GTZ Report on Proposal for Nepal Grant Formula - LGCDP

Proposal for a municipal grant allocation formula 5Proposal for a new local government taxation system in a federal Nepal2 Proposal for a new local government taxation system in a federal NepalThis chapter deals with options on how to redesign the local taxation system in Nepal under two major changes that will affect local government:• First, the section 2.1 on “Replacement of the Local Development Fee“ shows the major implication on municipal oinance in Nepal if the LDF is being abolished, • Second, section 2.2 titled “A local taxation system acknowledging the design principles of congru-­ence, equivalence and connectivity“ outlines the key principles after which a local taxation system should be designed.• Sub-­‐section 2.2.1 titled “An optimal set of local government taxes“ applies the principles to taxes typically assigned to local governments,• Sub-­‐section 2.2.2 titled “A reasonable sharing of taxes between levels of government“ discusses the need to tax sharing arrangements in a federal structure, and• Sub-­‐section 2.2.3 titled “A cost-­‐recovery approach in the calculation of user charges“ determines the key design criteria for the calculation of prices for user charges and fees.The options discussed are based on Public Finance Theory and experiences in federal states such as Germany, Austria, Switzerland, and others. 2.1 Replacement of the Local Development FeeThe Local Development Fee (LDF) plays a major role in local government funding in Nepal for the mu-­nicipalities. The LDF' predecessor, the octroi, was replaced by a centrally collected import duty and has been redistributed to the municipalities. However, the formulae for the allocation is based on previous octroi collection, and although modioied – guaranteeing minimum amounts to all municipalities – the LDF is far beyond a fair distribution. The LDF is regarded as “own source revenue”, although the LDF in practice is more similar to an uncon-­ditional grant without a clear formula. Dr Alexander Wegener interpublic consultancywww.interpublic-­‐berlin.de