The Karnali provincial government, the most impoverished of all, had the lowest internal revenue—in terms of its own generation and resources received through revenue sharing with federal and local governments—in the last fiscal year.

Its revenue stood at Rs7.66 billion—collected from both resources, according to a report of the Financial Comptroller General Office (FCGO) titled ‘Economic Details 2020-21 of the Provincial Governments.’

When it came to its own revenue generation, collection stood at Rs400 million, according to Bindaman Bista, the province’s economic affairs minister. This accounts for just 1.79 percent of the total resources it received combining revenue from its resource and what it received through revenue-sharing, own revenue sources and fiscal transfer from the federal government. Its combined resources stood at Rs22.3 billion.

“Agricultural income tax is the only revenue source of the provinces that need not be shared with federal and local governments,” said Minister Bista. “Being an impoverished province, Karnali has very limited sources of internal income, which makes it almost fully dependent on the federal government.”

He lamented that the federal government was not sharing resources by considering Karnali an under-developed province.

“The current formula of revenue sharing is unjustified for the Karnali as it gives 50 percent weightage to the population,” he said. “Our province is sparsely populated and is geographically remote and underdeveloped.”

The minister said the minimal internal resources and low resource-sharing from the federal government contributed to keeping the province backward as other provinces which are already richer compared to Karnali march forward with their higher internal incomes and higher resource sharing from the centre.

Even though this province has very poor sources of internal incomes, all the provinces rely heavily on the federal grant and revenue to run the government.

The situation is not different in the case of local governments.

Experts say such a situation has constrained sub-national governments to freely exercise their constitutional jurisdictions.

Seven provincial governments collected Rs92.17 billion from their own revenue sources and revenue-sharing with federal and local governments, according to the FCGO report.

FCGO spokesperson Nawaraj Dhungana told the Post that his office does not have segregated data about the earning of provincial governments from their own revenue sources and revenue-sharing.

“We are still in the process of setting up a system to get segregated data,” he said.

This total revenue of Rs92.17 billion accounts for 45.51 percent of the total resources the provincial governments received in the form of revenue sharing, fiscal transfer from the federal government and own revenue sources.

They received Rs110.34 billion in fiscal transfer from the federal government, which meant their combined resources from three sources— own source revenue, revenue sharing and fiscal transfer—stood at Rs202.51 billion. They also had cash reserves of Rs62.44 billion from the previous fiscal year 2019-20. This puts their combined resources at Rs264.95 billion.

But a study titled Planning and Budgeting in the Provinces of Federal Nepal—released by the Asia Foundation, an international NGO, in July last year—found that own source revenue in the provincial budget was 11.24 percent for the fiscal year 2019-20, which rose incrementally to 14.47 percent in the fiscal year 2020-21.

Own source here refers to the resources generated from internal revenue sources excluding revenue-sharing.

According to the study report, due to the lack of a breakdown, the own-source revenue was computed on the basis of what is left of the total budget after subtracting grants, revenue-sharing, internal loans, and the cash balance.

The report, however, found that the own-source revenue of the provincial governments has grown since they were formed in 2017.

In the fiscal year 2017-18, provinces collected a nominal amount of their own-source resources of a little over one million rupees, according to a report of the Office of Auditor General for that year.

The provinces had just been created that fiscal year and their financial activities were not fully functional. Institutions and laws were also just beginning to evolve, constraining revenue generation and collection in the provinces.

The own-source resources of the provinces have steadily risen over the last three years. In the fiscal year 2018-19, provinces collected Rs19.54 billion as their own-source resources. In the fiscal year 2019-20, they had revised estimates for the collection of Rs29.18 billion as their resources, according to a study report.

The provinces were expected to collect Rs38.22 billion in the fiscal year 2020-21. These figures of own-source resources also point out the heavy dependence of provinces on the federal government for financial resources.

The situation is not different when it comes to local governments.

Local governments collected just Rs35.62 billion from their sole revenue sources against total resources of Rs410.2 billion that they received from internal resources, revenue-sharing and grants from federal and provincial governments in the last fiscal year 2020-21, according to a report titled “Economic Detail 2020-21 of the Local Governments” released by the FCGO this week.

