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May 20, 2021

Development Finance

NON-TAX REVENUES OF URBAN LOCAL GOVERNMENTS

In addition to tax revenues, Urban Local Governments (ULGs) in India can also generate non-tax revenue through various means. Non-tax revenue refers to revenue that is generated from sources other than taxes.

A further source of urban local governments income comes from non-tax revenues. These are mainly derived from fees levied in markets, bus stands, cart stands, slaughter houses, and rents from Municipal property such as land and buildings (especially shopping centers) income from public utilities and interest on investments. Apart from taxes and rates there are some sources of revenue such as fines, fees, penalties, rents and income from other minor sources. Income from all these sources is generally not substantial.

Here are some of the major sources of non-tax revenue for ULGs in India:

Fees and charges: ULGs can levy fees and charges for various services such as building plan approvals, issuing certificates, and other licenses. These fees and charges are usually fixed by the ULG and can be revised from time to time.
Rents and leases: ULGs can generate revenue by leasing out their properties, such as community halls, markets, and shops, to private parties. The revenue generated from rents and leases can be a significant source of income for ULGs.
Sale of property and assets: ULGs can generate revenue by selling their assets such as land, buildings, and vehicles. However, such sales need to be done in a transparent and accountable manner.
Grants and subsidies: ULGs can receive grants and subsidies from the central and state governments for various development projects. These grants and subsidies can help ULGs to undertake infrastructure development projects and provide better services to citizens.
Loans and borrowings: ULGs can also generate revenue by taking loans and borrowings from banks and other financial institutions. However, ULGs need to ensure that they have adequate revenue sources to repay the loans and borrowings.

1. Fees

The term fee is generally defined to be a charge for special service rendered to individuals by some government or semigovernment agency. The amount of fee levied is to bear some relationship with the expense incurred by such agency in rendering a service, though costs are uniform and no account is taken of the

varying abilities of different recipients to pay. These are undoubtedly some of the general characteristics, but as there may be various kinds of fees, it is not possible to formulate a definition that would be applicable to all the cases.

Applying the ratio of these decisions, it has been held by the Hon’ble court that it is incontrovertible that the municipality which is rendering numerous services to the persons within its area of operation and therefore, the levy of license fee as fee by it is fully justified. The municipal committee is competent to levy the following fees.

(i) Fee for copies of register, documents maps etc.

(ii) Fee for notice of demand for payment of a tax.

(iii) Tehbazari fee

(iv) Fee for license for dangerous or offensive trades.

(v) Fee for license of the diverse of the vehicles of animal kept or plying for hire.

(vi) License fee in respect of total and lodging houses

(vii) Fee for licensing of potters, animals etc.

(viii) Fee for licensing of premises and person engaged in sale, preparation or exposure for sale of specified articles of food and drink.

(ix) Fee for registration of dogs.

(x) Fee for use of premises of slaughter of animals.

(xi) Fee for disposal of dead animals.

(xii) Fee for wasting and bathing animals.

(xiii) Fee for detention of stray dogs.

(xiv) Cattle pound fee

(xv) Fee for letting of fire works

(xvi) Fee for supply of copies of bye-laws.

(xvii) Medical Fee

(xviii) Fee from educational institution

2. Rents

Apart from fees, a substantial portion of the municipal fund is earned by way of rents received from Municipal property. This may include rents from land and buildings, marriage places, dak bungalows, rest house, serais etc.

3. Sale Of Property

The municipality may also appropriate the proceeds out of sale of its movable and immovable properties which can be sold with the prior sanction of the state Government.

4. Income from Investments

Municipality may with previous sanction of the Deputy Commissioner invest any

portion of its municipal funds in securities of the central government or invest it in such other securities or place it in such a manner as the State Government may approve in this behalf and vary such investments and place for others of like nature further provides that the income resulting from such securities and placements and the proceed of the sale of the same shall be credited to the municipal fund.

5. Fines and Penalties

Urban local governments have been authorized under the statutes to claim fine and penalties in respect of matters under its control.

Overall, non-tax revenue sources can help ULGs in India to generate additional income and fund their development projects. However, ULGs need to ensure that they use these sources of revenue in a transparent and accountable manner to benefit their citizens.

