As per the provisions of the 73rd Constitutional Amendment, Tamil Nadu was one of the first States to establish the State Finance Commission vide G.O.Ms.No.350 Finance Department dated 23.04.1994. So far, three State Finance Commissions have been constituted for devolution of funds to the Local Bodies.

6.1 First State Finance Commission

The first State Finance Commission was constituted for the period from 1997-1998 to 2001-2002. The key recommendations of the State Finance Commission are given in the below:

• The devolution of funds for Local Bodies should be gradually increased from 8% to 12% of the States’ Own Tax Revenue during the Commission’s Award period.

• The vertical sharing of devolution between rural Local Bodies and urban Local Bodies should be in the ratio of 60:40 respectively.

• After allocating a lumpsum grant (Block grant) to meet the actual needs of the District Panchayats, the balance amount out of rural pool should be allocated amongst Panchayat Unions and Village Panchayats in the ratio of 50:50.

• 90% of the total realization of Entertainment Tax should go the Local Bodies concerned.

• The collection of cable TV tax may be done by the Government and the entire amount be given to the Local Bodies after retaining collection charges.

• The Local Cess Surcharge should be credited to the General Fund of the Panchayat Unions. This need not be remitted to the Panchayat Unions “Education Fund Account” and the maintenance of school buildings be done through the General Funds of Panchayat Unions.

• The House Tax may be calculated on ‘Plinth Area or Rental Value basis’.

The Government in G.O.(Ms) No. 225, Finance (Revenue Resources) Department, dated: 2.5.97, ordered the sharing of the State Finance Commission Grant between rural and urban Local Bodies in the ratio of 55:45 and the rural share of 55% was apportioned among the Village Panchayats, Panchayat Unions and District Panchayats in the ratio 45:45:10 respectively.

6.2 Second State Finance Commission

The second State Finance Commission was constituted for the period from 2002-2003 to 2006-2007. The key recommendations of Second State Finance Commission are given below:

• The devolution of funds for Local Bodies shall gradually increase from 8% to 10% from States’ Own Tax Revenue during the Commission’s Award period.

• The vertical sharing of devolution between Rural Local Bodies and Urban Local Bodies should be in ratio of 58:42 respectively.

• After allocating the salary requirements of District Panchayats, the balance funds should be distributed between Village Panchayats and Panchayat Unions in the ratio of 60:40 respectively.

• 13% of the devolution may be used for distinct purposes, such as 3% as Reserve Fund, 5% as Equalization Fund and 5% as Incentive Fund. The balance of 87% of devolution fund may be used for general purposes.

• The rule enabling postponement of general revision of House Tax should be deleted.

• Village Panchayats and Panchayat Unions be fully compensated for loss of Local Cess and Local Cess Surcharge whenever land revenue is waived or ordered for remission.

• An amount of Rs.600/- per Hand Pump and Rs.7,500/- per Power Pump be fixed as Operating and Maintenance cost eligible for Village Panchayats for Hand Pumps and Power Pumps respectively.

• Grama Sabha should approve all works taken up by Panchayat Unions, District Panchayats and DRDAs and all State and Centrally sponsored schemes in Village Panchayats.

• The Census figures of 2001 be adopted for all resource transfers to the rural Local Bodies.

• A grant of Rs.6 crores be given for various training needs of Panchayat Raj Institutions.

• The District Collector may be nominated as Co-Chairman instead of Vice-Chairman of District Planning Committee.

The Government passed orders vide G.O. (Ms).No 284, Finance(FC IV) Department, dated 12.8.2002 for devolution of funds out of the rural Local Bodies’ share to the District Panchayats, Panchayat Unions, and Village Panchayats in the ratio of 8:45:47.

6.3 Third State Finance Commission

The third State Finance Commission was commissioned for the period from 2007-2008 to 2011-2012. The key recommendations of Third State Finance Commission are given below :

• The devolution of funds for Local Bodies shall be 10% of the States’ Own Tax Revenue.

• The vertical sharing of devolution between rural Local Bodies and urban Local Bodies should be in ratio of 58:42 respectively.

• The horizontal sharing of devolution among Panchayat Raj Institutions be in the ratio of 8:32:60 for District Panchayat, Panchayat Unions and Village Panchayats respectively.

• 3% from out of Village Panchayat share should be set apart as Incentive Fund for Village Panchayats.

• All educational institutions including State Government Owned and Government aided buildings, except Elementary Education Schools, should be subjected to levy of House Tax.

• The power to levy and collect Cable TV tax be vested with the Local Bodies.

• The tax collecting machinery in Village Panchayats should be strengthened by involving Makkal Nala Paniyalargal and also allocating work among the Village Panchayat Assistants who have been brought under time scale.

• Social Audit may be conducted in Village Panchayats using the Grama Sabha as the forum for the above.

• The issuance of birth and death certificates be entrusted with the Village Panchayats.

The Government of Tamil Nadu have ordered Vide G.O.(Ms). No. 199, Finance (FC IV) Department, dated 25.5.2007 that the devolution of funds to the Local Bodies from the States’ Own Tax Revenue for the year 2007-08 will be at 9%. This will gradually be raised to the optimum level during the award period. The ratio of the shares of rural and urban Local Bodies will continue to be 58:42. Since Village Panchayats are entrusted with most of the basic functions such as maintenance of village roads and streets, drinking water supply, sanitation, street lights and solid waste management and they are the largest in number (12,618), the allocation for the rural Local Bodies will be in the ratio of 60:32:8 among Village Panchayats, Panchayat Union Councils and District Panchayats.

6.4 Constitution of Fourth State Finance Commission

The Government have, vide G.O.Ms.No.549, Finance (Finance Commission-IV) Department, dated 01.12.2009, constituted Fourth State Finance Commission to review the financial position of the rural and urban local bodies namely Village Panchayats, Panchayat Union Councils, District Panchayats, Town Panchayats, Municipalities and Municipal Corporations. The Commission has the mandate to make recommendations as to – (a) the principles which should govern –
   (i) the distribution between the State and the said local bodies of the net proceeds of the taxes, duties, tolls and fees leviable by the Government which may be divided between them and the allocation between the said local bodies of their respective shares of such proceeds;
   (ii) the determination of taxes, duties, tolls and fees which may be assigned to or appropriated by the said local bodies; (iii) the grants-in-aid to the said local bodies from the Consolidated Fund of the State.
(b) the measures needed to improve the financial position of the local bodies and to suggest possible new avenues for tapping resources in rural and urban local bodies keeping in mind the local body tax structure in other States. In reviewing the financial position of the local bodies, the Commission has been asked to assess the financial position of the local bodies as on 31st March, 2010. The Commission has been asked to make its report available by 31st May, 2011 covering the period of five years commencing on 1st April 2012.