FEDERALISM: Fiscal Imperatives

As the federal structures will affect the business communities, Confederation of Nepalese Industries has initiated discussions on federalism with economic perspectives

Aug. 17, 2014, 5:45 p.m.

At a time when the political parties are discussing the federal structures on the basis of politics and identity, Nepal's business communities have joined in the debates, taking the key economic factors and fiscal viability into consideration.

Organized by Confederation of Nepalese Industries (CNI), speakers taking part in a 2-day workshop on federalism and economic perspectives stressed the need to consider the economic imperatives while crafting the states and allocating them the economic powers.

"As the Constituent Assembly is making progress in constitution drafting with federalism as the key issue, this kind of discussion is highly important. The CA will consider the right suggestions given by the eminent business bodies like CNI," said chairman of Constituent Assembly Subas Nembang.  "Previous CA has done intensive homework on fiscal parts of the federalism."

In general terms, federalism is a system of government in which powers are divided between two or more constituent entities by a written Constitution. A constituent entity often comes in the form of a state, region or province.

However, fiscal federalism concerns the division of public sector functions and finances among different tiers of government. The Theory of Fiscal Federalism considers the provision of goods financed by taxes and the appropriate revenue collection system at the regional level.

Experts argue that fiscal federalism is concerned with "understanding which functions and instruments are best centralized and which is best placed in the sphere of decentralized levels of government. As Fiscal federalism is the study of how competencies (expenditure side) and fiscal instruments (revenue side) are allocated across different (vertical) layers of the administration, CNI has made efforts to inform the complexities of the issue.

"This workshop is the beginning of this exercise, and we remain committed to ensure that the process of state structuring and the federalism process cannot be overstated and to raise thought provoking questions. With adequate discussions, the new constitution will meet the dreams and aspirations of our country and people," said Narendra Kumar Basnyat, president of CNI.

As Nepal's revenue collection situation is complex, there will be more economic disparities in case of failure to demarcate the boundaries properly. Customs revenue accounts for almost 27-30% of national revenue and six customs points collect 90% of the customs revenue. Similarly, the Central Region alone accounts for over 60%. Again this is not reflective of actual consumption due to scale efficiencies, vocational advantages, infrastructure, linkages, policy etc.

"We need to look at overall economic scenario of the country. Centralized for over such a long period of time, federal Nepal's challenges will be to establish the province capitals and institutions. The cost of such construction will be huge. As Nepal has already declared been as a federal state, we don't have any other options than to go for federal states," said industrialist and president emeritus of CNI Binod Kumar Chaudhary, who also served as a member of the first CA.

"We need to intensively discuss on how the Tax Administration role will be shared between Center and State and how will the future of our investment be," said industrialist Chaudhary.

A serious issue of federalism is: where does the tax revenue get routed, through State or Central Coffers? How will a Company having a Corporate office Multi Ramifications of a Federal in one state and factories in another, and selling products across the country –need to organize its  tax planning?

Despite the fact that political debates on federalism started a long time back, the importance and criticality of Economic Perspectives on the Federalism Process cannot be overstated."CNI is keen to offer its service to the Nation, to the CA, as a catalyst to raise the level of thought. We will bring in experts from around the world to share the issue. It is the CA to take decisions on how many provinces Nepal wants and they should draw the line for future economic cooperation. However, the provinces must be financially viable," said Basnyat. "We are also very much concerned whether the private sector's investment will be secured in the changed political context or not. This kind of discussion will be helpful to us."

Experts from Germany Dr. Kebschull highlighted the complexities of the federal fiscal system. Charge d' affairs of Germany Jacqueline Groth also addressed the program. As federalism is in the making, CNI has taken a lead to initiate debates on fiscal federalism.

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