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Development Finance

TAX REVENUE OF URBAN LOCAL GOVERNMENT

Tax revenue is an important source of income for Urban Local Governments (ULGs) in India, which includes Municipal Corporations, Municipal Councils, and Nagar Panchayats. ULGs in India are empowered to levy various taxes and fees to generate revenue for providing public services to citizens.

The major sources of tax revenue for ULGs in India include the following:

Property tax: Property tax is a tax levied on the value of property owned by individuals or entities within the jurisdiction of the ULG. Property tax is the most significant source of revenue for ULGs in India and is typically levied annually.
Profession tax: ULGs can levy a profession tax on individuals or entities engaged in professions, trades, or callings within their jurisdiction. The tax is usually collected monthly or annually and is based on the income earned by the individual or entity.
Advertisement tax: ULGs can levy an advertisement tax on hoardings, signboards, and other types of advertisements within their jurisdiction. The tax is usually levied based on the size and location of the advertisement.
Entertainment tax: ULGs can levy an entertainment tax on various forms of entertainment, such as cinema tickets, amusement parks, and sports events, within their jurisdiction.
Vehicle tax: ULGs can levy a vehicle tax on vehicles registered within their jurisdiction. The tax is usually based on the type and value of the vehicle.

Apart from these taxes, ULGs in India can also generate revenue through user fees for various services such as water supply, sewage, and garbage collection. Additionally, ULGs receive grants from the central and state governments for various development projects.

A variety of taxes are levied by the urban local government in different states. The most common taxes are

property tax/house tax,
profession tax,
vehicle tax,
Octroi,
tolls,
technical tax,
tax on animals,
entertainment tax,
tax on transfer of property
tax on advertisements.

There has always been a controversy regarding the overlapping of the taxes by the state government and the local government.

Following some encroachment by the state government into the field of taxation, the need of reserving certain taxes for the local bodies is obvious. This requires specific provision for the purpose of local government legislation.

Article 243W and 243X of the constitution of India impose a duty upon the state legislature to endow the municipalities with such powers and functions in the form of taxation, fee etc. to enable them to perform their functions. Though the constitution does not prescribe the kinds of tax, duties or fees to be levied by the urban local government,

1. House Tax/Property Tax

The tax on land and buildings which is known as ‘house tax’ or ‘property tax’ in most of the states constitutes on important source of urban local government’s tax revenue

The expression ‘property tax’ implies a tax on property. Traditionally, it is a tax on immovable and tangible property. It excludes such movable properties as furniture, fixtures, machinery, equipment etc. and such rights as licenses to run a hotel, shop in a cinema theatre.

2. Professional Tax

In addition to property tax there is second source of urban local government’s income i.e. professional tax. This is levied on persons according to occupation, in order to obtain revenue from those who do not pay the property tax but who should also bear their just burden of local expenses.Professional tax is levied on trades, Professions and Callings and may be termed as local income tax. It is elastic as it automatically increases with increase in income and population.

Moreover, since it is a personal tax, it assures quick and easy payment.

Professional tax is a levy on the incomes earned while entering in a profession or trade or business etc. The constitution of India, under Article 276 makes provision to facilitate the levy of this tax by the local bodies. The article imposes a limit of rupees 250.00 per annum which has since been raised to Rs. 2500/- per annum in 1988 by the constitution (sixteenth 16th Amendment). People think that “profession” tax and the central income tax need to be merged. It is recognized that “the profession” tax is a type of income tax

3. Terminal Tax

It is another indirect tax. It may be defined as a tax imposed on the incoming goods for consumption within the municipality or corporation. However, there is no system of refund when good are sent out of cities as is the case with Octroi. It may be collected through the agency of Railways on a commission basis.

This is the tax payable by the owner, on all or any vehicles (other than motor vehicles), animals used for riding, draught or burden, and dogs, when such vehicles, animals used as aforesaid, and dogs are kept within the local areas. Terminal Tax is covered by Entry 56, List II, schedule seventh of the constitutions of India and as such a terminal tax on goods or animals imported into or exported is similar in its incidence and is payable on goods on their journey ending within the municipal limits or commencing there from and not where the goods were in transit through the municipal limits.

