GTZ Report on Proposal for Nepal Grant Formula - LGCDP

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Proposal for a municipal grant allocation formula 6Proposal for a new local government taxation system in a federal NepalFigure 2: The importance of LDF in the past [iscal years for municipalities in Nepal12000000001000000000800000000Nepalese Rupees6000000004000000002000000000FY91/92FY93/93FY93/94FY94/95FY94/96FY96/97FY97/98FY98/99FY99/00FY00/01FY01/02FY02/03FY03/04FY04/05FY05/06Annual BreakdownSince Nepal's ratioication to accede the World Trade Organisation it is clear that duties have to be abol-ished to foster free markets, and this would in consequence result in a dramatic oinancial loss of the re-ceiving municipalities. The importance of LDF is extraordinary high (see oigure 2 on page 6). Revenue from LDF has been growing for years and since some years, around one billion Nepalese Rupees are redistributed to muni-cipalities.The design of a new local government oinance system for Nepal has thus to oind• alternatives to the LDF – in the amount of roughly one billion Nepalese Rupees, and• to design a local government oinance system in a future federal Nepal based on the above mentioned principles of congruence, equivalence and connectivity.2.2 A local taxation system acknowledging the design principles of congruence, equivalence and connectivityAssignment of reasonable taxing powers helps give a government control over its oiscal destiny. It al-lows the government, acting for its citizens, choice over its level of spending and how that spending will be oinanced from segments of its economy. That is an important element for oiscal autonomy. Dr Alexander Wegener interpublic consultancywww.interpublic-‐berlin.de
Proposal for a municipal grant allocation formula 7Proposal for a new local government taxation system in a federal NepalFrom the revenue side of the public economy, oiscal autonomy (and responsibility) is greatest when the subnational government chooses what taxes it will levy, deoines the bases it will use, sets the rate and preference structure for those bases, and administers the taxes that have been adopted (Mikesell 2003).Figure 3 on page 7 summarises the optimal design of three major types of income for local government bodies if the three guiding principles of congruence, equivalence and connectivity would be applied to the three main sources of income of local governments:• User charges (usually for utilities) and fees (usually for administrative services)• Local taxes• Grants.Figure 3: Revenue types and design criteriaSourceFees and user chargesLocal taxesGrantsBasisLocal services where the individual consumption is measurable and politic-ally desired (such as water, electricity, solid waste collection, etc.).Local fees and user charges should be designed that the services provided can be founded (full cost recovery).Local services, where the individual consumption is either not measurable, or not desirable.Local taxes, however, should follow the principle of equivalence. Therefore, the principle of equivalence is extended to local groups beneoitting from loc-al services such as house-‐ and land owners, businesses, or citizens.In an ideal world, grants do fuloil two functions only: The serve to guarantee a minimum oinancial basis of local bodies (oiscal function) and to internalise external spatial effects. after Friedrich 2005Based on this optimal design, the following sub-‐sections deal with• An optimal set of local government taxes (section 2.2.1 on page 9f.),• A reasonable sharing of taxes between levels of government (section 2.2.2 on page 9f.),• An optimal set of local government taxes (section 2.2.3 on page 10f.).2.2.1 An optimal set of local government taxesProperty taxes are regarded often as an “optimal” local tax, especially when taking into account Anglo-‐Saxon literature. However, this type of tax affect only a specioic group of the local citizenry and not ne-cessarily the whole community. This tax is an example of a group-‐related equivalence, whereby the as-sumption is made that property owner beneoit in general from local government decision-‐making and service delivery beyond user-‐charge based service delivery. Dr Alexander Wegener interpublic consultancywww.interpublic-‐berlin.de
Page 1 and 2: Urban Development through Local Eff
Page 3 and 4: Proposal for a municipal grant
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GTZ Report on Proposal for Nepal Grant Formula - LGCDP

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