Terming India's fiscal decentralisation as 'flawed', the World Bank has mooted six broad strategies, including strengthening the state finance commissions, broadening tax base and greater devolution of power to Panchayati Raj institutions.
"Despite India's commitment to rural decentralisation, panchayats cannot live up to their potential because of the flawed structure of the fiscal decentralisation system," World Bank said in its report on 'Fiscal Decentralisation to Rural Governments.'
The report, which went into decentralisation in Kerala and Karnataka, also found official data was not reliable and rural decentralisation was far from complete.
"Neither the panchayats, nor SFCs, nor GoI, nor state rural development and panchayat departments know the actual amount of funds available to panchayats, or their expenditure pattern," it said.
In this context, the Bank suggested strengthening SFCs, saying there was a need for an analytical cell within each state to track the performance of local governments, a census on local government finances and an annual report on inter-governmental fiscal relations.
On broadening tax base, it suggested allowing panchayats to tax agricultural land and imposing local business tax.
Apart from these, the non-tax earnings like user charges, rents and licence fees, and streamlining the property tax mechanism for augmenting resources to local bodies was needed.
For enabling the local government to reach the tax target set by the respective states, World Bank also recommended a suitable incentive package by devising a special pool.
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