4. Entertainment Tax

Entertainment tax is levied on programmes and luxuries including betting and gambling. Generally entertainments for charitable, religious and educational purpose as also for advancement of agriculture, industry and public health are exempted. The tax is determined, imposed and collected by the state governments and after the close of each year, it is reimbursed to the Municipal/Corporation bodies concerned in whole or part. The committee on Augmentation of Financial Resources of Urban local bodies had suggested that entire proceeds from this tax which at present go to the state exchequer, should be earmarked for the local bodies as it has a local basis and can also be best administered by a local authority with a certain degree of autonomy.

5. Advertisement Tax

Urban local governments are empowered to levy tax an advertisements other than those published in the newspapers with the prior sanction of the state government. Any person who displays an advertisement on any land, building, post of structure or in any vehicles playing within municipal or corporation area, or by means of cinematograph, has to pay this tax. However, any advertisement relating to public meetings or election to parliament or state legislature or the corporation is exempted from such tax. The state government can also direct an urban local body to levy this tax.

6. Toll Tax

The state legislature can by virtue of entry 59 in list II of seventh schedule of the constitution levy tolls. The word ‘tolls’ has a variety of meaning and commonest of them is where a committee or a local authority prescribes a levy for vehicles and animals passing over road, ferries and bridges etc, within the control of that authority

7. Tehbazari

In one’s own word tehbazari may be defined as the rent/charges received by the municipality/corporation for the use of public land. The law Lexicon, 2001 defines tehbazari as the ground rent of a stall in the market.

8. Other Sources of Tax

Apart from the above described major sources of tax revenue other taxes which are levied by urban local government includes:

a) Tax on Animals b) Servant tax

c) Tax on transfer of property d) Tax for sanctioning building plans

e) Show tax f) Sanitary tax

g) Water tax h) Education tax

i) Tax on pilgrimage

j) Tax on lotteries

Overall, tax revenue is an important source of income for ULGs in India, and effective tax collection mechanisms can help ULGs to generate adequate revenue for providing public services and improving the quality of life for citizens.

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Development Finance

Municipal Finance

Municipal finance refers to the financial management of local governments or municipalities, which includes planning, budgeting, accounting, and reporting of financial activities. Municipal finance is crucial for the provision of public services and infrastructure to citizens and the overall economic development of a city or town.

In India, municipal finance is mainly regulated by the provisions of the 74th Constitutional Amendment Act, which gave constitutional recognition to urban local bodies (ULBs) and made it mandatory for them to prepare and implement their own plans for economic development and social justice.

Municipal finance in India is primarily generated through property tax, user fees, and grants from the central and state governments. Property tax is the most significant source of revenue for ULBs, which is levied on the value of property or land owned by individuals or entities. User fees, such as water and sewage charges, are also an important source of revenue for ULBs.

In recent years, the central government has launched several schemes to promote the financial sustainability of ULBs, such as the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and the Smart Cities Mission. These schemes provide financial assistance to ULBs for the implementation of infrastructure projects and the provision of basic services.

Municipal bonds are another important source of financing for ULBs. Municipal bonds are debt securities issued by ULBs to raise funds for infrastructure development projects. However, the market for municipal bonds in India is still underdeveloped compared to other countries, and there is a need to develop the market to provide long-term financing options for ULBs.

Urban Local government in most of the states have been empowered to drive their income from several sources such as taxes, fees, fines and penalties and remunerative enterprises. Apart from these, local bodies also depend upon grants and contributions, loans and some miscellaneous sources. There is tradition to classify the sources of finances into four categories viz.

1. Tax revenue.

2. Non-tax revenue

3. Grants and Contributions

4. Loans

According to the study by the National Institute of Urban Affairs Income from taxes constitute about two third of the revenue accounts of the municipalities and over one half of the total income from all the sources. In Punjab and Haryana, the revenue from taxes constitute approximately 80% of the total local bodies income from all sources.

Overall, municipal finance is crucial for the sustainable development of cities and towns in India. With the implementation of effective financial management practices, ULBs can improve their revenue generation, enhance their financial sustainability, and provide better services to their citizens.

