Federal Tax Regime Under Attack

Ritu Raj Subedi


Three years after the new constitution was adopted with federalism as one of its key pillars, the nation has started confronting a federal dilemma. This happened particularly after the new government with a solid popular mandate raised taxes by increasing its bases and rate exorbitantly to implement federalism based on the provisions of national charter. The statute has clearly distributed the political and economic rights and powers among the three-tier of government - local, provincial and federal. The local units have been granted sweeping powers compared to provinces. As the three layers of government began to collect taxes to sustain themselves without properly defining their jurisdiction and coordination, the diverse sections of the society have started crying foul, posing a serious challenge to relevance of federalism. As the lion’s share of taxes goes for meeting the general expenditure, including the salary of around 800 elected representatives, many raised questions about the new tax regime under the federal setup. The people are not assured that the government will sincerely utilise their hard-earned money in the interest of the public. Firstly, there is overlapping in the collection of high taxes – double and triple taxation. This riled the people beset with myriad problems related to livelihood, education, health and employment. Secondly, it is the trust deficit with state and its ability to deliver public goods and services. This makes the people reluctant to be honest with the government.

This is a sort of catch-22 situation. Until the citizens pay taxes to the government, it can’t bring welfare schemes for them as mentioned in the new constitution. Without paying taxes to the state, it ill behoves the citizens to demand better service delivery from the government. On the other hand, the people lack faith in the state mechanisms and political leadership, and are not sure their contribution is wisely spent. This requires that the government take the people into confidence that not a single penny of taxpayers’ money will be misused. In fact, tax and welfare state bear symbiotic ties. In countries where the public welfare system is strong and effective, the citizens feel proud of paying taxes to the state. The more they pay the taxes, the more they enjoy benefits from the state. Taxation is the single most economic weapon of a state that follows the democratic socialist policies. It is the rich people who often try to avoid paying taxes to the government but ordinary people are honest in paying the taxes because of their greater loyalty to the state.
A socialist democratic government enforces progressive taxation system, meaning that it collects taxes from the wealthy people and spends them on improving the living standards of the poor. A neo-liberal government often cuts taxes in favour of upper class people, reducing the spending in the public sector. The US is a glaring example to this end. When the Democratic Party wins the election in the US, it increases taxes on the people, particularly the wealthy ones so that the social security system becomes strong and covers more people living on the margins of the society. But, as the Republican Party forms the government, it cuts taxes to benefit the upper middle class. Now the Republican President Donald Trump is doing so, dismantling the Medicare system of his predecessor Barack Obama. Now many Americans are losing medical insurance facility and those from the lower economic backgrounds have been deprived of the opportunity to have an access to quality education owing to the expensive tuition fees. This has further bred economic inequality and social tension in the world’s richest country.
The ongoing public outcry against the double taxes emanates from the procedural lapses and lacks of better coordination between the three-tier of governments. It should first constitute a fiscal commission that will establish legal clarity on areas of taxes collected by the federal, provincial and local government. The way the government has been mocked over its taxation policy shows that it is fleecing the people and fattening the politicians. It is a grossly mistaken viewpoint. The KP Oli government, formed on the planks of stability, prosperity and nationalism, appears committed to fulfil its election promises. It is saddled with the task of implementing the constitution that is a common document agreed upon by all major players of the country. There is also a possibility that the business community is using the current anti-tax sentiments to evade taxes because they have earned notoriety as tax dodger community in the past. Detractors have started using anti-tax ire as new arms against the government as well as federalism.
The other day, Finance Minister Dr Yuabaraj Khatiwada tried to alley trepidation fuelled by the double as well as high taxes imposed on the people. He said the government had no policy of applying duel taxation system to increase the state’s revenues. The government has also formed a 3-member committee to look into the matter. Nonetheless, the federal taxes have already shaken the foundation of federalism considered to be a complex and expensive governance system. Chairman of ruling Communist Party of Nepal Pushpa Kamal Dahal Prachanda warned that federalism could collapse owing to the multiple taxes foisted on the citizens. He even compared federal Nepal with Baise-Chaubise Rajya (twenty-two and twenty-four states) of pre-unification period when the people were forced to pay taxes as they went from one state to another. Prachanda argued that the people from these states welcomed the unification campaign of Prithivi Narayan Shah in order to get rid of unnecessary taxes levied on them.

It is interesting to see Prachanda digging into the inherent causes of Nepal’s unification under visionary statesman PN Shah. The decade-old Maoist insurgency under Prachanda did everything to destroy the legacy of the nation’s founding father, who created a unitary, unified, strong and independent Nepal with greater socio-cultural autonomy to the people of annexed states. Prachanda made reference to PN Shah’s unification campaign to highlight a threat to the federal setup. Is it an indication that federalism is going to be a poisoned chalice for Nepalis? Now the real debate has started over the pros and cons of federalism which was accepted halfheartedly amidst the internal political chaos and external coercion.

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