Inconsistencies in mining legislations in federal Nepal

The advent of federalism in Nepal has devolved certain governance authorities and revenue jurisdictions to provincial and local governments. Such devolution of powers to sub-national authorities originates from the constitutional text of federal narrative that grants independent and concurrent powers to all three levels of governments. The devolution is further elaborated by the successive legislations amongst which the Intergovernmental Fiscal Arrangement Act (IGFA), 2017 may come at the forefront. Likewise, the fundamental legislations have been further followed by the finance Acts of provincial and local governments that specifically provide fiscal arrangements relevant within their territorial jurisdictions for revenue functions assigned to them.

In the same context, the majority of provincial governments in their respective finance Acts have reportedly been assuming the jurisdiction of provincial and local governments regarding authorization of extraction works of earth resources useful for construction purposes and administration of royalty revenue earned from entities engaged in extraction and sales of such resources. As such, the local governments are authorized to sanction extraction of stone, sand, gravel, and other earth resources for construction purposes and draw royalty revenue from such projects based on the royalty rates prescribed by the concerned provincial governments in their respective finance Acts. The prevailing practice is such that the local governments authorize such extraction works by independently inviting private parties for tender after specific minefields have received environmental clearances from the concerned provincial authorities hosting the minefields.  Following which, the local governments are authorized to charge royalties from the exploiting entities based on the royalty rates set by their respective provincial governments. The forty percentage of the collected royalty revenue is then shared with the concerned provincial government while the local government retains the rest. Basically, the royalty sharing mechanism devised for the royalty revenue obtained from such earth resources is identical to the sharing provision for entertainment tax and land and building registration fees that fall within the single tax administration approach between local and provincial governments.

However, amid this impressively devolved arrangement for governance of such earth extraction works and the administration of revenue amassing from it, Mines and Mineral Resources Regulation (1999), amended in 2017, still authorizes Department of Mines and Geology (DMG) and erstwhile District Development Committee (DDC) as the federal bodies to license, regulate, and draw royalties from extraction of earth resources for construction purpose as per Rule 34 – 36. The Rule requires erstwhile DDC or apparently the current District Coordination Committees (DCCs) to authorize and license extraction of such resources after consulting with the Mine Development Committee of the concerned district and receiving clearance from the DMG. 

Having said that, there visibly prevails a legislative contradiction between the levels of government regarding the matters concerning authorization of extraction of earth resources for construction purpose, and the authority to collect and manage royalty revenue earned from entities engaged in such extraction activities. Undoubtedly, it creates a scenario of legal confusion and uncertainty in this particular sub-sector that can breed regulatory tensions in the future, and further encourage private entities to skip legal procedure in entirety and resort to unscrupulous and informal routes to conduct such activities. Therefore, such regulatory contradiction that represents in coordination between levels of governance in the current federal system requires sufficient amendment and harmonization in the immediate future at the best interest of the extraction industry and the environment.

At present, the Constitution of Nepal, 2015 with clarification from cabinet unbundling report 2017 recognizes the jurisdiction of local governments to authorize and regulate extraction of earth resources for construction purposes based on the authority granted to local government itemized as “protection of watershed, wildlife, mines and minerals” in Schedule 8 of the Constitution. However, the unbundling report informs the authority of the federal government to stipulate royalty rates and collect and share royalty revenue from natural resources while clarifying the authority of federal government in where concurrent authority prevails between federal, provincial, and local governments in the item titled “natural resource revenue sharing” enlisted in Schedule 9 of the Constitution. The report also informs the authority of local governments to collect royalty revenue from resources authorized by the federal or provincial government, as well as to independently raise and keep royalty revenue earned for natural resources deemed to be of low value in concern to the item titled “service fee, charge, penalty and royalty from natural resources, tourism fee” as enlisted in Schedule 9 of the Constitution. 

As such, while the authority of the local governments, though within the mandate of provincial governments, in licensing and regulation of extraction of earth resources for construction purpose is constitutionally secured, there still remains confusion regarding the fiscal jurisdiction of either local or provincial governments to independently set royalty rates of such earth resources and administer collection and retention of such revenue. However, the authority of local governments to determine royalty rates as well as to collect and share royalty revenue earned from extraction of earth resources for construction purposes can be assumed given the observation that such earth resources are undoubtedly of low value in comparison to other precious and semi-precious mineral resources. But such an assumption does constitutionally guarantee the authority of provincial or local authority in regards to independent administration of royalty revenue as informed in the respective provincial finance Acts. Furthermore, consultation of fundamental legislations as the Local Government Operations (LGO) Act (2017) and IGFA Act (2017) does not come to much avail in confirming the royalty revenue authority of local or provincial governments for extractive mineral resources useful for construction purpose. As such, the LGO Act (2017) only confirms the authority of local governments to administer royalty revenue from certain natural resources only under the bounds and authority of federal and provincial governments as per clause (a) and (j) of Section 11(4) of the Act. Meanwhile, the IGFA Act (2017) has no specific mention of extractive resources useful for construction purpose, and instead only mentions provision for the item titled “mines and minerals” from which the earned royalty revenue is to be completely administered by the federal governments and shared among provincial and local governments based on Schedule 4 of the very Act.

It is quite clear that the provision in the provincial finance Acts to authorize local governments to license extraction of earth resources useful for construction purpose needs to overwrite the provision in the Mines and Mineral Resources Regulation (1999) as the constitution clearly awards local governments with the jurisdiction to authorize and regulate extraction of such resources. However, the same cannot be constitutionally claimed in regards to authority to collect, retain, and share royalty revenue from such extractive resources. As constitution only hints at the authority of local governments to collect, retain, and share royalty revenue of mines and mineral resources deemed to be of low value. And, as discussed earlier, other fundamental legislation directly concerning federal affairs does not elaborate or confirm any further.

This article was originally published in Republica by Prience Shrestha on March 23, 2021.

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