The government has submitted two important bills related to fiscal transfers for provincial and local governments. They are the National Natural Resources and Fiscal Commission (NNRFC) Bill and the Intergovernmental Fiscal Transfer (IGFT) Bill. The constitution has provisioned the establishment of a National Natural Resources and Fiscal Commission. Its key functions are distributing revenue from the government consolidated fund to federal, provincial and local levels and distribute revenue between provincial and local governments from the provincial consolidated fund. In fact, the constitution provides the sole power to the NNRFC to determine the amount of fiscal transfers to sub-central governments (SCG). 

Conflict of interest

The NNRFC Bill proposes a revenue sharing mechanism under which revenue will be shared based on only seven criteria. They are population, area, revenue effort, fiscal need, human development index, infrastructure development and special event. The proposed criteria are not only insufficient, they are also narrow. For example, human development index means only the index. If the word index had been removed, human development would have a wider meaning; and human development related variables such as per capita income, life expectancy and literacy could be used. Similarly, demography would have been a better term than population as it would encompass population, population growth, household size and age group. 

The constitution has given the job of the Ministry of Finance to the NNRFC. During resource allocation, there is a high possibility of a conflict of interest between these two institutions. The bill has proposed making the Finance Ministry the liaison for the NNRFC. This provision should be changed, and the Office of the Prime Minister and the Council of Ministers made the liaison. In fact, the Office of the Prime Minister should be made the liaison for all constitutional bodies.

Compared to the NNRFC Bill, the IGFT Bill is more regressive. In fact, this bill is a misfortune to SCGs from the fiscal aspect. The constitution provides equal state power to all three tiers of government. However, the federal government has been assigned a significant role in the financing of SCGs. An analysis reveals that 85-90 percent of the revenue has been proposed for the federal government. Further, in terms of functional responsibility, around 55 percent has been devolved to SCGs. On the revenue side, they have been given less than 15 percent. 

According to revenue sharing principles, the revenue gap should be fulfilled from transfers. This provision is clearly included in the constitution. However, the bill proposes nominal revenue sharing with SCGs. The bill proposes to share only 5 percent of the revenue from hydropower, tourism, forests, mines and minerals with local governments. The lion’s share, or 85 percent, has been proposed for the federal government. The remaining 10 percent goes to the provinces. Currently, the Local Self-Governance Act (LSGA) provides up to 50 percent of the revenue to local governments. For example, in hydroelectricity and minerals, they received 50 percent. In mountaineering, their share is 30 percent.

Steps back

If we follow the constitutional provision carefully, the biggest slice should go to local levels. With regard to natural resources, the constitution states that ‘the policy shall ensure fair distribution of the benefits generated by it by giving local people priority and preferential rights’. Further, in the article related to fiscal power, the constitution states that federal, provincial and local entities should make arrangements for equitable distribution of the benefits from the development of natural resources. Here, the constitution clearly emphasises that priority should be given to local levels.

Further, the bill also proposes that local governments will get 15 percent of the income generated from value added tax (VAT) and excise duties imposed on domestic products. Article 60 of the constitution clearly states that the NNRFC will recommend the amount of the fiscal transfer that provincial and local entities are to receive.

How will the NNRFC determine how much they should get when the government has already laid down the sharing proportions? Members of Parliament should raise this question while discussing the bill. Considering the way the bill has been drafted, the government still seems to have a centralised mindset. Everyone says that power has been devolved from Singha Durbar to the villages. However, this should be seen in actual practice. 

Federal countries across the world fulfil fiscal gaps from transfers. For example, as per the recommendation of the 14th Finance Commission, the Indian government shares 42 percent of its tax revenue with state governments. In the 13th Finance Commission, the ratio was 32 percent. Similarly, in Germany, the federal government shares 42.5 percent of the revenue from personal income tax with the provinces and 15 percent with local governments. Further, the provinces and local levels receive 48 percent and 2 percent of the VAT revenue respectively. And out of the remaining tax revenue, the provinces receive 21 percent and the local levels 8 percent.

Likewise, Canada and Switzerland respectively share 35 and 30 percent of the revenue from personal income tax with the provinces. Canada shares 40 percent of the remaining tax revenue with the provinces and 10 percent with the local levels. Similarly, Switzerland shares 24 percent with the provinces/cantons and 15 percent with the local levels. 

The NNRFC has been given full authority to share all revenues including royalties from natural resources. The bill tabled in Parliament clearly contradicts the constitution. Further, it is a backward step compared to the Local Self-Governance Act. The bill has also neglected international practices. It will be a misfortune for the spirit of the constitution if Parliament approves the bill.

Devkota is a fiscal federalisation and local government analyst