Business in federalism

Published On: April 5, 2018 01:00 AM NPT By: Purushottam Ojha

Provincial and local governments should have a clear roadmap to advance and realize their prosperity agenda

Nepal is institutionalizing federal system with successful completion of electoral process from the rural municipality to provinces and central legislature and formation of majority governments in all three levels. It is widely accepted that with the two left parties together and in process of unification, this government bears strength and capacity to lead the country to higher growth trajectory and path of prosperity. Prime Minister K P Sharma Oli and Chief Ministers of all provinces seem enthusiastic to drive the prosperity agenda by enhancing investment in infrastructures, agriculture and manufacturing, tourism and development of other basic services like health and education. Pledges have been made to create job opportunities within the country, so that the youths do not have to leave the country for decent jobs and livable income.

It is obvious that it requires massive investment for the government to fulfill election promises. The election manifesto enlist plethora of initiatives and promises for big investment projects such as hydropower, roadways, railways, airports, industrial zones, and health and education facilities.  Both public and private investment should be mobilized to generate resources. Hence, a robust and bold strategic and policy framework is needed for attracting and retaining the private investment both from domestic and foreign fronts.

Are we ready?

The moot question is - are we ready for that? Are we in a position to attract a large volume of foreign investment to meet the resources gap? The local governments are still mired in establishing and managing workplace and creating legislative framework to take up their tasks. Instead, some local governments have gone in reckless move of imposing taxes, fee and royalty on institutions and projects within their geographical jurisdiction. One rural municipality in Dolakha district, for example, demanded annual royalty of one million rupees from the hydropower project run in the district. Others have gone for raising property tax, tourism tax, local resources utilization tax and so on. These arbitrary decisions impact overall investment climate in the country, provinces and municipalities. The constitutional provisions regarding tax imposition also seem confusing. 

Taxes like tourism fee, entertainment tax, vehicle tax, and royalty are included under shared jurisdiction of provincial and local governments. In the absence of proper unbundling of the common taxes and fee, each level of government is interpreting the constitutional provisions the way it suits them much to the annoyance of businesses and enterprises. 

In principle, in a federal structure, central government is supposed to focus on policy issues—framing policy and making electoral democracy participatory and creating conducive business environment by promoting rule of law, controlling corruption, cartel and syndicates and developing basic infrastructures. The constitution has delineated composite function and scope of each level of government which needs to be resurfaced and elaborated during implementation. 

Success of decentralized structure of government depends on key factors like transfer of financial resources, functionaries, good governance, maintenance of law and order and a fair degree of policy stability.  

Improving the business climate also depends on country’s performance in some internationally accepted indicators. Doing business indicators is one of them. Nepal stands at 105th position out of 190 countries in the DB report-2018 of World Bank. Similarly, the country has scored 88th position out of 137 countries in the global competitiveness index-2017 and 124th position out of 160 countries in the logistics performance index-2016. This shows we are still to work to enhance business enabling situations in the country. 

Nepal took the lead in South Asia by integrating tax system with introduction of Value Added Tax (VAT) in 1998. Other countries are following suit.  India has recently introduced goods and service tax (GST) that replaces multiple taxes imposed by the central and provincial governments. In the changed context, the collection of taxes by the provincial and local governments not only increases incidence of tax burden but also adds complexities in the process by creating multiple collection centers.  This issue needs to be addressed urgently. 

Get pragmatic

Moving toward a federated system from the unitary governance need careful planning and understanding of nuances of federalism. The devolution of tasks at the various level of government needs to be supported by fiscal decentralization and a judicious system of transferring resources to the grassroots level. Tax collection system needs to be simplified and overlapping functions of government need to be addressed in order to avoid confusion and ambiguity. 

Provincial and local governments should have a clear road map to advance and realize their prosperity agenda. The National Planning Commission has greater role to play than ever in achieving goal of ending poverty and achieving common prosperity by helping the governments to formulate pragmatic policy, plan and programs. The focus should be on improving business climate so that more private investment is funneled in big projects and industrial ventures, which in turn help to create jobs and build resilient economy. 

The author is former Secretary of Government of Nepal. Views are personal

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