As per the budget statement for the fiscal year 2016-17, government revenues totalled Rs412 billion in fiscal 2014-15. Tax and non-tax made up 88 percent and 12 percent of this amount respectively. Taxes include customs, excise duty, VAT, corporate income tax, individual income tax, tax on remuneration and so forth. According to the new constitution, all these revenue sources fall within the purview of the federal government. Most of the revenue headings for provincial governments are included in the concurrent lists. Tax on agriculture is the only revenue source provided to provincial governments. Property tax, house rent tax and registration fee for houses and land are collected by local governments. In short, 80-85 percent of revenue sources fall under the federal government.

Agriculture tax totals less than Rs200 million. Royalties from mountaineering, hydroelectricity, forests and minerals are included in the concurrent list for all three levels of government. Similarly, land registration fee, vehicle tax, entertainment tax and advertisement tax are contained in the concurrent list of provincial and local governments. In fiscal 2014-15, the government collected Rs9.38 billion in royalty from land registration, accounting for 2.14 percent of total revenue. Similarly, the government collected Rs6.32 billion in vehicle tax. Both these revenue headings have now been included in the concurrent list for provincial and local governments. Likewise, the government earned Rs3 billion in rent tax. The new constitution has given local governments exclusive right to rent tax.

Present practices of local bodies reveal that the revenue collection pattern is unsatisfactory. The usual practice around the world is that the central government focuses on revenue collection and subnational governments handle expenditure. Based on this principle, Nepali political parties may have given more revenue assignments to the federal government. The constitution also says that the federal government should distribute the revenue collected to subnational governments on a transparent and equitable basis.

Unanswered questions

Most local-level functions are given to local governments. Based on this principle, it follows that more budget allocations should be made to local governments. Rs115 billion has been earmarked for education in the current fiscal year’s budget. Out of this amount, 52 percent has been set aside for primary and secondary education. As per the new constitution, this funding goes directly to local governments. Similarly, more than 50 percent of the budget allocations for development related ministries such as health, irrigation, road, agriculture, livestock and drinking water go to local governments.

Will the new local governments be capable of implementing their constitutional rights? Is the government willing to transfer all the constitutional rights to subnational governments? These questions remain unanswered. Based on our existing practices, more than two-thirds of the local governments will be economically non-viable. Political parties have held no discussions on the second question yet. Needless to say, there is a possibility of uncertainty, and subnational governments may lack the capacity to deliver all the functional rights at once. It will be advisable to transfer functional rights on a gradual basis.

Increasing fiscal imbalance

Subnational governments should be economically viable to implement their constitutional rights properly. However, based on our existing practices, the situation is critical. Fiscal imbalance is widening. In fiscal 2014-15, 15 districts were responsible for 96 percent of all the revenue collected. The remaining 60 districts contributed only 4 percent. Five districts, namely Parsa, Kathmandu, Lalitpur, Rupandehi and Morang, accounted for a whopping 84 percent. This shows that there are huge horizontal disparities in revenue collection among districts.

Parsa district contributed almost 27 percent of the country’s total revenue, 91 percent of it in customs revenue as most of Nepal’s trade passes through here. Kathmandu ranked in the second position in terms of revenue collection. However, the share of customs revenue in its contribution is only 11 percent. In terms of customs revenue, Sindhupalchok district tops the list with 95.34 percent, followed by Parsa, Morang, Rupandehi, Jhapa, Banke, Kapilvastu and Kailali, in that order. In terms of the proposed federal provinces, Province 3 has the highest revenue collection of 48.13 percent followed by Province 2 with 30.01 percent and Province 5 with 10.61 percent. The share of Province 6 is the lowest with only 0.19 percent.

Similar to districts, there are horizontal disparities among provinces with regard to revenue collection. In terms of customs revenue, Province 2 accounts for almost 84 percent. Meanwhile, the pattern of local revenue collection is more or less the same. Local bodies in the eastern and mid- and far western hilly and mountain districts collected very little revenue. Based on existing practices, it can be argued that there will be no significant improvement in revenue collection for the new local governments in the federal system of governance.

The limited amount of revenue of the government should be distributed among sub-national governments since the constitution has given equal state powers to all the three levels of government. To utilise these state powers effectively, subnational governments should be economically viable. As per the constitution, poorer subnational governments will receive fiscal equalisation grants from the federal government. Moreover, the federal government will share revenues with subnational governments. Additionally, subnational government will receive conditional grants from the federal government. The constitution contains a provision for the establishment of a National Natural Resource and Fiscal Commission to deal with all revenue sharing and inter-governmental fiscal transfers. It is hereby urged that the government create this commission at the earliest so that a transparent budget allocation system can be established.

Devkota, a former member of the Local Bodies Fiscal Commission, holds a PhD in fiscal decentralisation