Taxation And Governance
Dev Raj Dahal
Paying reasonable tax to the state is a civic duty of good citizens. They do so in return for the life-saving goods and services they get. Tax through coercion is justified for the robust government’s role in the economy, production and supply of public goods, creation of a fairer society based on equity and justice and control free-riders. The classical ideal of democracy evoked “no taxation without representation.” But the political limit of the government implies that consent of citizens is vital in any policy innovation. It affirms the democratic spirit of the principle of affected. Nepal’s media have now spurred a heated debate on the political implications of raising and expanding visible tax base by three-tiered governments - federal, provincial and local- without prudent planning and ignoring its impacts on the life on of ordinary beings.
Local units are collecting extra revenue to sustain fiscal federalism and finance growing public expenditures. The Constitution of Nepal clearly outlines single taxation system, not the double one and, therefore, spending on good causes need to be streamlined through the setup of Fiscal Commission. Many local representatives, unaware of their tax jurisdiction, seek well defined laws and rules. The Inter-Governmental Financial Management Act has fixed the proportional distribution of revenue and the royalty of natural resources. What is unspecified is which province and local body is entitled to what amount.
The lack of clarity about economic path, due process and rate of tax collection by different layers and same layers in different scales continue to violate tax rules by stealth, bred malaises in the tax system and increased financial costs for doing business. Some kinds of harmonisation and standardisation in the determination of tax and due diligence are essential to balance the stock of revenue and policies of social justice. The taskforce, set up by Finance Ministry, now aims to settle the prevailing tax anomaly. The question is how can Nepali polity which has already maximised the cost of governance with huge size of politicians and bureaucracy fulfil Nepalis expectation of public goods.
Optimal redistribution of the capital income to the poor can provide them incentives to work harder and augment the power of polity and build its capacity to reduce poverty and inequality. Tax, however, distorts incentive if the income of society is low and the nation is economically less unified. To measure capital income is hard if there are double book-keeping of companies and firms and tax and revenue administration is riddled with a number of loopholes and seductive incentives, reflecting poor transparency and law-enforcement. Only accountable governance can create fair opportunity for all citizens and utilise tax for overall progress.
The howls of anguish of Nepali Congress (NC) against new tax regime manifests in its pledge of not imposing tax in NC dominated local bodies. Some Gaonpalikas and municipalities have already decided not to enforce tax on birth, death and marriage registration, migration, necessary services and wage labour of the poor. What is and how much is taxed depends on the ability of citizens. Business community who had earlier rebelled against value-added tax is not cheerful either. It wants to see the proper utilisation of tax money. The federation of Gaonpalikas has advised its members to review the taxation system while non-ruling left parties hit the street defying it and price hike on essential goods favouring radical egalitarianism. Ordinary citizens, haunted by tax increase, feel that it does not match their income level and services they get from the regime. They fear that it will be used for socially undesirable activities such as purchase of luxury goods, high cost vehicles and increment of perk, travel costs and allowances for normal meetings of local authorities.
The share of tax in Nepal’s GDP is about 23 per cent. Strong tax base of the state can give national leadership adequate policy space for the grasp of welfare measures and reduce the level of misery. Money moving from top-down via progressive taxation of wealthy can develop social welfare benefits to Nepalis and finance the wages of low income groups on health, education, income, contributory social security, social protection of vulnerable, unemployed and support the dignity of work and universal measures. By contrast opponents of progressive tax believe that it reduces incentive to increase income and investment and causes capital flight control of which is vital to drive investment in the nation’s productive sectors of economy.
The constitutional right to secure proportional redistribution and equalisation measures through Natural Resource and Fiscal Commission marks the seal of good governance and affirms the belief that proportional taxation of wealth can contribute to the quality of governance in Nepal. The general tendency is that tax avoidance and tax evasion persist among the high income groups especially those engaged in property markets including intellectual property. Taxes imposed on the income of factors of production such as land, labour, capital, technology, etc. increases the cost of production while tax on the consumption of public goods raises the prices where poor can ill afford.
