Dissecting Fiscal Considerations for Nepal

– This article has been originally published by Sujan Regmi in The Himalayan Times on April 1, 2018

Part 5 of the Constitution of Nepal provides the structure of the state and the distribution of power among three orders of government. Each order of the government then can make laws, their respective annual budgets, formulate and implement their own policies and plans. This power is a core fundamental of the Federal principle.

The Constitution states that the Federal government has the responsibility to make necessary policies, standards and laws on any matter listed in the concurrent list. It also has the power to obtain foreign assistance and borrow loans to ensure macro-economic stability of the entire economy, and handle major issues of management of budget deficits and fiscal discipline. Article 60 of the Constitution talks about the provision of imposition of taxes on matters falling within their respective jurisdictions and collection of revenue from these sources. Those provisions relating to the concurrent list and other matters that are not included in any list lie with the Federal Government. Concurrent sharing of revenues is seen in the form of revenue from natural resources, tourism fee, service charges, penalty and fines which are shared as per the Fiscal Commission discussion.

The “Intergovernmental Fiscal Arrangements Act, 2017” provides necessary provisions for revenue generation, revenue sharing, grants, loans, budget arrangement, public expenditure and fiscal discipline. As per the Act, the Federal Government can levy taxes and raise non-tax revenues as specified in Federal law. The state and local governments can also impose taxes so long as they do not contravene with the Federal government’s economic policies and provisions for transportation of goods and services, capital and labor.

The three orders of government determine non-tax revenues by factoring for the cost of goods or services, operation cost and maintenance cost. The tax and non-tax revenues are collected as per single tax administration system. For example, while collecting motor vehicle tax, the state collects the same tax imposed by the local government as well. On the other hand, the local governments will be collecting building and land registration fees that are levied by the state. These governments deposit the revenues raised not exceeding 2% of the tax collected as administrative cost and remaining amount in the Consolidated Fund of the same level whose tax is collected.

The Federal Government has created a Federal Divisible Fund in order to share value added tax and excise duty collected from domestic sources in the proportion of 70%, 15% and 15% respectively between the Federal, State and local governments. On the basis of the principle of equitable distribution of benefits derived from natural resources (through, say, mountaineering, electricity, forest, mines and minerals as well as from water and other natural resources), the federal, state and local governments further share royalties from such sources in the proportion of 50%, 25% and 25% respectively in their corresponding Consolidated Funds.

The Government provides four types of grant, namely, fiscal equalization grant, conditional grant, complementary grant and special grants. These grants are given to the state and the local governments on the basis of either their need or implementation of any specific project operated by them. The federal government reserves monopoly right regarding right to obtain any foreign grants or loan. On the other hand, all governments may obtain internal loans within the limit as recommended by National Natural Resource and Fiscal Commission.

Provincial revenue collection of 2015/16 (in NPR Billion)

Revenue type state 1 state 2 state 3 state 4 state 5 state 6 state 7 Total
Tax 40.65 86.00 192.04 7.95 87.28 0.74 6.49 421.15
Non tax 1.75 0.98 66.09 0.92 1.53 0.25 0.52 60.87
Total 42.22 86.00 247.12 8.87 88.82 0.99 7.02 482.02
%share in Total revenue 8.76 18.05 51.27 1.84 18.43 0.21 1.46 100.00

Source:  Federal Nepal: The Provinces (Governance Facility 2018 January)

When we scrutinize the revenue collection of the seven states in 2015/16, state 1, 2, 3 and 5 are seen to be major players where as other states do not seem to have significant contributions. This kind of concentration of large shares of revenue in a few states is mainly due to the revenue generated from the international trade collected at customs points. The state 4 has an advantage to attract a large number of tourist as well as related services which are a major source of revenue. States 6 and 7 look to be the ones to be confronted with the greatest challenge in this front due to their low share in national revenue. They should thus focus on upgrading their hard as well as soft infrastructures through policy innovation. Each states and local level has to identify their comparative advantages on agriculture, tourism, non-timber forest products or any other sector to generate revenue.  The balance sheets of most of these sub-national governments will likely show a significant deficit. Thus, alternate sources of financing by leveraging the principle of Public-Private Partnership could be tested.