Municipal finance tools

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Development Finance

Centrally Sponsored Scheme

The Union government supports several developmental initiatives at the state level. These schemes are aimed at supplementing the efforts made by state governments since the central government has more resources at its disposal.

Centrally Sponsored Schemes (CSS) are programs and initiatives implemented by the central government of India in collaboration with state governments. These schemes are designed to address issues that require a coordinated effort by the central and state governments and are funded by both the central and state governments.

Under the CSS, the central government provides a certain percentage of the funding required for a particular scheme, while the state government provides the remaining amount. The central government sets the guidelines for each scheme, and the state government is responsible for implementing the scheme within its state.

CSS cover a wide range of areas, including education, health, rural development, agriculture, and infrastructure. Some of the popular CSS in India include the Pradhan Mantri Gram Sadak Yojana, Sarva Shiksha Abhiyan, and the National Rural Health Mission.

The central government provides financial assistance to the state governments for CSS through two channels: statutory and non-statutory. Under the statutory channel, the central government transfers funds directly to the state governments, while under the non-statutory channel, the central government provides assistance through various institutions like the National Bank for Agriculture and Rural Development (NABARD) and the National Housing Bank (NHB).

There are 29 centrally sponsored schemes. These are broadly divided into two categories – core of the core schemes and core schemes.

Centrally Sponsored Schemes: Core of the core schemes

The six core of the core schemes are:

1.National Social Assistance Programme

2.MGNREGA or the Mahatma Gandhi National Rural Employment Guarantee Act

3.Umbrella Scheme for Development of Scheduled Castes

4.Umbrella Programme for Development of Scheduled Tribes

5.Umbrella Scheme for Development of Minorities

6.Umbrella Scheme for Development of Other Vulnerable Groups

Centrally Sponsored Schemes: Core schemes

There are 23 other centrally sponsored schemes, which are listed under core schemes. Most of the flagship schemes of the Union government are covered under this category. The centrally sponsored core schemes are:

1.Green Revolution

2. White Revolution

3.Blue Revolution

4.Pradhan Mantri Krishi Sinchai Yojna (PMKSY)

5.Pradhan Mantri Gram Sadak Yojna

6.Pradhan Mantri Awas Yojna (PMAY)

7.Rural Drinking Water Mission

8.Swachch Bharat Mission (SBM)

9.National Health Mission

10.Mid Day meal in schools

11.National Livelihood Mission – Ajeevika

12.Shyama Prasad Mukherjee Rurban Mission

13.Rashtriya Gram Swaraj Abhiyan (RGSA)

14.Rasthriya Swasthya Bima Yojana

15.National Education Mission

16.Umbrella ICDS

17.Mission for Protection and Empowerment of Women

18.Jobs and Skill Development

19.Environment Forestry and Wildlife

20.Urban Rejuvenation Mission: AMRUT and Smart Cities Mission

21.Modernisation of Police Forces

22.Infrastructure Facilities for Judiciary

23.Border Area Development Programme

The CSS have played a significant role in the development of India, particularly in the areas of education, health, and infrastructure. However, there have been criticisms that the CSS may lead to a reduction in the flexibility of the state governments to allocate resources according to their priorities.

In summary, Centrally Sponsored Schemes are programs and initiatives implemented by the central government in collaboration with state governments to address issues that require a coordinated effort. These schemes cover a wide range of areas, and the central government provides financial assistance to the state governments for the implementation of the schemes.

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Development Finance

Consolidated Fund (Central and State)

Definition: Consolidated Fund of India is the most important of all government accounts. Revenues received by the government and expenses made by it, excluding the exceptional items, are part of the Consolidated Fund.
The Consolidated Fund is a term used in India to refer to the funds of the central and state governments that are available for meeting all kinds of expenses. The Consolidated Fund is one of the three types of funds created by the Constitution of India, the other two being the Contingency Fund and the Public Account.

The Consolidated Fund is made up of revenues received by the government through taxes, duties, and other sources. All money received by the government, including loans raised by it, are credited to the Consolidated Fund. The money in the Consolidated Fund is used to meet all the expenses of the government, including salaries of government employees, payments of interest and debt, and other general expenditures.

