Conflict on concurrent powers on revenue generation might remain. Government should harmonize taxes in different tiers and across horizontal units
Of late, taxation in Nepal has become a taxing issue. Tax perhaps holds a prime place in the list of public criticisms against the government, including federal system. In this context, this article seeks to explore myths and misconceptions, shortfalls on the part of tax-imposing authorities, and discuss some remedial considerations about taxation in federal Nepal.
The first myth about tax as a tool of revenue generation is related to understanding the rationale of tax itself and modus of generating it. It appears that there is a problem in our understanding when we talk of levying tax. This leads us to refer to its etymological meaning in Nepali, Kar. The Nepali counterpart of tax connotes some sort of ‘pressure’ to do something. In this light, the word “Kar” gives the innate meaning of imposition. The very essence of it has transmigrated in the minds of rulers and bureaucrats alike that tax is fundamentally a government’s legal discretion to be imposed upon citizenry, not a subject of voluntary contribution of citizens or any act done out of persuasion. Nor do the authorities seem to have internalized that their salaries are based on such taxes. They cannot convey to the public that tax is imposable for the service the government provides or plans to. A recent government study has pointed out many anomalies in relation to tax imposition.
Another misconception is about the moral and legal authority of levying tax. It appears that local governments have overstated their powers on both legal and moral grounds. News abound that many local governments have imposed taxes on many areas which neither constitution nor any laws allow for.
The tax system should command a general moral sanction too. And for that, there needs to exist a substantive relation between intention and service delivery of the government and the tax payers. In many instances, none exist, hence creating a discretionary system leading to a sort of tax anarchy. In fact, tax system must uphold aspirations of people. It must convey that it reflects the country’s political objective. It has great associational value with practical life of a taxpayer. It is essentially linked with reciprocity of gains in return of taxpayers’ contribution. Going further, tax reflects cordiality between the state and its citizens. In this regard, a great Indian poet Kalidas has a very fitting metaphorical proposition made before a King in Raghubansha, wherein, he says: “It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold.” This is the point missing in ours.
Provincial and local governments seem to have ignored these tenets in their taxation policies. We need to remove the misconceptions whatsoever and rise above the conventional understanding of taxation. The reported decision of Gulariya Municipality of Bardiya to reduce tax rates is commendable step toward this direction.
Getting it wrong
Constitution of Nepal has structured Nepal into federal, provincial and local levels. It provides that Federation, State and Local level may impose taxes on matters falling within their respective jurisdiction and collect revenue from these sources. In a way it gives a say to the people at the grassroots in mobilizing funds for fulfilling their pressing needs. Further, in case of disbalance of collection of revenue and its demand Federal Act comes to rescue. But clarity about revenue generation and distribution system is something that is yet to be worked out.
Very few people know about shared jurisdiction whereby provinces keep 60 percent of the collected taxes and transfer 40 percent to the local divisible fund. Likewise, local levels also keep 60 percent and transfer the rest to the province consolidated fund. The funds are divided among the different units in accordance with the formula set by National Natural Resources and Fiscal Commission. Drawing from the conversations with provincial lawmakers, they seem to harbor an unknown and uninformed worry about provinces’ economic sustainability. It is perhaps because some municipalities and rural municipalities were found imposing vehicle and entertainment taxes.
Some provinces (Karnali, Province 1 and 3) went further by imposing district export tax on forest, agriculture and mineral goods, by violating Article 236 of the constitution which guarantees unhindered movement of goods and services across provincial or local boundaries, thereby undermining the idea of cooperation, an important facet of Nepali federalism.
Provinces have brought highly ambitious budget, setting unrealistic targets of revenue generation, causing inevitable deficit and pressure to achieve the target. There was a rush to catch up with the constitutional deadline of introducing budget at the federal level. This rush was seen to take chaotic turn at the provinces because there were no relevant human resources in budgetary field. Nor did the experience or planning mechanisms exist at provincial level planning. Poorly set targets of revenue in provinces and in local levels ultimately had no other option but to be met by waging tax offensive. Neither were any alternatives thought about nor were plans for incentives to tax payers worked conscientiously. This provided fuel of thought to the skeptic mass who believed that the federal polity is unaffordable and public will have to take additional financial burden to make it operational.
The time to embark on the journey to prosperity and fulfilling aspiration of Nepali people had never been more conducive. But the most disappointing fact remains that there is little improvement in service delivery. The new constitution guaranteed better education, healthy life and respectable employment to the people. It is therefore that Nepali people collectively chose pro-development and stable government by giving resounding two-third majority to the ruling party. But those aspirations are yet to be addressed.
A recent survey of National Vigilance Centre shows a dismal picture of governance, wherein, 61 percent of service seeking public believes that it is impossible to get a job done without bribing. This has resulted in erosion of public trust in the state machineries which people helped create with huge financial liabilities.
Though there is no empirical evidence on correlation between economic growth and tax reductions, it is evident that inefficiency in government spending of the resources in its hand has wide implications on economic growth.
Budget expenditure of the government is always dismal. At a time when the government is itself not able to spend the funds in its coffers, it has set ambitious targets to collect more revenue in pursuit of more funds. The piling of funds in the national treasury at the expense of expendable funds in the hands of personal tax and corporate tax payers will sap the funds from the economy. This may pull the economy to a downward spiral.
As a result of all these anomalies, regressive elements have got convincing agenda to their benefit in fuelling the distrust in federal system on the whole. It seems that a neutral but critical mass is increasingly prone to subscribe the anti-federal sentiments, calling federalism an extremely expensive system beyond Nepal’s fiscal capacity. If the governance situation does not improve, this mass may present irrefutable figures of facts one day, challenging the rationale of federalism and high-end taxes. This may result in a civil mass defiance to tax or evasion may escalate, putting governments into a greater difficulty.
Given the constitutional provisions, some level of conflict and confusion about concurrent powers on revenue generation might remain but the government should work to harmonize taxes in different tiers and across horizontal units. Increasing the tax base instead of increasing the tax rate would be more effective measure for preventing tax avoidance. It should encourage the sub-national governments to make their tax rates more realistic. Massive efforts on tax literacy may be of help, particularly to induct the authorities on the limitations of the concurrent jurisdictions and the potential duplications thereof.
This apart, tax payments should be essentially linked to incentives to the taxpayers’ lives. Persuasive approach should be encouraged while also ensuring punitive measures. The best way to persuade people to pay tax is by showing by example that service delivery has markedly improved.
The authors are corporate lawyers. Views are personal