In this sense, introduction of any tax, direct or indirect, must sensibly match with the ability of citizens to pay. The Constitution of Nepal has promised all welfare provisions from the right to work to food sovereignty, expanded more rights to the citizens and made populist promises during the elections. But the fiscal capacity of Nepali state to fulfil them is weak. The nation since 1990s adopted revenue-based, not production oriented economy, infecting food crisis, misery, violent conflict and migration of youth. The rollback of Nepali state cut in public subsidy to agriculture and privatisation of public industries imposed a burden on the poor facing food scarcity and robed the soul of its social democratic constitution. Lowering of corporate tax did not increase either saving for productive investment or broad-based economic growth. The gross domestic saving as percentage of GDP is about 9 per cent. Nepal always faced a conflict between constitutional ideals of justice and usual biases of powerful actors prompted by private profit, privilege and distribution of income at higher ups.
Taxation influences the governance effectiveness in many ways. The first is strong tax base of the nation provides Nepali government a degree of autonomy to engineer the vision, laws, policies, priorities and institutional design. It does not have to depend on external advice, financial resources to execute development projects and run meritocratic administration. The second is large share of finance in the budget from the tax makes the government accountable downward to the citizens. If bulk of revenue comes from remittance or foreign aid which Mike More calls “strategic rents,” it undermines the mandate of the government to serve citizens and would be interested in sending its citizens abroad in the hope of hopping remittance to finance budget and trade deficits, soaring debt and mitigate inflation.
For long, Nepali government did not care about tax for losing popular support and received large non-tax incomes from foreign aid and investment. This broke political leadership fiscally free from taxpaying Nepalis and less receptive to address their problems. Similarly, non-tax unearned money flowing through foreign businessmen, INGOs, NGOs, civil society, private foundations, solidarity support groups, sponsors of social movements and charity-based organisations have provided leadership additional incentives and leverage to work for the expansion of their own political constituencies, patronage and clientalist networks rather than work for the mobilisation of domestic resources for productive use and generate welfare benefits for Nepalis. It bred corruption. Businessmen, easy with tax-loopholes, are successful to thwart progressive tax with the help of bureaucracy, lawyers and political patronage and stifled redistribution which is the central appeal of democratic governance to peddle the prosperity of the poor.
Erosion of Nepali state’ monopoly on power and its ability to create security and business-friendly environment hamstrung to effectively collect revenues. The tax base of Nepali state is inadequate to sustain polity and acquire, utilise and keep power autonomous of either dominant interest groups of society or powerful business lobby and even donors to set a context for sustainable development. This is why Nepal’s political class is weak to build up the political and institutional capacities of the state for effective governance that can manage both demand and supply, formulate and implement development policies, create public order and engage fully in resilient rebuilding of this troubled nation.
In a crisis time, building the financial capacity of Nepali state and its institutions is vital to enable it to perform basic state functions and transcend geopolitical constraints and conditionalities that contest national prerogatives. The liberal economic policy of Nepal permitted self-disclosure of tax admitting the non-interventionist nature of state. But many business houses collude with certain sections of rent-seeking bureaucrats and politicians which has neutralised the action of all branches of governance in favour of tax-emption and choked governance effectiveness in service delivery.
The ability of Nepal state to enforce law and order and foster national integrity system of economic and political institutions rests on the autonomy of Nepali regime from strategic rents, unearned and non-tax revenue. It enhances the responsiveness of governance. How government uses tax money transparently and yields positive outcome of development matters for political legitimacy. It is, however, absurd to think that a government fully dependent on taxation for revenues will be more effective and responsive to citizens’ needs. The system of checks, monitoring and impact assessment are equally essential both for the efficient collection of tax and its proper use in the public and national interest.
Tax reform in Nepal should introduce high rate of value-added tax on luxurious goods and abuse of tax laws. If a government imposes steep taxes coercively without welfare guarantee in return then it can easily spoil state-citizen relations, underpin poor governance and inflict distrust on public institutions and officials. National leadership in Nepal faces some disincentives to tax coercively owing to its tangible political costs manifesting in contradiction, resistance and opposition. It must assess the public mood, foresee political consequence and understand whether new tax regime veers to welfare regime as per the Constitution or converts into an extractive state that enriches few elites at the cost of many. Democracy is a distributive regime, therefore, its leadership should open possibility to consult citizens on what is suitable tax for Nepal. This can minimise Nepal’s perpetual legitimacy crisis, dependence on aid, crisis of trust on governance and turn the nation successful.