The Constitution of India provides that no money can be withdrawn from the Consolidated Fund without the authorization of Parliament in the case of the central government, or the state legislature in the case of state governments. All expenses incurred by the government are authorized through appropriations made by Parliament or the state legislature.

The Consolidated Fund of India is maintained by the Reserve Bank of India on behalf of the central government, while the Consolidated Fund of each state is maintained by the State Bank of India on behalf of the respective state government.

Description: This fund was constituted under Article 266 (1) of the Constitution of India. All revenues received by the government by way of direct taxes and indirect taxes, money borrowed and receipts from loans given by the government flow into the Consolidated Fund of India.

All government expenditure is made from this fund, except exceptional items which are met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without the Parliament’s approval.

In summary, the Consolidated Fund is a key component of the financial system of India, as it is the primary source of funding for all kinds of expenses incurred by the central and state governments. The money in the Consolidated Fund is used to meet all the expenses of the government, and no money can be withdrawn from it without the authorization of Parliament or the state legislature

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Central Finance Commission and State Finance Commissions Comparison Chart

The Central Finance Commission (CFC) and the State Finance Commissions (SFCs) are two constitutional bodies in India that are responsible for recommending the distribution of financial resources between different levels of government. While the CFC is responsible for recommending the distribution of resources between the central government and the state governments, the SFCs are responsible for recommending the distribution of resources between the state governments and local bodies.

Here are some key differences between the CFC and SFCs:

Scope of Recommendations: The CFC makes recommendations on the distribution of resources between the central government and the state governments, while the SFCs make recommendations on the distribution of resources between the state governments and local bodies.
Frequency: The CFC is constituted every five years, while the SFCs are constituted every five years in each state.
Basis of Recommendations: The CFC’s recommendations are based on factors such as population, area, revenue-raising capacity, expenditure needs, and debt burden. The SFCs’ recommendations are based on factors such as the level of decentralization, the financial position of the local bodies, and the expenditure requirements of the local bodies.
Binding Nature of Recommendations: The recommendations of the CFC are binding on the central government and the state governments, while the recommendations of the SFCs are binding on the state governments and the local bodies.
Purpose of Recommendations: The recommendations of the CFC are intended to ensure that the financial resources of the country are distributed fairly and efficiently between the central government and the state governments. The recommendations of the SFCs are intended to ensure that the financial resources of the state are distributed fairly and efficiently between the state governments and the local bodies.

Central Finance Commission and State Finance Commissions Comparison Chart

S. No	Characteristics	CFC	SFC	Comments
1.	Composition	President of India appoints one Chairperson, other members, and secretary in pursuance of article 280	Governors of the respective state appoints the Chairperson, other members and secretary in pursuance of article 243	While composition of CFC has well established conventions, this in not the case in case of many SFCs
2	Tenure	As per the notification- normally it is 2 years	As per the notification- normally it is 2 years	Adhocism at SFC level
3.	Terms of Reference (This is issued in continuation of the order with reference to the appointment of the commission)	1. Nature and Functions of the Commission 2. Time frame for the different Kinds of activities 3. Area of recommendations shall be made	1. Nature and Functions of the Commission 2. Time frame for the different Kinds of activities 3. Area of Recommendations to be made	Unlike NFC, SFCs are required to first generate data and then analyze it, which is beyond the capacity of SFCs in their present form

S. No	Characteristics	CFC	SFC	Comments
4	Major Areas of Assessment	1. Assess the existing state of distribution between the Union and the States 2. Assess the principle that governs the grant-in-aid. 3. Measures taken to augment the Consolidated Fund and also to supplement the resources of the Panchayats and Municipalities. 4. Review the state of finance of the Union. 5. Review the present arrangements with regard to disaster management with reference to national calamity relief fund. 6. Review of shares between the state and the union on profit from non tax income. 7. Assessment of the debts of the states.	1. Review the financial status of the rural and urban local bodies the state. 2. Assess the distribution of finance between the states and the local bodies. 3. Review the determination of taxes, tolls and fees assigned to the appropriate local bodies. 4. Review the grant-in-aid to the local bodies from the state. 5. Review the existing level of devolution and other resource transfer to the local bodies from the state and central government. 6. Review the status of implementation of the recommendations of the earlier finance commission. 7. Review the system of accountability of the local bodies in terms of resource utilization.	SFCs terms are clearly non specific; hardly any previous norms are available. Hence they may have to grapple in the dark.

