Fiscal Federalism in Nepal

By-
Sagar Baral
castro.sagar1@gmail.
com
 Conceptual Understanding of Fiscal Federalism
The American economist Richard Musgrave first proposed in 1959 that the federal
government system have the ability to solve the problem of unequal distribution of
wealth and resources among provincial or local governments. He propounded the
principle of fiscal federalism which views that "the country's resources should be given
by the federal governments to the lower-level governments through legal arrangements",
who can reach to the grass root people.
Pillars of Fiscal Federalism
Fiscal Federalism in Nepal

Inter-governmental Fiscal Arrangement Act,

2074
NNRFC
Local Government Operation Act, 2074

National Natural Resources and Fiscal Co-ordinating

Commission Act, 2074
Agencies
Public Debt Management Bill, 2076
Expenditure Assignment
Revenue Assignment
Types Gov Rights Distribution
Motor Vehicle Tax State Rate determination/Collection Initially, 100% goes to the state
divisible fund and from it SCF 60 % and
Local -
LDF 40%
In case of tanga, rickshaw, auto
rickshaw etc. local level will
determine the tax rate and collect
tax accordingly.
House and Land State Rate determination Initially, whole amount is deposited in
Registration Fee the local divisible fund. Then, 40% SCF
Local Collection
60% LCF
Entertainment Tax State Rate determination Same

Local Collection

Advertisement Tax State - Same

Local Rate determination/Collection

Business tax State - 100 % to LCF

Local Rate determination/Collection

Agriculture Income State Rate determination/Collection 100% to the SCF

Tax Local -

Tourism fee - Trekking fee determined and Respective Consolidated fund

collected by Province

- Park, zoo, historical and

archaeological sites, museum like
heritage fee is determined by local
government.
Revenue /Royalty sharing
Revenue and Royalty Distribution Deposition Initial
sharing Deposition

Excise duty 70% to the FG FCF 100% to the

FDF
15% to the PG SDF

15% to the LG LDF

VAT 70% to the FG FCF 100% to the

FDF
15% to the PG SDF

15% to the LG LDF

Mountaineering, 50% to FG FCF 100 % to the

electricity forest, FDF
25% to PG Concerned
mines and minerals,
SCF
water and other 25% to LG
natural resources Concerned
LCF
VAT and Exercise Duty Sharing Mountain Royalty Sharing
Basis Sub-indicator % Indicator % Basis Sub-indicator Indicator %
1 Population 60 %

• Total population 70
• Dependent population
30 Geographical location 40
2 Geographical area 15
• LG with mountains 60
3 HDI 5
• LG adjoining to LG with mountains
4 Expenditure needs 5 40
5 Efforts made for revenue collection 3
6 Infrastructure Development 10
LG with base camp 10
• Road access/coverage 60
Area of affected area 25
• Electricity facilities/access 10
• LG with mountains 60

• Information technology access 10 • LG adjoining to LG with mountains

40

• Drinking water access 10

Population of the affected area 25

• Cleanliness (Availability of toilet) 10

7 Special condition 5 • LG with mountains 60

• LG adjoining to LG with mountains
40
• Differently abled population 20
• Socio-economic inequality
80
Total 100
Total 100
Grant Transfer
As per the Article 60, four types of Grants to be transferred:
Sub-national borrowing
• Constitutionally, all the tiers of the government can borrow the loan. (Arts. 115, 203, 228(1).)
• Constitutional mandate to NNRFC has been given for recommending "ceiling of internal loans that the
Federal, State and Local Governments can borrow."
• Types of borrowing:
✓Internal Loan:
Government Internal Loan
NG Maximum 5.5% of GDP
Province 12% of estimated total revenue sharing form the NG and province OSR
Local 12% of estimated total revenue sharing form the NG and province (Motor-vehicle tax) and local

✓Loan from NG: OSR

✓ Foreign Loan: Federal Government on behalf of itself or for province and state can take foreign loan up
to 12 arba. PDMB, 2076
• Sub-national borrowing cannot be made to cover administrative cost. IGFAA, 2074 s. 23(4)
• PDMO shall carry out the function of the collection of internal loan for provincial and local government
after consent has been given by the NG. For example, issue the debentures on behalf of the provincial
government. ( PDMB, 2076)
 FISCAL FEDERALISM ISSUES

1. Budget Discipline
▸ In FY 2075/076, Changunarayan Municipality collected 13 thousand entertainment but
they reported 0 collection of entertainment tax. Such approach of non-sharing of
collected tax going against the law is representation of fiscal indiscipline and LG
anarchism against co-ordination, co-existence and co-operation. Furthermore, it may
result in lack of developmental fund at the province level causing effects to functional and
effective governance.
▸ Non-estimation of tax and non-tax revenue in budget: Non-estimation signifies the
violation of basic principles of budget making process.
▸ Kathmandu Metropolitan Municipality revenue deposit in the fixed deposit account of
Nabil Bank.

