Fiscal Arrangements for the Poorest of the Poor in Federal Nepal

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Fiscal Arrangements for the Poorest of the Poor
in Federal Nepal

• Uma Shankar Prasad, PhD
• 14 November 2011

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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

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• 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

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• 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

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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 Dalits live
  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

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Source Nepal Human Development Report 2009, UNDP
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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

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• 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.

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• 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

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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

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

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• 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 levies VAT at both the central
  and state levels

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• 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

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• 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

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• 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

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• 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

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• 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

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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

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• 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

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• 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

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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

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• 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

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• 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

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• 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

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• 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

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• Thank you !