In summary, while both the CFC and the SFCs are important institutions for promoting fiscal federalism and ensuring that financial resources are allocated in a fair and equitable manner, they differ in terms of their scope, frequency, basis of recommendations, binding nature of recommendations, and purpose of recommendations.

State Finance Commission (SFC)

Central Finance Commission (CFC)

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Central Finance Commission (CFC)

Finance Commission of India: The Finance Commission is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.

The Finance Commissions are commissions periodically constituted by the President of India under Article 280 of the Indian Constitution to define the financial relations between the central government of India and the individual state governments. The CFC is constituted every five years under Article 280 of the Indian Constitution.

The 15^th Finance Commission (Chair: Mr N. K. Singh) set up to give recommendations for devolution of taxes and other fiscal matters for five fiscal years, commencing 1 April 2020. The main tasks of the commission were to “strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability“

The primary responsibilities of the CFC include the following:

Recommending the distribution of net proceeds of taxes between the central government and the state governments.
Determining the principles that govern the distribution of funds and grants-in-aid to the state governments.
Reviewing the state of the public finances of the central government and the state governments.
Making recommendations on any matter referred to it by the President of India or the Governor of a state.

The recommendations of the CFC are binding on the central government and the state governments, and they are intended to ensure that the financial resources of the country are distributed fairly and efficiently among all levels of government. The CFC is an important mechanism for promoting fiscal federalism and ensuring that the states have the resources they need to provide basic services to their citizens and promote economic development.

The recommendations of the CFC are also based on a detailed analysis of the financial needs and capacities of the central government and the state governments. This includes factors such as population, area, revenue-raising capacity, expenditure needs, and debt burden. The CFC also takes into account the priorities of the central government and the state governments, as well as the broader economic and social context in which they operate.

Devolution of taxes to states: The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-20 period to 41% for 2020-21. The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.

The commission’s challenges was to find a balance between equity and efficiency, adding that urban and rural local bodies—the constitutionally-mandated third-tier of government in India—needed to be further empowered to stimulate added economic growth.

Overall, the CFC is an important institution for ensuring that financial resources are allocated in a fair and equitable manner between the central government and the state governments, and for promoting fiscal federalism and economic development in India.

State Finance Commission (SFC)

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State Finance Commission (SFC)

The State Finance Commission (SFC) is an institution created by the 73rd and 74th Constitutional Amendments (CAs) to rationalize and systematize State/sub-State-level fiscal relations in India. It allocates resources of a state to its Panchayati Raj institutions at all three levels in terms of taxes, duties and levies to be collected by the state and the local bodies.

The SFCs are constituted every five years in each state under Article 243-I of the Indian Constitution, and they are responsible for recommending the following:

Distribution of net proceeds of taxes between the state government and local bodies.
Determination of the taxes, duties, tolls, and fees that may be assigned to local bodies.
Grants-in-aid to local bodies from the Consolidated Fund of the State.
Measures needed to improve the financial position of local bodies, including revenue generation and cost reduction.
The principles that govern the distribution of funds and grants to local bodies.

The recommendations of the SFCs are binding on the state governments and the local bodies, and they are intended to ensure that the financial resources of the state are distributed fairly and efficiently among all levels of government. The SFCs also provide an opportunity for local bodies to participate in the decision-making process and have a say in how financial resources are allocated within the state.

State Finance Commission’s recommendations are generally based on the following considerations:

a) Financial review of the local bodies for the last six/seven years

b) Recommendations of the previous state finance Commission

c) Recommendations of the central finance commission

d) State‘s financial position

e) Existing system of data collection and its maintenance

f) Revenue resource and its demand for next five years

The SFCs are an important mechanism for promoting fiscal decentralization and strengthening local democracy in India. They help to ensure that local bodies have the resources and autonomy they need to provide basic services to their constituents and promote economic development at the local level.

