Finance forms an important part of any functional organisation, as functions can not be materialized without finance and finance without functions have no justification. The financial resources of the local government again, must correspond to the functions and obligations assigned to them. Hence, the rationale of resource development becomes imperative.

The tax structure and allocation of resources among the Panchayat Bodies in different states vary according to the statutory and rules and regulations framed by these states. Information on the actual financial operations of Panchayati Raj Bodies is lacking by and large. Still we can discuss the financial structure of Panchayat at village level and thereafter Panchayat Samiti and Zila Parishad on the basis of the available information.

The source of income of Panchayats can be put under five main categories:

1. Public contribution and donations
2. Taxes, Fees, penalities (Or Assigned Revenues)
3. Grants In Aid
   1. From the state government for administration
   2. For implementing schemes of the state government
   3. For implementing schemes of the central government
   4. From Panchayat Samiti / Zila Parishad, if any
   5. From the State government
   6. From the Central government
4. Economic Enterprises (Or Loans)
5. Own income

The laws of almost every state vest in the Panchayat the power to levy a few taxes. The main sources of income of village Panchayats in most of the states are tax on property, cess on land revenue, vehicle and profession tax. Some of the taxes are compulsory while others are optional varying with state to state. Following are the tax and fees of the Panchayats.

A. Public contribution
It is the commonest form of assistance provided by the people in villages mostly as cash, kind and labour. Shramdan or "labour in kind" is very popular during construction of buildings, schools, roads etc.

B. Taxes and Fees
The PRIs at the village and mandal levels in all the states are authorized to levy taxes or fees on some items like house, water rate, profession, trade, market, meals, slaughter houses, registration fee for cattle, etc. in the states of Andhra Pradesh, Assam, Bihar, Haryana, Punjab, Tamilnadu, Himachal Pradesh, Karnatka, Kerala and Madhya Pradesh, imposition of taxes is compulsory by law.

1. House Tax or building tax
   It is a compulsory tax in most of the states. It is levied in all the states above. Some of the properties have been exempted from this tax such as cowsheds, temples and sarais.
2. Land Revenue
   Land revenue is the commonest form of tax in Panchayats. Almost all of the states except Tamilnadu, Jammu and Kashmir, U.P. and Orissa have provision of land revenue grant to the Panchayats, though the pattern of share varies in different states.
3. Profession tax or trade and callings
   All the persons involved in any kind of profession are required to pay tax under this head. This tax is levied in the states of Assam, Bihar, Punjab, Himachal Pradesh, Kerala and Madhya Pradesh. This tax has been a cause of maximum annoyance to common people due to its wide coverage. Some states have dropped this tax without providing alternative source of finance to the Village Panchayats.
4. Vehicle tax
   This tax is compulsorily levied on by Panchayats of Kerala and Madras only. This tax is charged on animal driven carts, bicycle, and rickshaws.
5. Surcharge on transfer of property
   This tax is levied in the states of Kerala, Madhya Pradesh, Tamil Nadu and Haryana
6. Fee
   This source of income is levied on the services such as water supply, sarai, electricity, bus stands etc. under the public utility services. This fee helps in the maintenance of the public conveniences and ensures the continuity of such services. Some villages also impose fees on fair, hats or stamp duty.
7. Miscellaneous taxes
   Some of the Panchayat legislation as that of Andhra Pradesh, Bihar, Gujrat, Haryana, Jammu and Kashmir, Maharashtra and Punjab have authorized the Panchayats to levy the pilgrim taxes. Likewise Andhra Pradesh, Himachal, Haryana and Punjab levy tax on the sale of any commodity that is sold in the village by weight measures or number. Some of the other kind of taxes are as following:
   1. Advertisement Tax (Kerala)
   2. Private latrines (Madhya Pradesh)
   3. Light tax (Madhya Pradesh)
   4. Portion of entertainment tax (Tamilnadu and Rajasthan)
   5. Octroi on liquor (Rajasthan)

Though the imposition of the above taxes was compulsory as per acts, even then the reports of the study committees and Finance Commissions found that the PRIs failed to raise their own resources. They were generally worried about unpopularity and did not want to take the risk of losing votes in the next elections. In other states like Maharashtra, Gujrat, Orissa, Rajasthan, Uttar Pradesh and West Bengal, where imposition of taxes was left to the will of the PRIs, hardly any taxes were imposed. They mostly thrive on Central/ State government grants.

C. Grants in aid
Every PRI gets grant to meet the expenditure on pay and allowances, POL, maintenance of buildings, contingent expenditure, etc. These grants provide the external assistance to the Panchayat, in the form of grants for general and specific purposes. A state provides grants from its collection of land revenue and additional cesses. The extent of the grant varies from state to state. To meet the local demands for development of rural infrastructure, the Panchayats get funds from the Central government under the Jawahar Gram Yojna. They also get funds for the Indra Awas Yojna for the poor and homeless families. Similarly there are number of other schemes under which different states get grants from the Central and State Government. Article 243(I) enjoins upon the State Finance Commissions to recommend the share of state taxes, duties and fees to be transferred to the PRIs.

D. Economic enterprises and loans
Many states have transferred some of the sources of income under Panchayats, these include remunerative assets such as common land, village forests, cattleponds, fishery tanks etc. under the control and management of Panchayats. The government in addition advances loans to the Panchayats to exploit the sources of income to the fullest extent. HUDCO and other SFCs can give loans to the PRIs for income generating activities like construction of shops, highway facility schemes, development of markets and housing.

Panchayat Samities

1. Community development grants- it is the primary source of income of a samiti. Amount of grant varies from block to block according to the stage of its development.
2. The state government provides departmental grants- for implementation of specific schemes with the help of PRIs. The Samitis are required to follow certain directions of the government and they can not divert these grants to other schemes.
3. Taxes, fees and surcharges - this income source is not uniform throughout the country, they are almost similar to those of Panchayats. Overlapping of jurisdiction is quite common under this source.
4. Other sources- there are hardly any other sources of state income, Panchayat Samiti's are basically dependent upon the state grants for their revenue.

Zila Parishad

Many states don't have an upper tier in their Panchayati Raj system. The finances of the Zila Parishad are mostly grants of land cess and taxes which come under their range as assigned by the government. The powers of the highest tier of Panchayati Raj vary from state to state. These can be distinguished as- Zila Parishad with administrative and executive powers and others with purely advisory and co-ordinating functions. Some Zila Parishads are empowered to levy taxes and fees. Almost all states having Zila Parishad rely on Union or state grants and loans.