GTZ Report on Proposal for Nepal Grant Formula - LGCDP

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Proposal for a municipal grant allocation formula 10Proposal for a new local government taxation system in a federal Nepala uniform effective federal rate can be imposed on taxpayers without regard to their location.At the current stage of the discussion process of state restructuring it is not possible to recommend specioic taxes to be shared until there is a decision on task assignment between the federal, the new re-gional and the existent local level with a high degree of local self-‐governance is taken. However, the future funding mechanism will have to rely on shared taxes to meet the funding requirements of the local level, and most probably, tax sharing agreements usually refer to income taxes or taxes on consumption.Therefore, an “optimal set” of taxes and fees includes:• a stable and predictable tax revenue source• such as a property tax based on land and buildings, if the valuation is kept simple and complies with the standard institutional capacity of local governments units in Nepal.• a tax revenue sensitive to economic development• such as a business tax on prooits of all business activities (formal and informal sector, blue-‐collar and white collar, including freelancers, regardless of size and branch of activity) that create in-centives for local government units to promote economic development within their boundaries. The local business tax for businesses already paying corporate taxes should be deductible from the corporate tax.• Such as a local share of personal income tax for all natural persons• cost recovering user charges for fee-based technical services such as water, sewerage, solida waste collection and other services. Local councils may subsidise fees with general funds, if a full cost recovery approach is not feasible.In addition, the proposed basic grants should be based on population data and thus are encouraging local government units to create housing and job opportunities. The basic grant should be stable and predictable to enable local government oinancial planning.2.2.3 A cost-recovery approach in the calculation of user chargesAlthough user charges are by no means taxes, and typically, user charges are common for services which are consumed individually or per household and where a person-‐ or household-‐related charging is appreciated. User charges should not be considered as general funds, but specioically aimed to cover the costs of that specioic services, such as water consumption and waste water, street cleaning, electri-city consumption, abattoir services, and others.The user charges should not exceed the full cost of the service, and the council is due to make political decisions which services should achieve which level of cost recovery. Any cost recovery below full cost recovery will then require support from the general fund and thus reducing the local possibilities for decision-‐making.Dr Alexander Wegener interpublic consultancywww.interpublic-‐berlin.de
Proposal for a municipal grant allocation formula 11Proposal for a future grant allocation scheme for municipalities in a federal Nepal3 Proposal for a future grant allocation scheme for municipalities in a federal Nepal“We oind that developing countries have more centralized oiscal structures and argue that this is consistent with the theory of oiscal federalism. Economic development, however, does push the advantage toward decentralization. We also show that developing countries use a wide variety of transfer instruments to fund local governments, and that these in-struments give the national government varying degrees of control over local government oinances” (Bahl and Linn 1994, 1)Economic theory assigns the functions of general purpose grants to address vertical imbalance between central and local budgets and to adjust horizontal imbalances among local budgets. The the-ory also assigns specioic purpose grants to correct spillovers and to implement national goals through local expenditure. Grant allocation should support local self-‐governance in promoting social, economic and democratic progress on the local level. Grants are not to be misused to tighten control over local government, neither by federal level, nor by regional level.Regarding the design of equalization and specioic purpose grants, Bird and Smart (2002) set out the following principles of international lessons. These are: • Both general purpose and special purpose matching grants should be managed on the basis of rules. • The funding pool of general purpose grants should be set in a stable but olexible way. • The allocation of general purpose grants should take account of both need and capacity. The formula should be as simple, reliable, and transparent as possible. • Specioic incentive features to encourage additional tax effort are not necessary, if the general pur-pose grants are designed properly and if some tax policy discretion is guaranteed for local govern-ments.• On the use of general purpose grants, no conditions should be imposed. • Matching conditions according to the expenditure type and oiscal capacity of recipient government should vary in the provision of specioic purpose grants. • In oinancing infrastructure by specioic purpose grants, recipient governments should satisfy technic-al conditions, which ensure that money is properly spent. • The management of local public oinance of all local governments should follow standard procedures, to maintain adequate and current accounts, and be audited regularly and publicly. 3.1 Total gross fund de[initionIn a federal Nepal, it is assumed that local government is deoined as one of three state levels next to the federal level and the regional level. This is necessary to ensure that federal government has a stake in local government oinance. If local government would be regarded as an internal affair of the regional states, the federal government would possibly violate the constitution if they would directly address Dr Alexander Wegener interpublic consultancywww.interpublic-‐berlin.de
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GTZ Report on Proposal for Nepal Grant Formula - LGCDP

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