GTZ Report on Proposal for Nepal Grant Formula - LGCDP

Proposal for a municipal grant allocation formula 9Proposal for a new local government taxation system in a federal Nepalthey may be concerned that a government not receiving the revenue from a tax that it ad-­ministers is likely to feel less urgency in collection of or for reform of that tax than are those using the revenue to oinance their operations. They may feel that administration in practice is inextricably intertwined with tax policy and that, without having choice over administrative decisions, they lack appropriate oiscal autonomy” (Mikesell 2003).In the context of Nepal, the number of taxpayers for high-­‐yielding taxes such as individual or corporate income tax, value-­‐added tax or others is still low. However, Government might consider surcharges to increase the overall revenues from these taxes, as there are still a large number of potential taxpayers de facto “exempted” from tax invoices.2.2.2 A reasonable sharing of taxes between levels of governmentThe large importance of the LDF to local government funding in Nepal (at the moment limited to muni-­cipalities) raises the question which income might replace the LDF when abolished. It is rather evident that given the relatively large number of revenue titles that are assigned to Nepalese municipalities no single additional “new” tax can be created to replace the high-­‐yielding LDF.An alternative and more efoicient way to equip local governments with revenue is to better exploit the shared revenue between central and local governments. We can expect beneoits of tax sharing such as reduced tax competition among local governments, economies of scale in tax administration and collection, and the maintenance of revenue stability over the business cycle etc. However, there are also downsides of the tax sharing scheme, due to disadvantages such as a reduction in local autonomy and the breaking of the link between the beneoits and costs of local public expenditure (Mikesell 2003).This fact is an argument to broaden the tax bases of the current taxes (see the section above). However, even with a broadening of the tax bases of the current local taxes in Nepal – especially the integrated property tax and the business tax as the potentially most important local taxes in the future – there is a need to replace the current grant allocation scheme and the LDF redistribution through a system of shared taxes.Shared taxes are very common in federal states. In Germany, for example, there are a number of taxes which are shared between the federal level and the state level, and there are provision that guarantee local governments a share. This is the case for the distribution of the value-­‐added tax, the personal in-­come tax and tax on capital gains. Local governments in Switzerland levy supplements to canton individual income taxes (see Mikesell 2003). Each of the twenty-­‐six Swiss cantons has its own tax system and local governments are entitled to levy taxes to the extent authorized by the canton. The communal tax is levied as a percentage or multiple of the basic canton tax rate. A federal law requires cantons to harmonize their income tax concept and deductions with the federal base, but they may set the amount of deductions and their rate schedules. Each of the cantons has a separate administrative body for collection of its taxes. The communal tax is piggybacked on the canton tax and federal tax is reported on the canton return. Thus, the canton is responsible for assessing and collecting federal, canton, and communal income tax – cent-­ralization down from the canton but decentralized administration up to the federal level. In contrast to the case in many nations, subnational – canton and municipal – Swiss governments receive the bulk of income tax collections, not the federal government. And, again in contrast to most international exper-­ience, the income tax is a relatively modest revenue source for the federal level. But because the tax is collected across all cantons, it is important that the base and deductions be standardized in order that Dr Alexander Wegener interpublic consultancywww.interpublic-­‐berlin.de