Pillars of Fiscal Federalism and the Constitution of Nepal
Fiscal federalism is the state in which the institutional capacity of the federal units is developed and the responsibilities of work, the right to collect revenue, the intergovernmental financial transfer and the right to borrow are effectively implemented. The Constitution of Nepal envisages a three-level system of government, which is the federal, state and local levels, and the governments of all three levels are implementing financial federalism. The Constitution of Nepal has demarcated the power of the state, including the responsibilities of the three levels of government and the right to revenue.
Article 232 of the Constitution of Nepal stipulates that the relationship between the union, state and local levels shall be based on the principles of cooperation, coexistence and coordination. There is a legislative executive and some judicial interrelation between the union, state and local levels. The Constitution of Nepal has constitutionally divided the three levels of power and authority and allocated, mobilized and managed financial resources.
Arrangements made by the Constitution of Nepal for the implementation of financial federalism - Provisions have been made in the constitution to provide necessary resources to fulfill the responsibilities of different levels of government. In order to fulfill the responsibilities of union, state and local level, the constitution of Nepal and other prevailing laws have provided as follows.
• In Article 57 of the Constitution of Nepal, the right of the Union in the matters mentioned in Schedule-5 of the Constitution, the rights of the provinces in the matters mentioned in Schedule-6, the common rights of the Union and the provinces in the matters mentioned in Schedule-7, the rights of the local level in the matters mentioned in Schedule-8 and the Union, Province And it has arranged that the common rights of the local level will be in the matters mentioned in Schedule-9.
• In Article 59 of the Constitution, the union, state and local levels have the right to enact laws, make annual budgets, make decisions, prepare policies and plans and implement them in matters related to economic rights within their authority.
• Article 60 of the Constitution provides that the union, state and local levels can levy taxes on matters within their economic jurisdiction and collect revenue from those sources.
• The federal government has arranged to give four types of grants to state governments and local levels and state governments to local levels under intergovernmental financial transfer, namely financial equalization grants, conditional grants, supplementary grants and special grants.
• Provisions have been made to distribute revenue between the union, state and local levels in a balanced and transparent manner.
• Part 10 of the Constitution of Nepal provides for the federal financial system, part 16 for the provincial financial system and part 19 for the local financial system, and provides for the receipt, expenditure, management and operation of the reserve fund.
• The National Natural Resources and Finance Commission is provided for in Part 26 of the Constitution to make recommendations regarding financial grants and revenue sharing between the Union, State and local levels.
• The government at all three levels has arranged that the final audit of the income and expenditure accounting done in accordance with the constitution and laws shall be done by the office of the auditor general in part 22 of the constitution.
• Local Government Management Act, 2074 Intergovernmental Finance Management Act, 2074 National Natural Resources and Finance Commission Act, 2074 Economic Procedures and Financial Responsibility Act, 2076 Economic Procedures and Financial Responsibility Regulations, 2077 Public Procurement Act, 2063 and Public Procurement Regulations, 2064 as well as various related rules and laws have been arranged.
The pillars of financial federalism:- The pillars required for the effective implementation of financial federalism are as follows.
a. Job Responsibilities:- For the successful implementation of financial federalism, the necessary resources, infrastructure and manpower must be arranged for which work will be done by the government at which level. The Constitution of Nepal provides that the basic structure of the Federal Democratic Republic of Nepal will have three tiers of government, the Union, State and Local levels, and that all three tiers can exercise state power in accordance with the Constitution and laws. Federal units can collect, mobilize and manage financial resources within their jurisdiction. It has been arranged that those levels can make laws and implement them on the matters mentioned in the schedule of the constitution.
The constitution itself has provided legislative, executive and judicial powers to transform the federal system of government into a form of government close to the people. It has been arranged that all the three levels can independently make and implement laws based on cooperation, co-existence and coordination in accordance with the principles of federalism, and related federal units can make and implement laws together regarding the list of common rights.
b. Right of revenue:- Revenue collection, mobilization, management and distribution are arranged for the effective implementation of financial federalism. Union, state and local levels can impose taxes on matters within their economic jurisdiction and collect revenue from those sources in accordance with the law, but the arrangements for taxation and revenue collection on matters within common jurisdiction and matters not included in the list of any level are determined by the Government of Nepal.
The distribution of revenue between the union, state and local levels should be done in a balanced and transparent manner. Services to be delivered to the people by the state and local levels during revenue distribution, revenue potential, ability to raise revenue, aIssues such as regional imbalance, poverty alleviation and economic inequality should be given attention.
Federal units are independent and autonomous to collect revenue by enacting laws within the jurisdiction mentioned in the Schedule of the Constitution of Nepal. When making a law on the list of common rights, it is necessary to make a law through cooperation between the relevant units. Within the scope of the constitution, revenue related laws should be created, tax rates and scope should be determined, revenue mobilization capacity should be developed and revenue should be properly managed. For the implementation of financial federalism, sources of revenue should be searched, collected and mobilized.
