Three-tier government at loggerheads over taxOn August 4, a delegation of the Morang Chamber of Industries and Morang Merchant Association met Prime Minister KP Sharma Oli to discuss the issues that businesspeople in Province 1 are grappling with.
On August 4, a delegation of the Morang Chamber of Industries and Morang Merchant Association met Prime Minister KP Sharma Oli to discuss the issues that businesspeople in Province 1 are grappling with. But one topic dominated the agenda that afternoon: the series of taxes that provincial governments were imposing on businesses.
The fact that a delegation of businessmen had to come from Biratnagar to Kathmandu to ask for the federal government’s intervention shows the growing unease with haphazard taxation imposed on the private sector at the state level.
While the federal government has been asserting that subnational governments cannot impose taxes beyond their constitution mandate, provincial and local governments are in no mood to listen to Kathmandu.
As the issues of inter-jurisdictional fiscal conflict come to the fore, the group that’s most worried—and has had to bear the brunt—is the private sector, which has been expressing grievances in recent months about multiple taxation at all three tiers of government.
As provincial governments get into a tax collection spree, three issues—double taxation, hefty rise in tax and fees, and imposition of new taxes that weren’t envisioned by the constitution—have emerged as key points of controversy.
Double taxation, double cost
When lawmakers were finalising the draft of new constitution in 2015, Nepal’s private sector was keenly observing the provisions related to taxation. When the three-tier government was envisioned in the document, some businessmen were worried about the kind of additional taxation in a federal Nepal.
Now, after nearly six months of the new system of governance, their fears have become the reality as provincial and local governments are levying additional taxes.
Some municipalities have imposed taxes on both cement and clinker which traders present as a clear example of double taxation. The Birgunj Metropolitan City imposed tax on scrap iron and additional tax on materials made from the scrap. After protests, the metropolis withdrew the tax.
Recently, the Ministry of Federal Affairs and General Administration received a complaint that one municipality in Arghakhanchi issued a notice for imposing taxes on both cement and clinker—the raw material. “A local unit can impose business tax on transactions once a year,” said ministry secretary Dinesh Thapaliya. “But it cannot tax each sack of clinker and cement sold.”
Shekhar Golchha, senior vice president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), says the situation is alarming. “None of the governments actually consulted with the private sector before introducing additional taxes,” he said. “The impact of such taxes will reflect on services and products, eventually hitting taxpayers.”
Going beyond the constitution
There is a clear demarcation in the constitution on what the three-tier government can do when it comes to taxation. However, businesses at the local level have been complaining about the new taxes breach the constitutional jurisdiction.
In the past one month, Birgunj Metropolis and Ilam Municipality slapped pollution tax on all petroleum products. Two weeks later, Birgunj, which had imposed 25 paisa per litre as pollution tax within the metro area had to backtrack after receiving a letter from the central government. However, Ilam Municipality has defied the federal government, continuing to impose 50 paisa per litre on diesel and petrol through all the petrol pumps starting July 31.
The Federal Affairs Ministry told the Post that the District Export Tax on any mineral products and agricultural goods imposed by the provincial governments also go against Article 236 of the constitution, which ensures free movement of goods without being subjected to taxation. Despite this, the Birgunj Metropolis imposed taxes ranging from Rs500 to Rs1500 per vehicle in its area, only to withdraw after intervention by Kathmandu.
The heads of local governments who spoke to the Post defended their move saying that low distribution of resources and their growing responsibilities have forced them to find additional ways to raise revenue. “We imposed pollution taxes and fees on vehicles because heavy movement of vehicles damaged our roads and caused pollution,” said Birgunj Metropolis Mayor Vijaya Sarawagi. Nearly 60 percent of the country’s external trade takes place through the movement of heavy vehicles crossing in and out of the southern border via Birgunj.
The federal and provincial governments are also fighting over additional taxes that the latter introduced last month. Most provincial governments have refused to reverse the district export taxes despite repeated calls from the central government, saying that the federal government has “no authority to lecture us on taxation”. Except Gandaki Province, all other six provinces are at loggerheads with the federal government on the issue.
In Biratnagar, the metropolitan government had a ten-fold increase in fees for citizenship applications and five-fold hike in registration of personal records. The fees for divorce applications have gone up from Rs500 to Rs2,000. The metropolis now charges Rs10,000 for international NGOs to register, an increase from Rs1,000.
As local governments haphazardly hiked taxes, fees, and surcharges, both public and private sectors have taken to the streets to protest. In Gaushala Municipality, which had hiked fees by 500 to 2,000 percent in 36 areas, political parties and business groups have been demonstrating against exorbitant tax rates. Politicians from the Nepali Congress and the Sanghiya Samajbadi Forum have backed local businesses’ demands for rolling back the increased rates.
Indecisive federal government
While the federal government has been uncomfortable with the way local units are raising taxes, some officials in Kathmandu defend the local governments’ decisions.
Dinesh Thapaliya, secretary at the Ministry of Federal Affairs and General Administration, said it is natural for local bodies to increase taxes because the tax rates have not been revised since 1999.
“If a lawyer who helps in documentation for paying land revenue used to charge Rs200 for his or her service 19 years ago, he now charges Rs5,000,” Thapaliya said. “The local government shouldn’t be expected to charge taxes on such law firms based on older rates.” Thapaliya, however, admitted that some local governments have charged unreasonably high taxes.
With complaints mounting, the federal government has had a tough time taking a balanced approach. Local units are independent governments according to the constitution, said Finance Secretary Rajan Khanal, so they have every right to prepare laws within the constitutional limits. “The centre cannot intervene,” Khanal said, “but we remain concerned as they impose the same tax the federal government has been levying.”
Officials at the Finance Ministry said the issue could have been solved through the Natural Resources and Fiscal Commission, which has yet to be formed.
On Monday, the Parliamentary Finance Committee directed the government to resolve the issue, asking the Finance Ministry to play the coordinating role. It has also called for immediate formation of the fiscal commission. Former Chief Secretary Som Lal Subedi said both federal and subnational governments should start serious discussions so the taxation issue is resolved—and does not repeat.
“Many local governments did not think about the affordability of their people,” Subedi said. “And now they should revise the tax rates.”
(Additional reporting by provincial correspondents)
- While the federal government asserts that subnational governments cannot impose taxes beyond their constitution mandate, provincial and local governments are in no mood to listen to Kathmandu
- Private sector has been expressing grievances in recent months about multiple taxation at all three tiers of government