A year after local governments were constituted and started functioning, and nearly half a year since provincial and federal governments came into existence, the people’s aspirations that the governments formed as per their mandate will correct years of misrule and set the new course for prosperity, accountability and pro-people governance seem to be fading away. Hope and expectations are slowly turning into frustration because of mishandling of governance in the federal set up, particularly due to mishandling of tax provisions. Taxation has started to arouse fear among people for local governments and provincial governments have started to impose additional taxes on almost everything they see fit. Local governments have been found imposing taxes even on most basic things like goats and cattle, chickens, ducks and eggs. Tax of house and land has been increased exponentially in some municipalities. Bhimseshwar Municipality of Dolakha district, for example, has raised the land tax by as much as 2,500 percent. Bheri Municipality of Jajarkot district has made it mandatory for ironsmiths to register their furnace under tax system for which the owner of the furnace has to pay as much as Rs 1,000. In the past one month, Birgunj Metropolis and Ilam Municipality slapped pollution tax on petroleum products even as the central level has been collecting tax on the same items. Across the country, tax terror has mauled the psyche of Nepali people. And they have started to vent their frustration: The government does not provide us even paracetamol tablets when in need and it is extracting hefty tax from us.

This frustration is soon going to spread far and wide if the federal government does not direct its agencies or find ways to make the provincial and local governments adopt reasonable tax system.  Private sector seems as concerned. The series of taxes the provincial governments have imposed on businesses have made them nervous. Haphazard taxation will discourage private actors from establishing new business ventures. Double taxation, hefty rise in tax and fees, and imposition of new taxes—even those not envisioned by the constitution—have emerged as new challenges. It goes without saying that more revenues than in the past need to be generated to sustain federal system, which is costly and to run which Nepal will need a lot of additional resources.  Provincial and local governments have justified tax on the same ground too. But there is a clear mismatch between what these governments are extracting from taxes and what they are delivering or will deliver. Across the country, the focus of local and provincial governments has been on raising their perks and allowances, purchasing luxury vehicles and going on foreign trips. This has created a strong impression that parties are adding tax burdens to people for their luxury. This tendency will be dangerous not only for political career of leaders but also for the health and future of federal system.   

The government should immediately intervene to make the tax regime at provincial and local levels more accountable and reasonable. Constitution has clearly defined fiscal rights of three levels of governments but some of the powers overlap—which is why local governments and provincial governments may be competing to impose taxes on the same heading. Some bit of clarity in this matter would go a long way in correcting tax anomalies. Besides, the delay in forming National Natural Resources and Fiscal Commission, the constitutional body to manage fiscal issues in federal set up, has complicated the matter. This Commission should be formed immediately to work on resolving taxation issue. As we have maintained in this space before, federalism should not come to mean only taxing the poor. Until the political leaders ensure through action that the taxes the people pay are exclusively meant for their service and wellbeing, people will doubt the intention of the government.