Central Finance Commission (CFC)

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Special Purpose Vehicle (SPV)

A special purpose vehicle is a legal entity that has been established to separate an asset, subsidiary, or financial transaction from a larger corporation or government agency. A special purpose vehicle (SPV) is typically created for a limited task to help isolate risk with a transaction or an asset.

A Special Purpose Vehicle (SPV) is a legal entity created for a specific purpose or project, often to isolate financial risk and protect other assets from potential losses. SPVs are commonly used in structured finance transactions, such as securitization of assets or infrastructure projects, as well as in public-private partnerships (PPPs) and other complex financial arrangements.

The primary function of an SPV is to provide a ring-fenced structure that separates the assets and liabilities of a project or transaction from those of its sponsors or other stakeholders. This can help to reduce the credit risk associated with the project and make it more attractive to investors.

Some of the key features of an SPV include:

Limited liability: The liability of the SPV is limited to its own assets and operations, which can protect the sponsors and investors from potential losses.
Independent legal status: An SPV is typically created as a separate legal entity, with its own board of directors, management team, and governance structure.
Asset segregation: The assets and liabilities of the SPV are typically separated from those of its sponsors or other stakeholders, which can help to insulate them from risks associated with other projects or transactions.
Tax efficiency: SPVs are often structured in a tax-efficient manner, with the goal of minimizing tax liabilities and maximizing returns for investors.
Simplified management: An SPV can be managed by a third-party service provider, which can simplify the management and administration of the project or transaction.

The implementation of the Smart cities Mission will be done by a Special Purpose Vehicle (SPV) created at city level.

The SPV will plan, appraise, approve, release funds, implement, manage, operate, monitor and evaluate the Smart City development projects.

Each smart city will have a SPV which will be headed by a full time CEO and have nominees of Central Government, State Government and ULB on its Board.

The States/ULBs shall ensure that, a)a dedicated and substantial revenue stream is made available to the SPV so as to make it self-sustainable and could evolve its own credit worthiness for raising additional resources from the market and b)Government contribution for Smart City is used only to create infrastructure that has public benefit outcomes. The execution of projects may be done through joint ventures, subsidiaries, public-private partnership (PPP), turnkey contracts, etc suitably dovetailed with revenue streams.

Structure of the SPV :

The City level SPV will be established as a Limited Company under the Companies Act, 2013 and will be promoted by the State/UT and the ULB jointly, both having 50:50 equity shareholding.

The private sector or financial institutions could be considered for taking equity stake in the SPV, provided the State/UT and the ULB share are equal to each other, and together the State/UT and ULB have majority shareholding and control of the SPV (e.g. State/UT : ULB : Private sector shareholding can be in the ratio 40:40:20 or 30:30:40.

Key functions and responsibilities of the SPV are to:

Approve and sanction the projects including their technical appraisal.
Execute the Smart City Proposal with complete operational freedom.
Take measures to comply with the requirements of MoUD with respect to the implementation of the Smart Cities programme.
Mobilize resources within timelines and take measures necessary for the mobilisation of resources.
Approve and act upon the reports of a third party Review and Monitoring Agency.
Overview Capacity Building activities.
Develop and benefit from inter-linkages of academic institutions and organizations.
Ensure timely completion of projects according to set timelines.
Undertake review of activities of the Mission including budget, implementation of projects, and preparation of SCP and co-ordination with other missions / schemes and activities of various ministries.
Monitor and review quality control related matters and act upon issues arising there of.
Incorporate joint ventures and subsidiaries and enter into Public Private Partnerships as may be required for the implementation of the smart cities programme
Enter into contracts, partnerships and service delivery arrangements as may be required for the implementation of the Smart Cities Mission.
Determine and collect user charges as authorized by the ULB
Collect taxes, surcharges etc. as authorized by the ULB

Overall, SPVs can provide a flexible and efficient way to structure complex financial transactions and mitigate risk for investors. However, they also require careful planning and management to ensure that they are structured in a responsible and sustainable manner.

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