The Inter-Governmental Finance Management Act, 2074 has provided that the federal, state and local levels can collect tax and non-tax revenue for matters within their respective jurisdictions. The federal government collects tax revenues such as customs duties, excise duties, value added tax, corporate income tax, personal income tax, payroll tax and non-tax revenues such as passport fees, visa fees, tourism fees, service fees, gambling, lottery, casino and fines. They can collect according to the law and other prevailing laws.
The state government can collect tax revenue such as real estate registration fee, vehicle tax, entertainment tax, advertising tax, tax on agricultural income and non-tax revenue such as tourism fee, service fee, custom fines and fines in accordance with state laws and other applicable laws. .
The local level has tax revenue such as property tax, house restoration tax, real estate registration fee, vehicle tax, property tax, entertainment tax, advertising tax, business tax and non-tax revenue such as service fee, tourism fee, fines and fines. They can collect according to the law and other prevailing laws.
Royalties such as mountain climbing, electricity, forestry, mining and minerals, water and other natural resources received by the Government of Nepal are deposited in the Federal Dividend Fund, and the royalties collected in that fund are distributed to the Government of Nepal at the rate of fifty percent and to the respective provinces and local levels at the rate of twenty-five percent. Value added tax and excise duties raised on domestic production are deposited in the federal separate account and seventy percent of the amount deposited in the federal separate account is distributed to the government of Nepal, fifteen percent to the respective provinces and fifteen percent to the respective local levels.
The revenue collected by the state and local levels is collected in the state separate fund and local separate fund respectively and distributed to the state and local levels according to the basis and structure determined by the National Natural Resources and Finance Commission.
c. Inter-Governmental Financial Transfer:- The financial transfer made by one level of government to another level of government is called intergovernmental financial transfer in simple sense.
Intergovernmental financial transfers include financial transfers made by the federal government to state governments and local levels, and by state governments to their subordinate local levels. In order to reduce the gap between the functional responsibilities of different levels of government according to the constitution and laws and the right of revenue collected by the government of those levels, the constitution provides for intergovernmental financial transfer. Provinces and local levels are provided with four grants namely financial equalization, conditional grant, supplementary grant, and special grant. A brief discussion of those grants is as follows.
A. Financial Equalization Grant:- The financial transfer provided by one level government with equal recognition based on the expenditure needs and revenue capacity of the other level government is called equalization grant. In countries with a federal system of government, since the authority to mobilize revenue is less in proportion to the expenditure responsibility at the lower level, financial equalization grants are provided to minimize the financial gap between the expenditure needs and revenue capacity of the provincial and local levels.
The Government of Nepal provides equalization grants to the provinces and local levels on the recommendation of the National Natural Resources and Finance Commission based on the expenditure needs and revenue capacity of the provinces and local levels. Similarly, the province provides financial equalization subsidy to the subsidy received from the Government of Nepal and the revenue raised from its own sources based on the expenditure needs and revenue capacity of the local level within the province in accordance with the provincial law.
At present, the Government of Nepal sends the total financial equalization subsidy amount based on the minimum subsidy, formula-based subsidy (human development index, economic and social inequality, state of infrastructure development, revenue situation, expenditure needs and ability to raise revenue) and performance-based subsidy. Financial equalization is received in the form of block grants. If the amount of financial equalization subsidy is not spent by the end of the financial year, there is no need to return it.
come Conditional grant:- The financial transfer made by the government of one level to the government of another level with the necessary conditions to implement its plan along with the program and budget is called conditional grant. When sending a conditional grant, the budget is sent with the necessary conditions along with the program and it has to be spent accordingly. If it is not possible to spend according to the prescribed method and procedure, it should be returned to the relevant level at the end of the financial year. The federal government sends the budget to the state and local levels and the state government sends the budget as a conditional grant to the local level. At present, Nepal government schemes related to education, health, drinking water and sanitation, forestry and water resources are coming in the form of conditional grants.
e. complete Donation:- The financial transfer made by one level of government to another level of government based on the ratio of the total cost of a scheme is called supplementary grant. The Nepal government provides supplementary subsidies to the provincial and local levels and the provincial government provides supplementary subsidies to the local levels. Subsidies are provided based on the feasibility of the plan, the cost of the plan, the returns from the plan, the financial and physical capacity to implement the plan, the needs and priorities of the plan. The supplemental subsidy provided in this way should be spent in the proportion in which the plan has been approved. If it cannot be spent within the stipulated time, it should be returned to the concerned level.
e. Special Grants:- The Government of Nepal can hand over special grants to the provinces and local levels and the provinces to the local levels under it for a specific purpose. Special grants are provided for the development and supply of basic services such as education, health, drinking water, balanced development at inter-provincial and inter-local levels, upliftment and development of classes or communities that are discriminated against economically, socially or in any other way. If the subsidy received in this way is not spent by the end of the financial year, it should be returned to the concerned level.
d. The right to borrow:- Union, state and local levels have the right to borrow to meet their expenditure needs, to make development, construction and service delivery effective and to cover budget deficits. There is a provision that the government of Nepal, provinces and local levels can take internal loans within the limits of the recommendations made by the National Natural Resources and Finance Commission. However, the state and local levels must obtain the consent of the Nepalese government before taking internal loans.
Provisions that states and local levels should submit to the Nepal government the plans that are intended to take internal loans, the returns and achievements that can be obtained from the plans, the loan repayment plan, the details of the lending institution and if the submitted proposal is found to be implementable, the Nepal government can give consent to the respective provinces or local levels to take internal loans. has done
The National Natural Resources and Finance Commission can determine and recommend the limits for internal credit for the union, state and local levels. National Natural Resources and Finance Commission For 2078-79, the government of Nepal has analyzed the current macroeconomic situation, the situation of internal debt mobilized by the state and local levels, and the state of the budget, and has recommended that internal debt can be raised up to 5.5 percent of the projected gross domestic product.
The state government For 2078-79, it has been recommended that internal debt should not exceed 12 percent of the sum of the revenue allocation from the government of Nepal and the sum of the revenue received from the state government's own internal sources. Similarly, the local level For the year 2078-79, it has been recommended that the revenue distribution (including the amount of vehicle distribution) that can be received from the Nepal government and the provincial government and the sum of the revenue that can be received from the local level's internal sources should not exceed 12 percent of the internal debt.
Problems observed in the implementation of financial federalism:- Without the effective implementation of financial federalism, the federal governance system cannot be successful. Since the federal government system is a new government system for Nepal, some practical problems have appeared. The problems seen in the implementation of financial federalism are as follows.
• Failure to fully implement the rights guaranteed by the constitution by internalizing the principle of financial federalism.
• Some decisions of the government have narrowed the role of the National Natural Resources and Finance Commission, which is a constitutional body.
• Physical infrastructure, manpower, information technology, financial mobilization could not be effective according to work responsibilities.
• Since the amount of revenue sharing is less than the ceiling, it has affected the budget system.
• There is conflict between different levels about power and authority.
• Controversies arise from time to time on issues such as national forest, use of river water, community forest, pollution fee etc.
• The institutional capacity of the state and local levels has not been enhanced.
• Even though the country has been transformed into federalism, the centralized working style and financial indiscipline remain.
• Government levels pay more attention to expenditure plans than income plans.
• State and local level revenue collection system is weak
• Lack of coordination, cooperation and effective communication among the agencies implementing financial federalism.
• The capacity of parties to implement federalism has not been developed.
• Lack of financial discipline, good governance, effective utilization of public expenditure.
• Failure to develop the practice of analyzing achievements based on accounting, auditing, financial reports of public expenditure.
• There is a gap between the responsibilities and revenue rights of the state and local levels
• The government levels are aware of their rights but deviate from their duties.
• The domestic debt taken by the Nepalese government has not been utilized effectively.
• Due to functional duplication between different levels, the federal government system has become expensive
Solutions to the problems seen in the implementation of financial federalism
The solutions to the problems that appeared during the effective implementation of financial federalism can be presented as follows.
• Making laws for the effective implementation of the rights provided by the Constitution of Nepal and implementing them effectively.
• Accountability according to the concept of financial federalism
Arrange financial transfers along with transfers.
• Develop the capacity of the National Natural Resources and Financial Commission, which has a constitutional role, and effectively implement the recommendations made by the commission.
• Establishing coordination between different levels of rights in the list of single and common rights recognized by the constitution and making laws.
• Increasing the scope of revenue, studying revenue potential, controlling revenue leakage, using information technology, and increasing the internal income by developing the capacity of employees.
• Developing and providing services so that the taxes paid by the people are properly utilized.
• To develop a system of selecting and implementing plans based on the demand and needs of the people rather than on the cost, pressure and influence of the benefit cost analysis.
• Enhancing the institutional capacity of the bodies implementing financial federalism
• To make intergovernmental financial transfer systematic, scientific and fair.
conclusion
Federal governance system cannot be effective without effective implementation of fiscal federalism. Bringing the flow of services and development closer to the people is the essence of federalism. Along with the responsibilities of different levels of government, financial transfer should be arranged, revenue distribution should be made fair and orderly, and the budget deficit should be met by taking internal loans only in the areas deemed essential by the state. It is today's need to provide services according to the principles of federalism by making effective use of financial resources and maintaining financial governance.
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