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2. Equitable Goverance
BP contributes the lion’s share of the revenue,
followed by Provinces 1, 2 and Lumbini Province.
GP, Karnali Province and Far-western Province
would not be economically viable even if the
revenue they generated were used solely within
their boundaries. Inference is drawn that Karnali
Province and Far-western Province are the poorest
among the seven
3. Grant transfer
▸ Unfair grant distribution: For example, Namkha rural municipality of Humla has an area of
2,420 sq km. It is about three times the total area of the three districts of the Kathmandu Valley.
Namkha has a population of 3,900. In the FY 2077/78, it has received financial equalization grant
of Rs 6 crore 72 lakhs. Jagadulla Municipality of Dolpa has an area of 83 sq km and a
population of 2,100. This municipality has also received financial equalization grant of Rs.
6 crore 72 lakh. Namkha has more area and population than Jagadulla but the grant is
equal.
▸ Similarly, in the FY 2076/77, Karnali got the highest amount of Rs 9 arba 85 crore and Province 2
got the lowest amount of 7 arba 9 crore as fiscal equalization grant. The distribution of grants is
not fair if we look at poverty level. Province 2, which is the poorest, has received the lowest grant
per capita.
▸ Local governments are also being established as "implementing hands" of many programs of
federal and state levels through the conditional grant.
▸
3. Double Taxation
CFUG is a body corporate." The power to levy corporate
tax lies within federal government. Therefore, tax is laid
on its income on the basis of income tax act, 2058.
Similarly, as per LGOA, 2074 "CFUG should contribute
10 percent of their product sales to the consolidated fund
of the local government." Furthermore, extra 13 %
VAT is added to the sale of timber products for
commercial purposes. In similar vein, "provinces has
been also levying taxes on forest products sold from
CFUG." Bagmati Province and Province 1 have
enforced 10 % and 15 % taxes on the income of
community forests.

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4. Beggar-thy-neighbor policy
Chandragiri Municipality has imposed the taxation on the movement of scrap using its roads. It is
against the CON. As a result, writ petitioned was filed in the SC demanding the abrogation of such
taxation. The court issued interim order prohibiting the imposition of such tax. However, order
was not adhered. (Article 236: Inter-state trade )
5. Government effectiveness
FY 2076/077 ( in-crore)

Province OSR Estimated % Gap

Gandaki 241 328 74 86

Bagmati 1283 1189 108 94

▸ Till now, 0 Agricultural Tax and 0 Tourism fee is collected by both provincial government.
▸ Entertainment and advertisement tax is collected very negligible by Rural Municipality
▸ O parking fee collection by some rural municipality. Why ?
6. Fiscal autonomy

FY 2076/77 ( in lakh ) FY 2076/77 (in lakh)

Gandaki Bagmati PMM CM MRM
OSR 24,109 1,28,351 OSR 15,219 1,895 1,433
Allocated expenditure 3,17,748 4,73,079 Allocated expenditure 57,179 17,684 5,803
% Contribution in 7.59 27.13 % Contribution in allocated 26.62 10.72 24.69

allocated expenditure expenditure

7. Capital and Recurrent expenditure
FY 2076/2077 FY 2076/77
Province Expenditure %
%
Government Expenditure
Gandaki Recurrent 52.31

PMM Recurrent 55
Capital 70.47
Capital 32
CM Recurrent 83
Bagmati Recurrent 60.94
Capital 52
MRM Recurrent 74
Capital 57.70
Capital 52
 9. Problem in royalty sharing

Gov. Mountaineering Electricity Forest Mines and Water and other

Mineral Natural
resources
FY 075/76 076/77 075/7 076/77 075/76 076/77 075/7 076/77 075/76 076/7
6 6 7
PMM 162 37 31,97 39,88, 40 57 0 0 0 0
,
CM 0 0 0 0 0 1,05 0 0 0 0
MRM 63 1,15, 9,95, 17,57 26 37 0 0 0 0
 10. Data science
▸ NNRFC is using the outdated and obsolete data. HDI indicator published in 2014 by
the NPC has been used. The 2014 data cannot reveal the true reality of provincial
and local government. Ultimately, it may cause the higher fiscal transfer in the area
with the significant improvement in HDI in course of time.
▸ In Myanmar, there is township development index which used for the government
fiscal transfer which is updated annually.

▸ NNRFC capability to perform its constitutional mandate will depend on the use of
quality data and evidence-basis decision making. Internationally, governments are
using the evidence-based policymaking and data science to solve policy problem.
Data science helps to understand and predict trends to improve public policy.
11. Fulfilled Posts and Total Number of Posts

Government Fulfilled Total number % Gap

posts of posts Fulfilled
Gandaki 2138 2885 74 % 747
Bagmati 3764 4517 83 % 753

Government Fulfilled Total % Gap

posts number of Fulfilled
posts
PMM 579 754 77 175
CM 209 279 75 70
MRM 45 67 67 22
 Conclusion

• Giving higher revenue rights to sub-national governments is like giving

whiskey and car keys to teenagers. –Anwar Shah
• In some problematic aspects, Nepalese fiscal federalism modality needs
reengineering for establishment of good governance. However, from
other side of coin, in short duration of time, it is unfair to judge the
Nepalese fiscal federalism does not lead to good governance.
Thank You………..