.”

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