The Twelfth Finance Commission, which is to submit its report to the government later this year, is expected to suggest the devolution of 1 per cent of the divisible pool of central taxes and duties to Panchayati Raj institutions and municipalities.

In addition, the share of states in the divisible pool is expected to be hiked to 30.5 per cent.

At present, the devolution level is 29.5 per cent, with 28 per cent coming from the divisible pool and 1.5 per cent to offset the impact of additional excise duty on sugar, tobacco and textiles.

"This is one of the proposals being deliberated upon by the Twelfth Finance Commission. A decision is yet to be taken. A new formula for the division of resources between urban local bodies in states will have to be worked out," said an official in the commission.

The proposal to allot a separate amount for panchayats is in line with the consensus emerging at the meetings on Panchayati Raj being held across the country. A schedule of activities for panchayats is also being drawn up in consultation with states, NGOs and experts in the field.

There was unanimity on the need to devolve funds, functions and functionaries, said officials in the Panchayati Raj ministry.

The Twelfth Finance Commission had considered three possible approaches: either allocating a proportion of tax devolution from the central pool for local bodies, or following the route of the Tenth and Eleventh Finance Commissions and providing for an ad-hoc grant to augment the resources of local bodies, while at the same time building in incentives for decentralisation.

The third approach being considered was to supplement ad-hoc grants with additional resources to fulfill some basic services like the supply of drinking water in rural areas.

This will be an application of the equalisation principle -- that a citizen should be entitled to a minimum standard of civic services irrespective of where he or she resides.

The Twelfth Finance Commission's terms of reference requires it to suggest "measures needed to augment the Consolidated Fund of a state to supplement the resources of Panchayats and municipalities on the basis of the recommendations made by the Finance Commission of the state."

A new approach was required as a number of state finance commission reports for the relevant period were not available.

Moreover, the lack of uniformity in the approach of state finance commissions in terms of principles laid down for the devolution of resources from state to local governments compounds the problem.

Officials said the task of recommending measures on the basis of the suggestions of state finance commissions was extremely complex because of the lack of synchronisation in the award period of the state panels and the absence of a rational determination of the gap between normative costs of service delivery and normative capacity to raise resources.

The Eleventh Finance Commission's suggestion for a Constitutional amendment to delete the reference to state finance commissions has, however, not been implemented.

The Eleventh Finance Commission had recommended grants totalling Rs 10,000 crore (Rs billion) for local bodies during 2000-05 to be utilised  for maintenance of civic services in rural and urban areas.

This excludes the amount earmarked for maintenance of accounts and audit and for the development of database.

The annual grant recommended was Rs 1,600 crore (Rs 16 billion) for rural local bodies and Rs 400 crore (Rs 4 billion) for urban local bodies.

Of the total grants for local bodies, the Eleventh Finance Commission has proposed Rs 200 crore (Rs 2 billion) for the development of database on the finances of panchayats and municipalities and Rs 493.04 crore (Rs 4.930 billion) for the maintenance of accounts of panchayats as the first charge on these grants.

Village invoice The proposal to allot a separate amount for panchayats is in line with the consensus emerging at the round tables on Panchayati Raj A schedule of activities to be earmarked for panchayats is being drawn up in consultation with states, NGOs and experts