Nepal recently adopted federalism, and the people, people’s representatives and bureaucrats are slowly adapting and getting used to the new system. Due to the absence of a concrete structure, expertise, technical manpower and behaviour compatible with the federal system, we are not achieving the desired output. Schedules 7 and 9 of the constitution contain the List of Concurrent Powers of Federation and State and the List of Concurrent Powers of Federation, State and Local Level respectively. This concurrency and interdependence in the jurisdiction of the three tiers of government has led to duplication and confusion.

The media has been circulating the news that local units are imposing more taxes on people. In a bid to sort out this issue, the Ministry of Economic Affairs and Planning of Province 5 recently conducted an interaction programme related to budget and revenue issues with 109 local units of the 12 districts within its territory. The interaction programme revealed that tax issues have been hyped in the media even though these issues are partially true. The reason behind the tax dispute is overlapping jurisdiction of the three levels of government, lack of structure and expertise in taxation and unhealthy competition among the different local units to impose new taxes instead of improving services.

Concurrent powers

The constitution, Intergovernmental Fiscal Transfer Act, 2017 and Local Government Operations Act, 2017 have demarcated the jurisdiction of the three levels of government in a way that has created inconsistencies, ambiguities and uncertainties. Registration fees for houses and land, advertisement tax, vehicle tax and entertainment tax are shared rights of the provinces and local units. Service fee, registration fee, fine, tourism fee and royalty received from natural resources are concurrent powers of the federal, provincial and local units.

The three tiers of government are at loggerheads over the concurrent jurisdiction. Schedule 7 of the constitution does not speak about taxation. We have to create another schedule to list the concurrent jurisdiction of the provinces and local levels. In case of shared jurisdiction, the province keeps 60 percent of the taxes it collects and transfers 40 percent to the local divisible fund. Likewise, when the local level collects taxes, it keeps 60 percent and transfers 40 percent to the province consolidated fund. The funds are divided among the different units based on the formula set by the National Natural Resource and Fiscal Commission.

The provinces set and collect vehicle tax. Local units are allowed to fix and collect taxes for rickshaw, auto-rickshaw, e-rickshaw and tanga cart. Land and house registration fees and entertainment tax are set by the province and collected by the local level. Advertisement tax is determined and collected by the local level. Currently, vehicle tax is collected by the Transport Management Offices, and house and land registration fees are collected by the Land Revenue Offices. These provisions are set down in the constitution, Intergovernmental Fiscal Transfer Act, 2017, Local Government Operations Act, 2017 and Federal Economic Act, 2018.

There is a huge gap between the laws and actual practice. Most rural municipalities and municipalities have been determining the rate and collecting vehicle tax and entertainment tax in violation of the law. Tulsipur Sub-Metropolitan City has imposed entertainment tax on Om Shanti Chalachitra Mandir and Bishnu Chalachitra Mandir of Rs3,500 and Rs3,075 per month respectively which is irrational and against the norms of taxation. What happens when a new cinema is opened? So, instead of naming particular entertainment houses, tax should be levied based on income and capacity so that it can be applied to all entertainment houses. Some local levels are imposing district export tax on goods against the provision of Article 236 of the constitution.

The provinces have the right to levy tax on agricultural income. This taxation system is based on a self-declaration system. It has not been fixed where agricultural income tax should be paid. There is lack of a structure to collect agriculture income tax. A revenue directorate should be formed in each province to sort out this issue. Most local units are collecting royalty on natural resources based on the old structure and system by going against the Province Tax and Non-Tax Revenue Act. A procedure to collect stone, gravel, sand and soil taxes should be prepared soon to facilitate the work. Most local levels are still collecting integrated property tax in the name of property tax which violates the law.

Tax literacy

If we compare the taxes provisioned in the Local Self-Governance Act, 1999 with the current taxes, there is no significant difference. At that time, the taxation system couldn’t be implemented effectively and efficiently because of lack of people’s representatives. People avoided paying taxes and they were accustomed to not paying taxes. Because of this habit of avoiding paying taxes, the people see the current taxes as being too high. With the help of a vigorous tax literacy programme, the people’s attitude towards taxation should be changed. Developing a taxpaying social culture is the need of the hour.

Local levels should also comply with provincial and federal laws. As finance follows functions and structure, provincial and local level structures should be clearly defined to make fiscal federalisation a success. The local units should not compete to impose taxes, rather they should compete to provide quality service delivery and development. The duplication, confusion, uncertainties and anomalies seen in the taxation system should be sorted out soon by organising academic, intellectual and political discourses.

- Marasini is a section officer at the Ministry of Economic Affairs and Planning, Province 5.