Dr Ram Sharan Mahat

Former Finance Minister

The provincial government will have to work hard to mobilise their own resources to reduce excessive dependence on the centre. In my opinion, the provincial governments should have the capacity to meet a bulk of the administrative cost of their respective provinces. But given the character of the proposed delineation of provincial boundaries, most provinces will have practically no revenue source at least in the short and medium run.

 

How would mobilisation of resources take place under the federal structure?

Mobilisation of resources is imperative to run the government irrespective of whether there is a federal structure or not. Under the federal structure, there will be governments both at the central and provincial levels. Therefore, resources will be mobilised at both ends. Apart from the revenue sources under their respective jurisdictions listed in the constitution, there will be a concurrent list of revenue sources imposed at both levels. In federal countries, the centre as well as the provinces impose taxes and duties such as income tax and excise duty which raises the burden on the taxpayers. Duties are normally collected by the centre at a single point for administrative convenience but shared at both levels. In addition to the central tax, the provinces piggyback to a certain extent, however, remaining within limits defined by the respective framework legislation. For example, if the central income tax is 25 per cent, the province may add another 5 per cent.

 

The source of revenue in Nepal at present are centralised in a few districts. Under such situation, how can fiscal balance be maintained when Nepal becomes federal?

This is definitely a big challenge. The provincial government will have to work hard to mobilise their own resources to reduce excessive dependence on the centre. In my opinion, the provincial governments should have the capacity to meet a bulk of the administrative cost of their respective provinces. But given the character of the proposed delineation of provincial boundaries, most provinces will have practically no revenue source at least in the short and medium run. People think that once they have a separate province, they will have all the autonomy and freedom. But if the province has no resource of its own and depends on the central allocation even for day-to-day administration, the autonomy has no meaning. Therefore, one has to be very careful while carving out the provinces. The decision should also be based on long term viability and economic sustainability of the regions, in addition to other considerations. Unfortunately, at present the most vocal demand relates to provinces based on ethnicities.

 

Do you see the danger of regional disparity due to unequal distribution of resources and sources of revenue?

The common fallacy among the ardent federalists in Nepal is that regional disparity will be narrowed and poverty banished once there is a federal structure. This is wrong. Resources and development potential are unequally distributed and so are the revenue sources. Competition among provinces with differing resource endowments could accentuate regional disparities instead of narrowing down unless there is intervention from the centre. For this, the centre must be strong with redistributive power. In the USA, there are serious regional disparities. West Virginia’s per capita income is less than half of Connecticut’s. In India, Haryana’s per capita income compared to UP and Bihar is three to five times higher. Please note that India is not the perfect example of a federal structure. India, at best, can be regarded as a quasi federation with a strong centre. So, this situation in India is despite central intervention.

 

What should federal Nepal’s fiscal policy focus on to ensure appropriate and equal distribution of resources among the provinces?

There is no alternative to a strong central government with fiscal redistribution power to ensure equity and economic justice. All provinces should have uniform access to basic services like education, health, electricity, roads and other socio-economic services. For this to happen, poorer provinces will need central support through a mechanism called Equalization Fund. A fiscal mechanism to ensure transfer of resources from rich to poor provinces is necessary. It is precisely for this and other reasons that revenue from major sources like customs, income tax, and partially VAT and excise must go to the centre. If you look at Nepal’s case at present, these sources practically yield no revenue. If they are brought under provincial jurisdiction, most federal units will have no income at all. 

 

Why hasn’t there been a meaningful debate on state restructuring and the form of federal system?