Public Finance and Fiscal Federalism

Nepal as a Federal Democratic Republic state has been enshrined in its constitution promulgated in 2015. Though attempts for decentralization had been made since 1950s no substantial outcome could be achieved as social, economic, regional and ethnic inequalities continued to persist. The constitution stipulates a model on fiscal federalism as per recommendation by the Committee on Natural Resources, Economic Rights and Revenue and Revenue Allocation. Yet, there are many issues relating public finance and fiscal federalism, which warrant serious attention. Any functional and robust fiscal structure should be devoid of distortionary transfer of capital and labor among local government and the federal government. However, there is serious lack of scientific data for fiscal transfer. Local governments lack skilled manpower and other resource in terms of revenue generation and capital expenditure. Many micro-enterprises do not fall under the ambit of formal economy at local levels. Royalty sharing from hydro power projects is another concern as such projects are scattered in various geographical locations. Reluctance of the federal government in power devolution remains as the biggest hurdle. The federal government holds jurisdiction over custom duty, value added tax, corporate tax, excise duty and personal income tax, which account to around 90 per cent of the total tax revenue. Researchers at SAIPAL are apt at formulating sound policies for effective implementation and functioning of federalism.