Section 139 of the Finance Act, 2001: Empowering Local Governments and Strengthening Fiscal Federalism

Section 139 of the Finance Act, 2001, holds significant importance in the evolution of fiscal federalism in India. It pertains to the transfer of funds to local bodies, specifically Panchayati Raj Institutions (PRIs) and Municipalities, and aims to empower them financially, enabling them to effectively carry out their constitutionally mandated responsibilities.

Prior to the Finance Act, 2001, the transfer of funds to local bodies was often ad-hoc and lacked a predictable formula. This resulted in financial uncertainty and hindered the ability of these institutions to plan and implement development projects effectively. Section 139 sought to address this lacuna by providing a more structured and transparent mechanism for the allocation of resources.

The core provision of Section 139 stipulated that a portion of the net proceeds of all shareable Central taxes was to be earmarked for distribution among the States. This share was determined based on the recommendations of the Finance Commission. Critically, a certain percentage of the State’s share was then required to be devolved to the local bodies within that state. This was a crucial step in ensuring that funds reached the grassroots level.

The Finance Commission, while recommending the amount to be devolved to the States, also outlined guidelines on how this amount should be further distributed among the PRIs and Municipalities within each state. These guidelines typically considered factors such as population, area, and the backwardness of the region. The intention was to provide more funds to areas that were in greater need of financial assistance for development projects.

A key element of Section 139 was the emphasis on untied funds. This meant that the local bodies had the autonomy to decide how these funds would be used, based on their own local needs and priorities. This departure from centrally-sponsored schemes with pre-defined expenditure patterns was a significant step towards empowering local governments and promoting participatory development. Untied funds allowed PRIs and Municipalities to address issues that were most pressing for their communities, fostering a sense of ownership and accountability.

The implementation of Section 139 faced several challenges. These included capacity constraints at the local level, the need for improved financial management and accounting practices, and ensuring transparency and accountability in the utilization of funds. Despite these challenges, Section 139 played a crucial role in strengthening fiscal federalism in India by providing a more predictable and equitable mechanism for the transfer of funds to local bodies. It empowered these institutions to play a more effective role in development and governance at the grassroots level, contributing to improved service delivery and enhanced citizen participation.

In conclusion, Section 139 of the Finance Act, 2001, represented a landmark step in the evolution of fiscal decentralization in India. Its focus on predictable fund transfers, untied funds, and local autonomy contributed significantly to strengthening PRIs and Municipalities, enabling them to better serve the needs of their communities and promote inclusive and sustainable development.