A municipality can be defined as a unit of local self-government in an urban area. By the term ‘local self-government’ is ordinarily understood the administration of a locality – a village, a town, a city or any other area smaller than a state – a body representing the local inhabitants, possessing fairly large autonomy, raising at least a part of its revenue through local taxation and spending its income on services which are regarded as local and, therefore, distinct from state and central services. The discussion in following paragraphs is based on an article “Audit of Municipal Administration” R. Chandrasekharan. By 1947, the year of independence of India, most of the urban and semi-urban areas had been constituted into municipalities of one kind or another. Among them were the premier corporations of Bombay, Chennai and Kolkata each with a special kind of constitutional structure, better financial resources and subject to less state control than other municipal bodies. The service which the local bodies had to render was restricted to education, public health, sanitation, medical relief, roads and a few public works. This was so because these bodies were considered to be inefficient and they lacked adequate financial resources. These bodies derived their revenues from a number of sources – taxes on property, taxes on trade, taxes on persons; fees and licences, non-tax resources such as rent of land, houses, income from commercial undertakings; government grants, etc. Municipal government in India covers five distinct types of urban local authorities, viz., the municipal corporations, the municipal councils, the notified area committees, the town area committees and the cantonment committees. The taxation powers of the corporations are confined to a few items and are of a generally compulsive nature; on the other hand the tax powers of the other types of urban local authorities cover a wider range, optional in nature and subject to a procedure for their imposition requiring the final sanction of the state governments. Municipal authorities are endowed with specific local functions covering  regulatory, maintenance and development activities.

Expenditure incurred the municipalities and corporations can be broadly classified under the following heads: general administration and revenue collection, public health, public safety, education, public works, and others such as interest payments, etc. Property taxes and octroi are the major sources of the municipal authorities; other municipal taxes are profession tax, non-mechanised vehicles tax, taxes on advertisements, taxes on animals and boats, tolls, show-tax, etc. Local bodies may receive different types of grants from the state administration as well. Broadly, the revenue grants are of three categories:

  1. General purpose grants: These are primarily intended to substantially bridge the gap between the needs and resources of the local bodies.
  2. Specific purpose grants: These grants which are tied to the provision of certain services or performance of certain tasks.
  3. Statutory and compensatory grants: These grants, under various enactments, are given to local bodies as compensation on account of loss of any revenue on taking over a tax state government from local government.
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