The tax revenue rights of local governments include property tax, house rent tax, house land registration fee, vehicle tax, service charge, tourism fee, advertisement tax, business tax, land tax and entertainment tax, among others. Some revenue-raising rights are shared with the provinces. And in order to avoid complications, a single tax administration system has been created where one level of government collects the money and distributes it to another. For example, the provincial government collects vehicle tax and shares 40 percent of it with the local government. Similarly, local governments collect property registration fees and share 40 percent of the money with the provinces. Currently, the government of Nepal has been collecting the fee on behalf of local governments.

The Intergovernmental Fiscal Arrangement Act stipulates that local governments should receive 15 percent each of the value-added tax (VAT) and excise duty on domestic production. Local governments also get 25 percent of the royalties from natural resources, mountaineering, forestry, electricity generation, mining and so forth. In terms of grants, local governments receive four types of grants: fiscal equalisation, conditional, special and matching grants.

Internal tax revenue

The 60th report of the Office of the Auditor General released recently shows that local governments have not paid much attention to mobilising financial resources. The 749 local units whose accounts were audited collected Rs659 billion in revenues in the fiscal year 2020-21. Out of that amount, internal tax revenue came to Rs35.75 billion, which is 5.42 percent of their total revenue. In the fiscal year 2019-20, the internal revenue of local governments amounted to Rs35.28 billion. Grants received from the federal and provincial governments accounted for 50.39 percent of total revenue. Revenues from VAT, excise duty and vehicle tax came to 13.70 percent. Miscellaneous revenues made up 15.28 percent of total revenue.

The total expenditure of local governments amounted to Rs543 billion, out of which capital expenditure was 30.69 percent and recurrent expenditure 52.14 percent. The remaining 17.16 percent came under the financing heading.

Metropolitan cities performed somewhat satisfactorily in terms of internal revenue mobilisation, but sub-metropolitan cities did not perform so well. The share of internal revenue in the total revenue of metropolitan cities is 23.46 percent while the figure for sub-metropolitan cities is only 8.66 percent.

Property tax

Looking at the experience of other countries, property tax is a permanent and sustainable source of revenue for local governments. The Local Government Operation Act defines property tax as a tax levied on all houses and land owned by a person within the local area.

Property tax plays a major role in the overall internal revenue mobilisation of local governments. As per the Property Tax Diagnostic Manual 2020 published by the World Bank, the share of property tax in the internal revenue of local governments in low-income countries ranges from 15 to 20 percent. In middle-income countries, it is 35 percent and in rich countries it is about 38 percent. Countries with rapid urbanisation tend to make better progress in property taxation.

Urbanisation is an important basis for revenue mobilisation by local governments. As the value of land increases based on urbanisation, the scope of property tax also increases. It is also a good source of urban infrastructure if managed well. This tax helps the local level to make public service delivery more accountable, efficient and responsive. Based on Nepal’s 2021 population census, urbanisation has accelerated (66 percent of Nepalis now live in municipalities), but there has not been as much effort in collecting property tax as there should have been.

As per a study report issued by the Ministry of Federal Affairs and General Administration in 2021, the share of property tax in the total internal revenue of local governments is 13 percent while the figure for metropolitan cities is 19 percent. Prior to the restructuring of the local levels, the share of property tax in the internal revenue of the then 58 municipalities was 10 percent. This figure shows a minor improvement but falls short of expectations.

A study of the proportion of property tax in the internal revenue of metropolitan cities shows that Pokhara has the highest ratio of 29.41 percent while Kathmandu has the lowest ratio of 18 percent. As per the same World Bank report, the share of property tax in the total internal revenue of Kuala Lumpur city of Malaysia is 46 percent. The per capita property tax of Pune city in India is $40. The average per capita property tax of Nepal's metropolitan cities is below $5.

It is necessary for Nepal’s large cities to pay special attention to increasing the scope of property tax. As the scope of internal resource mobilisation including property tax increases, the delivery of public services also increases. The performance of local governments in the past five years has been unsatisfactory. There have been public complaints that some local governments have created tax terror for the citizens. Rather than increasing the tax rate, local governments should pay special attention to increasing its scope. It has also been found that some local governments unnecessarily exempt contractors and business persons from tax due to personal interests.

Like the provinces, local units are weak in mobilising internal resources. The scope of the tax base of local governments is wider than that of the provinces, but the local governments do not seem to realise that. They must pay special attention to this. In the same way, the government of Nepal and other concerned entities should also cooperate in mobilising revenue at the local level.