A high-level committee formed to look into the tax row between the three tiers of government has concluded that the dispute arose mainly due to the upward revision of tax rates and service fees.

While there were cases of taxes levied against constitutional provisions, the committee said multiple issues—lack of adequate discussion among the stakeholders before deciding the tax rate, lack of clarity in laws and political polarisation in the post-election scenario—had fuelled the dispute. The panel agreed that there were discrepancies on tax between constitutional and legal provisions, which need to be sorted.

The government on August 14 formed a high-level committee led by Dinesh Thapaliya, secretary at the Ministry of Federal Affairs and General Administration, Revenue Secretary Sishir Dhungana and Secretary at the National Natural Resources and Fiscal Commission Baikuntha Aryal to recommend measures to resolve issues.

A senior official involved in the study told the Post that most of the local governments had not imposed new taxes besides the ones authorised by the constitution and laws. “However, a majority of them hiked the tax rate considering that they had not been revised for two decades. This invited controversy,” said the official.

The tax rates fixed by the Local Self-Governance Act-1999 had not been revised for nearly two decades.

According to the committee, some of the provincial and local governments did impose new taxes going against the constitutional provision. The pollution and vehicle taxes are against constitutional and legal provisions, according to the committee.

For example, Birgunj Metropolitan City and Ilam Municipality had imposed pollution tax on all petroleum products. While Birgunj levied 25 paisa per litre of fuel as pollution tax within the metropolis, it rolled back the decision after receiving a letter from the federal government. Ilam continues to impose 50 paisa per litre of diesel and petrol.

In some cases, disputes flared due to the inconsistencies between the constitution and laws and the lack of legal clarity, according to the official involved in preparing the committee’s report. The row over wealth tax is one such case between the federal and local governments.

After the Financial Act introduced by the federal government amended the provision of Local Government Operation Act-2017, local governments complained that the revision breached their right to collect wealth tax.

As per the Financial Act, municipalities and rural municipalities can impose wealth tax only on the building and the land covered by it or a 5476 square feet area, whichever is small. This calls for separate tax on the remaining land area owned by an individual. The committee also plans to suggest addressing this issue through legal changes, which the Finance Ministry has already initiated. The ministry has proposed amending the law in a way to partially address the concerns of local governments. On the issue of District Export Tax, the committee found discrepancies between constitutional and legal provisions regarding tax on the sales of goods originating from natural resources and mining. This issue came to light when provincial governments started imposing district export tax on agriculture products, sand and gravel, among others.

While the erstwhile District Development Committee imposed ‘District Export Tax’ on the sales of such goods as they are sold to another district, the new constitution banned it. However, Clause 11 of the Local Government Operation Act allows the local government to collect sales and export fees on such goods.

When provincial governments started imposing this tax, the federal government on July 20 reminded them that the move goes against the constitution. As provincial and local governments don’t want to lose this important source of income, they have been imposing this tax in different names despite the federal government’s directive. “There is legal vacuum to enable local governments to collect taxes particularly on sales of goods mined from land owned

by individuals,” said the official associated with the committee.