Varied debates and discussions on the model of the Federal Democratic Republic of Nepal are going on in the political sphere. The discussions have mainly concentrated on how the rights of all Nepali citizens can be ensured on the issues of identity, rights and feeling of ownership in New Nepal. Nepal is heading on a new journey where the vision is building a prosperous nation. This is where fiscal federalism comes into the picture. So far, the discussions have been being limited to the concept of central, provincial and local government structures. The subject of fiscal federalism in federal Nepal has not yet been dealt with clearly.
Fiscal federalism generally refers to the expenditure system, revenue collection, fiscal transfer and debt management of the governments at various levels. They are the four major pillars of fiscal federalism, and effective management of these pillars can make the country economically prosperous. As an appropriate model of fiscal federalism can make the regional and local governments autonomous and affluent, it is essential to carry out the task of overall federalism and fiscal federalism simultaneously.
The main problem of fiscal federalism is how to generate resources. If we examine the current trend of revenue generation, we see that it is concentrated in only four places: Kathmandu, Parsa, Morang and Rupandehi. Kathmandu alone accounts for 48 percent of the total revenue. Revenue allocation is a base of financial balance at different levels of the government. Based on the resources and their possible impact, tax generation and distribution can be allocated among the central, regional and local governments.
International practices also show that the central government can collect revenues like customs duty, income tax, value added tax and passport fees as they have significance at the central level. Likewise, excise duty, salary and energy tax can be generated by both regional and local governments. Local governments should be authorised to collect property tax, service charge and entertainment, vehicle and advertisement taxes, among others.
At present, revenue is collected by the tender system too. In some cases, the local body itself collects taxes. It is essential to have a clear-cut working method and public awareness about revenue collection. Service delivery and revenue collection should be interlinked. For that, local revenue consultant committees should be effective. A public-private partnership approach can also be used to generate revenue. There is no interlink between central and local revenue at present.
At present, VDC grants, for instance, are provided based on the particular VDC’s population, area and cost index. Grants for equity are also necessary as formula-based grants might not always work. To avoid misuse of such grants, an effective monitoring and evaluation mechanism is a must.
Foreign aid is also one of the means to fill the gap in financial resources in developing countries. Such support can be given as a conditional grant or as a protected loan. In some cases, it is applied to control local bodies by the centre as well as to maintain balanced development through central subsidies. Experts don’t recommend foreign aid that promotes the level of dependency. In sum, a separate foreign aid policy is required to clarify all these provisions.
In a federal structure, the local government might face a shortage of resources as major sources of revenue such as income tax, value added tax and excise duty are collected by the federal government. The constitution needs to mention the possible areas of tax generation at the local level. In order to formulate an action plan and act regarding the allocation of benefits and right to resources, it is necessary to form an independent natural resources commission at the national level. If the federal provinces are still short of cash, the possibility of transferring resources and revenue from places which generate a high amount of revenue can explored. This can be addressed by an appropriate transfer method and this is where the role of a financial commission comes forth.
In order to avoid possible controversies, the roles and responsibilities should be clarified among the local, provincial and central governments. After the allocation of responsibility, local governments should be made accountable for the management of their expenditure. It also helps to reduce the burden on the central government. Provincial and local governments also have the right to borrow in order to fulfil their needs, but the right should be limited to curb the possibility of misuse.
Since it is an issue directly linked with the livelihoods of ordinary people, more discussions and debates need to be conducted at all levels to find a concrete solution.
Considering the possibility of dispute regarding revenue generation and allocation, the governments at various levels should be aware of their working areas. Institutional provisions should also be strong to solve such disputes. The regional government can solve disputes at the local level while the central government is responsible for dealing with issues between provinces. An autonomous financial commission should be formed to look after disputes between the central and local governments.
The number and levels of governments, viability of resources and their distribution mechanism are the most crucial issues while outlining fiscal federalism. These things should be incorporated in the constitution. Unlimited rights can give rise to problems of management of resources. Further, there is always the risk of misuse of resources in the absence of accountability. The size of the government should also be appropriate bearing in mind the limited resources.
The operational cost shouldn’t be increased as resources might not have reached the people’s level due to the hefty and costly structure of the state. It is also necessary to ensure access to resources for backward and weaker sections of society. The interpretation of autonomy, financial discipline and skill, encouragement, along with service exit and compensation are the major challenges of fiscal federalism.
By Maina Dhital