Federal govt should properly orient sub-national govts on their tax collection jurisdiction

The provincial governments, except Province 4, have been imposing different taxes. Many local bodies are also doing the same against the spirit of the constitution. What is your observation on this?

Elected representatives started levying taxes to generate resources as the resources transferred by the federal government are limited. It is natural for the sub-national governments to expand the tax bracket in a dignified manner, but they cannot go against the constitutional provisions and existing laws. However, we have witnessed that sub-national governments have started collecting taxes rampantly due to lack of proper orientation regarding which taxes fall under their jurisdiction and which do not. This has resulted in ill-practices in the tax system and adversely affected the supply management, while consumers have had to bear all the accrued costs. Price of goods produced in one place or imported via one customs point has unnaturally hiked due to rampant taxes levied by the provinces and local bodies. This will create huge price variation in different parts of the country. The environment to do business will be distorted and the cost of development works will be high, with the consumers hit the hardest. This is why these taxes being imposed by the provinces and some local bodies have no moral and legal ground.

Can the federal government control the practice of levying taxes rampantly?

The federal government must control such haphazard taxation based on the provisions of the constitution and the prevailing laws. We have noticed that the federal government has corresponded with the provincial governments to revoke such decisions. I believe the provincial and local governments have imposed taxes haphazardly due to lack of proper orientation on tax system. The federal government should properly orient the sub-national governments on the taxes that fall under the jurisdiction of three layers of government – federal, provincial and local. If not, these problems will recur in the future. Major taxes, like excise and value added tax (VAT) fall under the jurisdiction of federal government, and 30 per cent of these taxes are shared equally by the provinces and local units. There are a few common taxes for the provincial and local governments like land and building registration tax, vehicle tax, entertainment tax and advertisement tax. The local governments can collect land revenue, property tax and corporate franchise tax. The rest of the taxes fall under the jurisdiction of federal government. In the case of royalty from natural resources – hydropower, mountaineering, forest, mines and minerals, water resources, among others – 50 per cent goes to federal government and the remaining 50 per cent should be shared equally by the provincial and local governments. Though the constitution has defined the tax sources for sub-national governments, they do not collect taxes from the locals as they would have to face lots of grievances from them every day. Hence, they have slapped taxes on the goods imported through their territory, which is wrong.

What should the federal government immediately do to control haphazard taxation?

The federal government should first identify where the taxes are being duplicated and notify the sub-national governments. The sub-national government cannot impose taxes that create the burden of double taxation on taxpayers, and the constitution has also prevented them from doing so.

You mentioned that consumers are having to bear the burden of these taxes that are being collected by sub-national governments against the spirit of the constitution? But how come consumers have not raised their voices against it?

Since the sub-national governments started collecting the taxes recently, I think the consumers are yet to grasp of what’s happening. The taxes collected by the sub-national governments are the black spot in the system as a whole, which is why, before it causes further damage, the federal government must be conscious about it and ask the sub-national governments to revoke tax duplication, which will raise the cost of doing business and create unnecessary burden on consumers.

The local governments have increased the fees of service delivery like birth, death and marriage registration; fees for issuance of citizenship certificates, passports; while valuation of land has surged so that land revenue can be increased. What would you like to say on this?

People should ask the local governments about the facilities they have been given for paying such fees. Unfortunately, all the revenue goes towards covering administrative expenses. Some of the services like birth and death registration should be provided for free, as is the practice worldwide. But media reports indicate that some local bodies are charging people for parking their cycles, which is a pity. Such practices are compelling low-income people to pay taxes without obtaining any facilities from the government. The revenue collected has been used only for the limited people who are in power, which will upset the common people once they understand what’s happening.

Taxation is largely believed to be the means for redistribution of resources. Do you see the universal principle of taxation working in Nepal?

Taxation should be based on equity and the principle of progressive taxation is to redistribute funds from high-income group to low-income group. Taxation should be justified for every citizen. I would like to recommend the federal government to properly orient the sub-national governments on their jurisdiction in terms of tax collection.

The federal budget has also set a high revenue collection target of Rs 945.13 billion (including the revenue shared with the sub-national governments) in current fiscal 2018-19, and federal government’s target is Rs 831.31 billion. Do you think the government will meet the revenue collection target?

It is an ambitious target because the government had a tough time meeting the target of Rs 730 billion in the previous fiscal. We are among the top in South Asia in terms of tax to GDP (gross domestic product) ratio and nearing saturation. Still, there are chances to expand tax volume if we expand tax net and initiate massive administrative reforms to minimise the cost of tax collection. On the other hand, there are possibilities to initiate reforms in major taxes. VAT is not cascading to the transaction level and billing enforcement is weak. Persuading more individuals and firms to come into the income tax bracket is a must. Reforms in the customs valuation process could bring tangible changes in customs revenue. Similarly, areas of non-tax revenue should be revisited to achieve desired revenue growth.

The federal government has ignored the principle of expanding tax net and raised the tax rates on internet and telecommunications. It has also revised the income tax slab and termed this as ‘progressive’ and ‘scientific’ taxation. Do you agree?

This is neither progressive nor scientific. Telecommunication services should be easily accessible for all and the government has targeted to expand internet penetration and expand digital services. However, the finance minister has slapped more tax on internet and telecommunication services. Increasing tax rate will make Nepal a high-cost economy. Similarly, the finance minister has introduced three slabs in income tax, but not revised the threshold in an appropriate manner. For example, if a person used to work in my office for 12 days a month, because of the new income tax rules, he would have to pay 36 per cent of his income. So, he will work for only nine days a month so that the salary paid to him will not exceed the upper threshold of the income tax. It would have been better if the finance minister had also revised the threshold eyeing all these consequences. Increase in tax rate is illogical and an economy like ours should keep the tax rate at rational level to attract investment. This is why the government should always look into expanding the tax bracket.