The Constitution has mandated local governments to collect different taxes under federal structure of governance, but the Constitution has also made them accountable to perform service delivery. There is a delicate balance between two. Tax-performance continuity demands increment in service delivery, both in terms of quantity and quality if taxes are to be increased.
Given our past experience, the government should put more emphasis on performance of public sector in terms of providing responsive, effective and accountable public services in order to justify the amount of taxes collected from citizen, even at the same level.
Now the issue has been surfaced because the provincial and local governments have been imposing new taxes haphazardly. There are duplications in taxes in different tiers of government. This is against the constitutional provisions and existing laws.
Citizens have shown dissatisfaction due to the increase in taxes. Local tax has also been increased on registration of vital statistics, citizenship recommendation, settlement, education, drinking water and waste. Citizens have expected improvements in service delivery under federalism, but there has been a burden in taxation without improvement in service delivery.
A couple of months ago, the Ministry of Federal Affairs and General Administration had published a guideline on taxation and circulated it among local governments highlighting their revenue and tax collection rights.
What went wrong? The federal government has not clarified constitutional provisions regarding tax collection at sub-national level. The Natural Resources and Fiscal Commission has not been effective, and the Finance Committee of the Parliament is now looking into the over-taxation issue.
Obviously, there is lack of proper orientation regarding which taxes fall under provincial and local governments’ jurisdiction. But the over-taxation is not just a technical issue. It’s a political issue. This situation has come because the political leadership is not clear about the distinction between the national issues and needs, and provincial and local issues and needs, and the inter-governmental financial distribution and management.
How long citizens live under ad-hockism in the name of new experiments of federalism in the country? Kathmandu bureaucracy and the newly elected representatives must improve understanding about their comparative roles, responsibility and accountability.
Revenue collection alone should not be the target of the government. As the tax-performance continuity depends on the performance of public sector, and demonstrated ability of the citizens and their willingness to pay for performance improvements, there is mutual accountability.
Just a reminder that the governments, in the past and present, have not able to use more than 50% per cent of the capital budget in any fiscal year. This has exposed the state’s low fund absorption capacity, which should also remain as a priority while we discuss tax-performance continuity.
Federalism is a costly governance mechanism. But the cost has been increased without equitable benefits to the people. In the long-run, if the federalism is to survive, there must be economy of scale. This is a serious issue and a root cause of over-taxation problem.
Under the current legal provisions, political leadership should look into opportunities, through scientific study, to merge and reduce local government units from 753 to 357 with an average of 80,000 people under one rural municipality. Federalism can only succeed with economy of scale and improvement in public service delivery, along with investment friendly policies to attract new business opportunities.