Following Nepal's transformation into a federal structure, it has been around four and three years respectively since the local and provincial levels started working under this system. With regard to financial resources of the subnational levels, we have to look at four aspects in particular. They include tax revenue raising rights, revenue sharing including natural resources, fiscal transfers and borrowings. The constitution provides key revenue-raising headings to the federal government. They include customs duty, excise duty, value-added tax, corporate income tax, individual income tax, tourism fee, passport fee, visa fee and so forth. The provinces have nominal revenue-raising rights. These include land registration fee, motor vehicle tax, entertainment tax, advertisement tax, agro income tax and others. The local level collects local tax (property tax, house rent tax, house land registration fee, vehicle tax), service charge, advertisement tax, business tax, land tax, entertainment tax and others.

Some revenue-raising rights at the provincial and local levels overlap and have been duplicated. The land registration fee, vehicle tax, entertainment tax and advertisement tax are on the list of the exclusive rights of both the provincial and local levels. To solve this problem, a single tax administration system has been followed. This means that one level of government collects the revenue and distributes it to the other. For example, the provincial government collects vehicle tax and shares 40 percent of it with the local government.

Nepal's federalism is heavily centralised with respect to revenue collection. In order to decentralise this system, a 'revenue sharing' provision has been created. The subnational units receive 15 percent of the value-added tax (VAT) and excise duty on domestic production. The subnational units also get 25 percent of the royalties from natural resources. The natural resources include mountaineering, forestry, electricity generation and mining. In terms of fiscal transfers, the subnational units receive four types of grants, namely fiscal equalisation, conditional, special and matching grants. Regarding foreign aid and loans, the subnational entities cannot take any kind of foreign grant or assistance or implement any plan or programme with foreign grant or assistance without the prior approval of the federal government. In the case of internal loan too, they must obtain the consent of the federal government.

Revenue pie

It is very difficult to get up-to-date revenue details at the local level. None of the government ministries and agencies has been keeping and publishing the details on a regular basis. As per the Office of the Auditor General, the total revenues of the provincial and local levels amounted to Rs229 billion and Rs343 billion respectively in the fiscal year 2018-19. Revenues from their own sources amounted to Rs24.88 billion and Rs26.73 billion respectively. Fiscal transfers to the provincial and local levels totalled Rs115 billion and Rs226 billion respectively. This reveals that fiscal transfers account for a lion's share of subnational level finances.

Compared to the previous unitary system, the local units now have a wider range of powers to levy taxes and service charges. Now they also have rent tax as an additional tax base. Its scope is so large that Kathmandu Metropolitan City collected Rs1.5 billion in rent tax in the fiscal year 2019-20. There is so much scope for property tax, business tax and building plan approval fees.

According to a recent study report by the World Bank, property tax alone accounts for 93 percent of the total tax revenue of the city of Kuala Lumpur, Malaysia. In Metro Manila in the Philippines, it makes up 54 percent. However, in Nepal, property tax does not make up even 20 percent of the total tax revenue. Due to the transfers, the pie of local level finance seems a little bit larger. But they do not seem to be much serious in mobilising internal tax resources. With the entire necessary infrastructure in place, it is important to pay attention to that.

The provinces passed annual budgets totalling Rs260 billion and Rs264 billion respectively in the fiscal years 2019-20 and 2020-21. The share of revenues from their own sources came to 11 percent in 2019-20 and 14 percent in 2020-21. Out of the total internal tax revenue of the provinces, the share of vehicle and house and land registration fees came to around 81 percent.

Other revenue headings

Like the local units, the provinces have not paid much attention to other revenue headings such as entertainment and advertisement taxes, fines, income from the sale of services and goods, tourism fees, FM radio operation fees and television operation fees. The provinces are heavily reliant on their limited sources such as vehicle tax and building and land registration fees. The share of revenue from their own sources is very small. This requires that the revenue base and potential be expanded. Further, extensive use of the existing revenue rights is also required.

With the elected representatives at the local level, local revenue has definitely increased. But it has not increased as expected. The revenue of the provinces is also increasing compared to the early years. But the progress is not satisfactory. Some constitutional rights have not been exercised, and the collection of some taxes is zero. In fact, the subnational level has to pay more attention to revenue mobilisation. They should not only depend on fiscal transfers but also try to enlarge their own earnings. Similarly, it is important for the federal government to focus on increasing the revenue base of the provinces. The federal government also needs to provide technical assistance to conduct revenue enhancement programmes at the subnational level.