It means the contribution of sole internal resources of the local government in their overall resources stood at just 8.68 percent in the last fiscal year.

If their earnings from revenue-sharing with the federal and provincial governments are also incorporated as their income, they collected the total revenue of Rs109.02 billion in the last fiscal year, which accounts for 26.57 percent of total resources they received in the last fiscal year.

As the country's 753 local governments also had cash reserves of Rs75.62 billion, overall financial resources with the local governments in the last fiscal year stood at Rs485.82 billion, according to the FCGO.

Federal and provincial governments had provided them Rs301.17 billion, which speaks volumes about the heavy dependence of the local governments on federal and provincial governments for financial resources.

Experts say that the federal government controlled the major revenue sources even though most of the tasks were transferred to sub-national governments.

“As a result, the provincial and local governments need to rely on fiscal transfer from the federal government,” said Purna Chandra Bhattarai, a former government secretary who has expertise on local government issues. “This has, however, constrained their ability to make independent decisions.”

As per the constitution, the federal government largely has monopoly over income tax, customs duty, value added tax and excise duty—four biggest sources of revenue.

Even though the federal government collects these revenues, it shares 30 percent of the collection from VAT and excise duty to sub-national governments—15 percent each to provincial and local governments, according to the Act Made to Inter-Governmental Fiscal Arrangement.

Likewise, they each receive 25 percent of the royalty collected from the use of natural resources, including from water, forest, electricity, mining and mountaineering, according to this law.

As per the constitution, house and land registration fee, motor vehicle tax, entertainment tax, advertisement tax, tourism, agro-income tax, service charge, fee and penalty fall under the jurisdiction of the provincial government.

Likewise, local governments have jurisdiction over local taxes (wealth tax, house rent tax, land and building registration fee, motor vehicle tax), service charge, fee, tourism fee, advertisement tax, business tax, land tax (land revenue), penalty, entertainment tax and land revenue collection.

Most of the revenue rights assigned to provincial governments overlap with those of local governments, such as the vehicle tax, land registration fees, entertainment tax and advertisement tax.

“Considering the constitutional arrangement of revenue rights, the provincial governments are in a disadvantageous situation compared to local governments,” said Khim Lal Devkota, an expert on federal affairs who is also a National Assembly member.

According to the Asia Foundation study report, the vehicle tax (registration and annual fee) and house and land registration fees are two biggest sources of revenue.

“But provincial governments have to share resources collected from both of these sources with the local governments,” said Devkota.

Initially, revenue collected from the extraction of sand, stone and pebble mines was supposed to be shared between provincial and local governments as per the Local Level Operation Act.

“But the federal government brought this revenue fully under the local governments’ control through the Some Nepal Act Amendments process,” said Devkota.

The provinces’ only sole tax revenue source in a true sense is the agricultural income tax, but it’s nominal, as they have not been able to tap this heading, according to Devkota.

Experts say that the allocation of limited revenue rights to the sub-national governments has constrained the sub-national governments’, particularly the provincial governments’ ability to implement “game-changer development projects”.

“The federal government agencies are themselves implementing smaller development projects, which are supposed to be implemented by provincial and local governments,” said Bhattarai, the former secretary. “The provincial and local governments have been forced to accept many conditions set by the federal government, constraining their ability to adjust the programmes as per the local needs.”

With the resources of provincial governments being squeezed even more, they have been forced to implement the projects that are supposed to be implemented by local governments, according to Bhattarai.

Despite their over-reliance on the federal government for resources, sub-national governments are yet to work towards broadening their own resources, according to experts.

They have also failed to spend even the existing budget received through fiscal transfer and revenue-sharing.

“It is high time the sub-national governments, particularly the provincial governments, spent existing resources and prepared institutional mechanisms to broaden their own resources and implement the projects,” said Devkota.

According to Bista, his ministry is coordinating a study on increasing internal resources. “The federal Finance Ministry is also helping us in the study,” he said.