Trials and tribulationsNepalis have become disheartened because of arbitrary taxation
The distribution of power and autonomy lies at the core of any federal system. True to this concept, Nepal’s federal structure with three tiers of government—federal, provincial and local—granted autonomy to each of them to raise and spend revenue with the freedom to pursue their preferred fiscal policies.
But of late, issues of tax duplication, haphazard taxation and sub-national governments imposing taxes beyond their constitutional mandate has made news. This has exposed the fault lines in fiscal federalism in the country, proving that the transition from a unitary system to full autonomy of the provinces will not be a smooth one.
People in different parts of the country like Biratnagar, Chitwan and Birgunj have taken to the streets to express their dissatisfaction over the decision of provincial and local governments to impose exorbitant taxes.
Provincial and local governments recently introduced new taxes, fees and charges under a number of headings, for example, a District Export Tax on mineral products and agricultural goods. However, Article 236 of the constitution says there shall be free movement of goods within the country. The imposition of a pollution tax on petroleum products is another example. In this case, it is a breach of the constitution as it doesn’t contain any provision permitting the imposition of such a tax. As a result, the federal government has been at loggerheads with several provincial and local units over the issue of new taxes.
For centuries, the country had a unitary system of government where the central government made all the decisions and crated laws and policies. Even laws pertaining to taxes were enforced uniformly across the entire country, hence, there was no duplication of taxes. But, since last year, there has been an effort to shift political and economic power from the centre to the states after institutionalising federalism.
In order to do away with imbalanced regional economic growth, the constitution too adopted principles of fiscal federalism. Article 228 states that the local government is empowered with the authority to impose taxes for income generation. For this to work, a sub-national governance system will have to be built from scratch. The revenue raising capacity too will vary among different provinces and local units. Nonetheless, this does not mean that provincial and local governments can start imposing taxes irrationally and unconstitutionally without taking into consideration the citizen’s sensitivities and affordability.
Had the National Natural Resources and Fiscal Commission been in place, this problem probably could have been addressed. The commission is responsible for determining the detailed basis and modality for the distribution of revenue between the three layers of government, recommending equalisation grants to sub-national governments and preparing parameters for providing conditional grants to provincial and local governments. Also, although provincial and local governments have been given the primary responsibility to deliver basic public services, they are not equipped with adequate resources as the bulk of the revenue collected is retained by the federal government.
Ad hoc planning has often sent the country haywire. The people rightly have huge expectations from the government at the provincial and local level. The responsible authorities must realise this and immediately correct the current issue of double and haphazard taxation. Implementing federalism was no easy feat, and it is unfortunate that the citizenry has become disenchanted with it so soon due to arbitrary taxation.