Fiscal Decentralisation In Nepal

 Kalpana Ghimire




Fiscal decentralization refers to the allocation of authority, responsibility and resources creating harmony among different levels of the government in which expenditure assignment depends on subsidiarity principle. It makes local government more responsible to spend as per the assignment functions and to generate own-source revenue but it is assigned to local level as per the nature of tax and the services. (Muwonge and Ebel, 2014)


Nepal has embraced the federal model of government. The Constitution of Nepal has determined the level of hierarchy of government and allocated the functions in different tiers of government: central, provincial and local. The central government holds the functions like: national defense, conducting foreign policy, protecting national borders and managing macroeconomic stabilization. Similarly, provincial government is assigned the functions like: security, land management, provincial level tax collection, health and education, information management. Local government should collect local tax, manage records and provide services (Constitution of Nepal, 2015).


But Nepal is in transitional phase of transformation from unitary to federal system and the laws are still in review. However, Nepal introduced the concept of decentralisation in 1953; Local Self-Governance Act 1999 (LSGA) has laid down the concept of devolution and it has made local level governance responsible for self-governance. That act has divided the government into two levels: central and local level wherein local level government represents two tiers of government: district and municipality level or village development committee (Local Self Governance Act, 1999)


Nepal government transfers the budget to its sectoral offices of district level and municipality level or village level through its line ministries. Basically, District Development Committee (DDC) and Municipality or Village Development Committee (VDC) are under the Ministry of Federal Affairs and Local Development. Devolution is being practiced by the DDC, Municipality and VDC. As per the provision of LSGA, main functional assignments of local government are: water, construction and transport, education, sport and culture, tourism, industry, health, environment and infrastructure.


In Nepal, central, provincial and local government have their authority to formulate budget and collect the revenues in their jurisdiction. Central government is responsible for declaring tax rates, exempting tax, collecting tax and managing the tax system. Besides that, provincial and local government can also generate revenue as per the law. Local government’s revenue sources are taxes (land, property, rent, transport, commercial, entertainment, business, advertisement and parking), user charges and non-taxes, intergovernmental transfer and others. Based on these resources, local governments collect the revenues which are internal revenue, shared tax, grants and specific programmes based in Nepal. Internal revenue includes local tax, fees, registration, property sales, fine and property tax. Similarly, shared tax indicates the tax-sharing system between higher and local government. Central government controls over the budget and shares it with the local government. In shared revenue, local government must share certain percentage of the revenue with the higher government. In Nepal, local government shares 5-90 per cent of property registration, 30 per cent of tourism royalty and 10-50 per cent of other royalties (Local Self Governance Act, 1999).


Expenditure and revenue assignments are different between central and sub-national government and among the sub-national governments. It creates imbalance between them. The difference in expenditure and revenue between different tiers of governments is called vertical imbalance and the difference in one's own revenue and expenditure among the sub-national agencies is known as horizontal imbalance. That’s why decentralisation system refers to the system of inter-governmental transfer to address fiscal imbalances (Muwonge and Ebel, 2014).


When local government assignment of responsibilities is not addressed by fiscal transfer, there occurs vertical fiscal gap. Due to the different fiscal capacities and expenditure, horizontal imbalance occurs between sub-national governments. In that scenario, the vertical and horizontal fiscal disparities can be decreased through following inter-governmental transfers (Muwonge and Ebel, 2014):

  • Unconditional: Sub-national governments have the freedom to use the transfer.
  • Conditional/Earmarked: Provide finance to undertake specific programmes based on input and output. Conditional transfers may incorporate matching provision: open-ended and close-ended.
  • Shared taxes: Tax-sharing between higher level government and sub-national government in certain criteria. It consists of personal income tax, corporate income tax and value added tax.

Sub-national governments receive transfer on the base of formula, criteria and performance. In Nepal, Ministry of Federal Affairs and Local Development annually adjusts the grants to local government on the base criteria and on minimum condition performance measurement (MCPM) indicators. Main basic criteria of inter-governmental transfer in Nepal are population 50%, area 10%, poverty 25% and tax effort 15%.

As per MCPM report 2016, local governments must comply with basic or minimum conditions (MCs) to access their grants. Besides that, municipal government can get additional capital grants on the basis of MCPM with 35 measured parameters, which are: Local self-governance; Fiscal management; Planning and program management; Organization and human development; and Urban basic services management. The provisions of grants are: do not meet criteria - no grants, meet minimum criteria but MCPM is low - 20% deducted, meet basic criteria with normal level MCPM - 15% additional grants and meet basic criteria with high level of MCPM- 20% additional grants.

To conclude, fiscal decentralization is a way to transfer the power of central government to local level and make them responsible. However, in terms of fiscal decentralization, legal provision of Nepal is strong while local government seems ineffective and weak in functional assignment and revenue collection.

The author is student of M. Sc. in Urban Management and Development at Rotterdam University of The Netherlands.






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