Maharashtra Finance Commission Proposes Higher Tax Share for Local Bodies to Bridge Rs 8,217 Crore Gap

The Sixth Maharashtra Finance Commission has recommended increasing the share of state taxes transferred to local bodies from 26.3 per cent to 27.3 per cent for a five-year period starting April 1, 2026. This move aims to address an annual funding gap of Rs 8,217 crore faced by municipalities and panchayats, despite the state transferring Rs 96,733 crore to them in 2024-25.

The commission, led by former chief secretary Nitin Kareer, also suggests that all 29 municipal corporations in the state should obtain credit ratings and issue at least one municipal bond by March 2030. This recommendation is part of broader efforts to enhance financial autonomy and accountability of local bodies.

A significant proposal is the return of profession tax collection powers to municipalities and panchayats, which were taken over by the state government in 1975 under the Maharashtra State Tax on Professions, Trades, Callings and Employments Act. The commission estimates that restoring this power could generate resources equivalent to 0.8 per cent of the state's average State Own Tax Revenue (SOTR).

Other revenue-raising measures include giving Zilla Parishads a 4 per cent share of Motor Vehicle Tax collections for district roads, allowing local bodies to lease public land and properties for up to 30 years, and levying an additional 10 per cent cess on the premium collected when agricultural land is converted for non-agricultural use (NA premium). The cess amount would be transferred to the local body where the development occurs.

The commission notes that while Maharashtra currently transfers about Rs 96,733 crore (26.3 per cent of state tax collections) to urban and rural local bodies through grants and compensations, a funding gap of Rs 8,217 crore persists. This gap equals 3.6 per cent of the SOTR. To close it, the commission recommends increasing the transfer share to 27.3 per cent during 2026-31.

Breaking down the required additional resources, the commission estimates that profession tax could contribute 0.8 per cent of SOTR, Motor Vehicle Tax share 0.6 per cent, improvements in local tax collection 1.2 per cent, and the remaining 1 per cent must come from additional state transfers.

For roads, urban local bodies currently receive 10 per cent of Motor Vehicle Tax collections as road grants, but rural bodies get none despite maintaining district roads. The commission proposes earmarking 4 per cent of such collections for Zilla Parishads.

Other recommendations include setting up the Maharashtra Municipal Property Tax Board, conducting GIS mapping of properties, assigning Unique Property IDs, and extending drone surveys beyond gaothan areas to broaden the tax base. The commission also suggests shifting urban local bodies to the Capital Value system of property taxation, as followed by the Brihanmumbai Municipal Corporation (BMC), where tax is linked to property value.

Additionally, the commission recommends a larger share for local bodies in extra stamp duty collections, traffic challan revenues, and disaster mitigation funds, along with formula-based distribution of District Planning funds.

The recommendations apply to all urban local bodies, including major corporations like BMC, Thane, Navi Mumbai, Pune, Nashik, and Nagpur, as well as surrounding villages experiencing rapid urban expansion.