This article examines provincial revenue collection and overall fiscal conditions based on the Financial Comptroller General Office data for fiscal year 2023-24. It concludes with an assessment of whether provinces are financially sustainable.

The constitution of Nepal grants provinces limited revenue authority, including house and land registration fees, vehicle tax, entertainment tax, advertisement tax, tourism tax, agricultural income tax, service charges, fines and penalties. However, house and land registration fees, vehicle, entertainment and advertisement taxes are exclusive revenue sources for local levels.

A single tax administration system has been adopted to manage overlapping revenue rights in the country, where one government level collects and shares the revenue with another. For instance, provinces determine and collect vehicle tax, retaining 60 percent and transferring the remaining 40 percent to the local level.

Provincial tax revenue

An analysis of provincial tax revenue reveals that the total agricultural income tax collected across all seven provinces is only Rs216,000. Madhesh, Karnali and Sudurpaschim Provinces have reported no revenue from this source. However, provinces have generated Rs79.8 million from the sale of agricultural products. Bagmati collected Rs38.8 million, the highest amount under this heading, while Karnali earned Rs150,000, the lowest.

From entertainment and advertisement taxes, which are shared with local levels, the provinces have earned Rs50.6 million. However, Karnali collected only Rs14,000 from entertainment tax, indicating either a failure to impose advertisement tax at the local level or a lack of revenue sharing with the province. Similarly, Madhesh has brought in Rs165,000 from advertisement tax but no revenue from entertainment tax. Meanwhile, Bagmati collected Rs17.8 million and Rs7 million from advertisement and entertainment taxes, respectively. This suggests weak revenue collection or improper revenue sharing at the local level. According to officials, local governments have not taken revenue collection seriously; in some cases, revenue leakage is observed.

Excluding shared tax revenue sources with local levels, provinces have collected Rs6.13 billion, accounting for 3.53 percent of their total revenue. Including grants, the total provincial revenue stands at Rs173.30 billion. Among the provinces, Bagmati has the highest revenue at Rs2.27 billion, while Sudurpaschim has the lowest at Rs240 million.

When considering tax revenue shared with local levels, the total collection amounts to Rs29.77 billion, making up 17.18 percent of the provinces’ total revenue. Combining shared and non-shared tax revenues, the total internal revenue of the provinces reaches Rs35.89 billion, representing 20.71 percent of their total revenue. Out of the approximate total of Rs36 billion in all provinces, Bagmati collects the highest revenue of Rs16.68 billion, while Karnali collects the lowest at Rs730 million.

Internal revenue indicates the province’s ability to cover its administrative expenses. However, this analysis may be insufficient since internal revenue includes revenue sharing and royalties.

Among the total Rs35.89 billion in internal revenue, house and land registration fees contribute 30.56 percent, while vehicle tax accounts for 34.59 percent, making up a significant portion of the internal revenue. This highlights the crucial role of these two sources in provincial revenue collection. Additionally, revenue from the sale of stones, gravel and sand, also shared with local levels, contributes 3.95 percent to the internal revenue. However, a slowdown in the real estate market and the involvement of middlemen may pose challenges to revenue collection.

According to the Intergovernmental Fiscal Arrangement Act, 2074, 15 percent of the value-added tax (VAT) and excise duty collected from internal production and 25 percent of the royalties from natural resources such as mountains, electricity, forests and minerals is shared with the provinces. Notably, when the bill was presented in Parliament, the government had proposed sharing only 5 percent with local levels and 10 percent with provinces. This is a glaring example of how the federal government can curtail the rights of provinces and local levels if members of Parliament are not alert.

Revenue sharing accounts for 33.73 percent of the total revenue of provinces, while royalties from natural resources account for 0.91 percent. Unlike the pooled distribution of the 15 percent VAT and excise duty revenue, only affected provinces are entitled to the 25 percent share of royalties from natural resources. The total royalties collected nationwide are not significant.

If we consider only the provinces’ share, Rs6.28 billion was collected in the fiscal year 2023-24, of which Rs1.57 billion was distributed to the provinces. An equal share was distributed to local levels, and the remaining went to the federal government. Although the share is small in terms of total revenue, it is significant as it is a long-term and sustainable source of revenue. Analysing the distribution by province offers insights into which provinces are rich in natural resources and which are not, helping provinces formulate necessary policies.

Royalties

Regarding the total royalties received by the provinces, electricity contributes 50.24 percent, forests contribute 27.58 percent and mountain resources contribute 13.72 percent. Koshi receives royalties from various natural resources, with mountain resources alone accounting for about 52 percent of the total royalties. Madhesh Province receives royalties only from its forests, so it must consider utilising other natural resources while strengthening its forests.

Bagmati and Gandaki have received significant royalties from electricity. They have access to various natural resources. Lumbini Province performs well in mineral royalties. However, Karnali and Sudurpaschim are weak in royalty collection despite having abundant natural resources. These provinces need a long-term vision. If we include revenue sharing and royalties as part of the provinces’ internal revenue, internal revenue accounts for 55.34 percent of the total revenue. The remaining 44.66 percent depends on grants.

Heavy reliance on grants

Of the total grants received by the provinces (Rs77.30 billion), equalisation grants make up 57.54 percent, conditional grants 30.85 percent, matching grants 6.46 percent and special grants 5.15 percent. Special grants are essential for supporting provinces that are lagging in social, economic and human development, yet the government is not committed to this goal.

The distribution process for equalisation and conditional grants has been criticised for its lack of scientific rigour. The distribution and equalisation of grants, along with vehicle tax revenue sharing, VAT and excise duty revenue and natural resource royalties, follow the criteria and recommendations of the National Natural Resources and Fiscal Commission. Nepal’s entire grant distribution system must be thoroughly reviewed.

The provinces’ internal revenue accounts for 55.34 percent of their total revenue, including revenue sharing and royalties. This indicates that the provinces can cover administrative expenses and work on socio-economic development and construction. However, this does not mean the provinces are self-reliant or independent. To achieve this, they must explore additional revenue sources. The constitution has weakened the provinces in terms of fiscal self-reliance, so constitutional amendments are necessary to address this issue.

In conclusion, while provinces generate significant internal revenue, their heavy reliance on grants and revenue sharing is alarming. Strengthening tax administration, exploring new revenue sources and addressing constitutional limitations are crucial to ensure true fiscal self-reliance and sustainability.