Fiscal Arrangements for the Poorest of the Poor in Federal Nepal

1. Fiscal Arrangements for the Poorest of the Poor in Federal Nepal Uma Shankar Prasad, PhD 14 November 2011

2. Introduction • Poverty is a holistic approach of human deprivation and a reflection of lack of dynamism in society • The importance of poverty reduction has been emphasized in almost all the plans in Nepal directly or indirectly • The article 138 (1) of interim constitution 2007 has declared Nepal to be an inclusive and Federal Democratic Republic state

3. The concept paper and preliminary draft report of the CA Committee on the State Restructuring and Power Sharing has proposed 14 provinces • The name given to Mithila Bhojpura Koch Madhesh and Lumbini Awadh Tharuwan province seems to be motivated by the theory of 'divide and rule' principle • The name of Mithila Bhojpura Koch Madhesh province itself seems to be representative of 4 provinces

4. Similarly Lumbini Awadh Tharuwan province seems to be representative of 3 provinces • The main objective of the Three Year Plan (2010/11 – 2012/13) has been poverty alleviation through inclusive and equitable economic growth by considering the federal states • In this context, this article analyzes the current fiscal situations as well as proposed fiscal arrangements for federal Nepal in relation to poverty alleviation of Madheshi Dalits

5. The poorest of the poor in Nepalese society • Madheshi Dalits are the poorest of the poor among ethnic groups in Nepal • About 80 per cent of the Madheshi Dalitslive below the poverty line • The literacy rate of Musahar was just 7.28 compared to national average of 53.73 in 2001 census • The condition of female Dalits is even worse

6. Source: Nepal Human Development Report 2009, UNDP

12. Expenditure Assignment • Clear constitutional demarcation of expenditure assignments between centre, sub-national and the local governments is necessary for an efficient federal form of government • Most of the constitutions have assigned legislative, not expenditure responsibilities, all over the globe

13. The expenditure responsibilities of sub-national governments include: • Providing quasi-public good like internal security, maintaining law and order • Providing social services like education, health care, family welfare, housing and social security • Development of economic services like agriculture, infrastructure, irrigation, power, public works, forestry, fisheries etc.

14. The CA Committee on Natural Resources, Economic Rights and Revenue Allocation has clearly demarked the expenditure responsibilities between three layers of government (central, state and local) • These expenditure responsibilities will have to be clearly stated in the new constitution to obtain optimal institutional framework for the benefits of economies of scale

15. Revenue Assignment • Each government unit should be able to raise the revenues to finance its expenditures as an important precondition for stable intergovernmental competition in federations • It increases fiscal autonomy, efficiency and accountability

16. Percentage Share of Government Revenue by Development Region, 2009/10

17. The broad and mobile tax bases may be assigned to the central government for stabilization and redistribution reasons • It is evident that most important direct taxes are levied concurrently on both the central and sub-national levels in federations • In most federal system of government, taxes on international trade (custom duties) are levied at the central level

18. Taxes on the consumption of goods and services are levied at both the central and sub-national levels. In Canada, the federal government levies value added tax and provinces levy retail sales taxes • Brazil, India etc leviesVAT at both the central and state levels

19. Nepal collects a substantially higher share of their revenue from custom, VAT and excise duties • The share of custom duties, VAT and excise duties in total tax revenue was 23.5 per cent, 36.7 per cent and 13.1 per cent respectively in 2006/07

20. The CA Committee on Natural Resources, Economic Rights and Revenue Allocation has assigned major sources of revenue custom duty, value added tax (VAT), corporate income tax, and personal income tax which comprise around 80 per cent of total tax revenue are assigned to be collected by the central government • Excise duty has been proposed to be collected concurrently by the central and sub-national government

21. This shows that around 90 per cent of total tax revenue will be under the central government • The sub-national governments have been assigned to collect transport tax, land revenue, property tax and business tax • The service charges, royalty from natural resources and penalties are proposed to be collected concurrently among all three levels of government

22. The entertainment tax, land and building registration charges are assigned to be collected concurrently by sub-national and local governments • However, the two main sources of government tax revenue, i. e., custom duties (export and import duties) by nature have to be collected by the federal government

23. Therefore, VAT and income taxes will have to be collected concurrently on both the central and sub-national levels • Other taxes (excise duties, entertainment tax, hotel tax etc.) will have to be collected by the sub-national governments which will support the expenditure responsibilities of the sub-national governments adequately

24. Fiscal Transfer • Fiscal transfer based on discretionary or negotiations are undesirable • The formula based distribution is regarded as a sound transfer system • Formulas should not be too complex and desired degree of inter-jurisdictional equalization can be built into such a formula

27. The current scenario of intergovernmental transfer in Nepal is guided by the political or electoral theory of public expenditure which explains that trend in public expenditure depends on electoral preferences of politicians • According to this theory, decision-making on public expenditure is dictated by the desire of politicians to promote their self-interest in terms of maximizing their chance of re-election

28. The recently proposed revenue sharing mechanism by the CA Committee on Natural Resources, Economic Rights and Revenue Allocation will also not provide sufficient resources to the sub-national governments • The sub-national as well as local governments will have to depend on the central government to meet their expenditure responsibilities

29. Concluding Remarks • To address the poverty problem of Madheshi Dalits, the fiscal arrangements in federal Nepal will need to be corrected through more equitable distribution of public expenditures • The expenditure responsibilities demarked by the CA Committee on Natural Resources, Economic Rights and Revenue Allocation will have to be clearly stated in the new constitution to obtain optimal institutional framework for the benefits of economies of scale

30. The revenue sharing mechanism proposed by the CA Committee on Natural Resources, Economic Rights and Revenue Allocation will also need to be corrected • VAT and income taxes will have to be collected concurrently on both the central and sub-national levels

31. Other taxes (excise duties, sales tax, entertainment tax, hotel tax etc.) will have to be collected by the sub-national governments which will support the expenditure responsibilities of the sub-national governments adequately • More expenditure will have to be allocated to the Terai region for poverty alleviation programmes in federal Nepal

32. The government will have to launch a special package for the Madheshi Dalits to alleviate their poverty • The government expenditure towards agriculture development, social sector and subsidy to the poor section of the society will have to be increased • Special package for Mushhar to increase their literacy rate

33. Since the NGOs/INGOs and donor community work for marginal, oppressed and vulnerable people and are committed to poverty alleviation of these groups in Nepal, they will have to allocate more fund for the Madheshi Dalits

34. Thank you !