“In one sense, this eases the government's position, as it can provide tax holidays for developing and promoting industries in those districts without affecting overall collections. But, as far as fiscal transfers are concerned, they will put a big strain on the federal coffers, threatening overall economic stability,” he said.
Presenting a paper entitled “Evolving roles and fiscal challenges of federal Nepal”, Dr Sharma projected that the government could effectively rely on state and local governments to collect 18 to 20 percent of the total revenue.
“The remaining fiscal requirements will have to be met by the center,” he said.
Highlighting the cases of various federal countries, the paper says expenditure responsibilities of defense, foreign affairs, international trade, monetary policies, immigration, airlines and railways will rest on the central government.
“Expenditure responsibilities of environment, fiscal policy, natural resources management and utilization, industry and agriculture, police and standard and targeted programs can be assigned to states and local governments,” says the paper.
The paper, citing international practices, notes that customs duty, VAT and other taxes as well as revenue coming from natural resources and mining such as hydropower should go to the central government's coffers.
“A certain portion of the royalty can be given to the locality where such projects exist,” he said, adding that the collections made by the center would then have to be transferred to the states and local bodies considering their expenditure and program needs.
While highlighting the burden of transfer, Dr Sharma also laid emphasis on the need to make state and local governments accountable and maintain financial discipline.
“Provisions to this connection should be incorporated in the constitution itself,” he said, citing the case of Brazil where the constitution limits borrowing and indebtedness for state governments.
Wednesday, May 7, 2008
Fiscal federalism in Nepal?
Lately, I have been wondering how Nepal would be divided when it goes for federal republic, which seems more certain than ever, especially after the Maoists won the CA election last month. Can the classification be based on geography or resources or any other standard? It is a very complex matter because a substantial chunk (almost 85%) of government revenue come from seven districts (Kathmandu, Parsa, Morang, Rupandehi, Jhapa, Sindhupalchok and Lalitpur). Other districts might have a daunting task maintaining fiscal balance.
More on this stuff from Dr. Shankar Sharma, former vice chairman of the National Planning Commission: