EDITORIAL: Burden of taxes

The whole purpose of federalism will be defeated if people get disillusioned with local govts over heavy burden of taxes

Duplication of taxes in different layers of governments has riled people across the country. Reports from all over the country have revealed that people, including the businessmen, have taken to the streets protesting the local governments’ decisions to impose heavy taxes beyond their capacity. The recent protests in Chitwan, Birgunj, Mahottari and Banke suggest the local levels have even decided to impose taxes beyond their jurisdiction. The local levels which function as the lowest level of government have increased taxes by 50 to 500 per cent. The local governments can collect taxes on eight taxable areas – wealth, vehicle, entertainment, tourism, house rent, land revenue – and fees on non-taxable areas. The local levels have also increased valuation of land plots in most of the urban municipalities to raise more taxes. Some municipalities have also imposed tax even on bicycles. However, the elected officials have purchased vehicles and motorbikes for them from the equalisation grants provided by the federal government. These are some instances that indicate the local levels are not functioning in line with the spirit of good governance, as per the people’s expectation and within the jurisdiction set by the constitution.

While addressing the Parliamentary Finance Committee meeting on Sunday, Finance Minister Yubaraj Khatiwada tried to allay the fears of duplication of taxes by sub-national governments. The Finance Ministry has also asked the local governments to limit themselves within their jurisdiction and to not engage in duplication of taxes. The federal government mainly collects value added tax, excise duty, customs duty and income tax. VAT and domestic excise are shared among three tiers of governments. The country needs to mobilise plenty of resources from internal revenue and external investment to push forward the higher growth trajectory. But it does not mean that the sub-national governments could impose taxes beyond the capacity of the people. The scopes of taxation and people’s capacity should be kept in mind before the local levels take their final decisions.

This problem could have been partially addressed had the National Natural Resources and Fiscal Commission (NNRFC) started its full-fledged operation. An Act to form the NNRFC was enacted in 2074 and its secretariat has also been established. But its chairman and members are yet to be appointed even though it has been three years since the new constitution was adopted. So, it is being led by a government secretary. Had its chairman and members been appointed, it could have conducted an in-depth study on taxes being collected at the local level and made necessary recommendations. This could have helped ease the problem of double taxation. The NNRFC can play a vital role in resource distribution and revenue sharing in a federal setup. Making reforms in the revenue regime is also equally important to sustain federalism. The sub-national governments need to follow directives issued by the concerned federal government authorities for some time to come until NNRFC begins its full-fledged operation. The whole purpose of federalism will be defeated if the people get disillusioned with local governments over the heavy burden of taxes beyond their capacity.

Youth dividend

Youths (people aged 15-39) account for 40 per cent of the country’s population. This hence gives Nepal an advantage when it comes to reaping the benefits of demographic dividend, which the UNFPA defines as “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older). The country hence has a huge potential in the form of young people for economic and social progress. But there is a danger.

If a huge chunk of young people cannot find jobs and earn, the youth bulge can become a demographic bomb. On an average 400,000 Nepali youths annually are migrating to foreign countries in search of jobs. A World Bank report last year said 32 per cent of Nepal’s working-age population (people aged 15-64) is either unemployed or voluntarily inactive. There is urgent need to focus on building capabilities of youths, ensuring their rights and freedoms and creating jobs. A wide-ranging approach is a must to achieve the demographic dividend.