Intergovernmental Financial Transfer and Revenue Allocation in Nepal
Financial Federalism
Financial federalism refers to the governance system that allocates financial powers and responsibilities among different levels of government—federal, provincial, and local—as outlined in the Constitution of Nepal, 2015. It ensures equitable resource distribution, fiscal autonomy, and effective service delivery across all government tiers, promoting balanced national development.
Five Dimensions of Financial Federalism
- Expenditure Responsibility Allocation: Defined in the Constitution’s schedules, which outline exclusive and concurrent powers of federal, provincial, and local governments.
- Revenue Rights Allocation: Distribution of revenue-raising powers among government levels, as detailed below.
- Financial Transfers: Grants and revenue-sharing mechanisms to support lower tiers of government.
- Debt Management: Managing internal and external borrowing by each government level.
- Natural Resource Mobilization: Allocation of royalties from natural resources among federal, provincial, and local governments.
Revenue Rights Allocation
The Constitution assigns specific revenue-raising powers to each government level to ensure fiscal autonomy:
| Government Level | Revenue Sources |
|---|---|
| Federal | Income Tax (Individual/Corporate), Value Added Tax (VAT), Excise Duty, Customs Duty, Remuneration Tax, Visa Fees, Passport Fees, Fines and Penalties, Tourism Fees, Gambling/Lottery/Casino Fees, Service Charges |
| Provincial | Vehicle Tax, Property Registration Fees, Entertainment Tax, Advertisement Tax, Agricultural Income Tax, Fines |
| Local | Vehicle Tax, Property Registration Fees, Entertainment Tax, Advertisement Tax, Land Revenue (Malpot), Property Tax, Business Tax, House Rent Tax, Fines |
Intergovernmental Financial Transfers
Intergovernmental financial transfers involve the transfer of financial resources between different levels of government (federal to provincial/local, or provincial to local) in a federal system. These transfers are a cornerstone of financial federalism, ensuring that lower-tier governments have sufficient resources to fulfill their responsibilities without incurring repayment obligations. The transfers are fully owned by the recipient government and are critical for addressing fiscal imbalances.
In Nepal, the National Natural Resources and Fiscal Commission (NNRFC) recommends the allocation of financial transfers, as mandated by Article 60 of the Constitution. These transfers include grants (fiscal equalization, conditional, complementary, special) and revenue-sharing mechanisms.
Objectives of Financial Transfers in Nepal
- Provide adequate financial resources to all government levels based on their responsibilities.
- Strengthen financial federalism for decentralized governance.
- Enhance service delivery and development through decentralized resource allocation.
- Ensure equitable distribution of resources among federal units.
- Promote balanced national development across all regions.
- Support provinces and local bodies with weak internal revenue sources.
- Ensure equal access to development opportunities for all citizens.
- Promote human rights through equitable development.
- Mobilize local resources and potential effectively.
- Strengthen national unity and loyalty to the federal government.
- Foster cooperation and coexistence among government levels.
- Mobilize development finance for national policy priorities.
- Maintain uniformity in the national financial system.
Fiscal Gap
The fiscal gap refers to the disparity between a government’s expenditure requirements and its revenue-raising capacity. In a federal system, fiscal gaps are analyzed across vertical (between different tiers) and horizontal (among same-tier governments) dimensions.
Vertical Fiscal Gap
This occurs when revenue sources are concentrated at the federal level, while lower tiers (provinces or local bodies) face resource shortages. For example, the federal government collects major taxes like VAT, income tax, excise, and customs duties, while rural municipalities may struggle with limited revenue sources.
Horizontal Fiscal Gap
This arises among governments at the same level (e.g., province-province or municipality-municipality) due to differences in size, population, geography, infrastructure, or socio-economic conditions. For instance, Kathmandu Metropolitan City has a higher revenue potential than Surma Rural Municipality in Bajhang due to economic disparities.
In Nepal, fiscal gaps are significant due to regional imbalances. These gaps are addressed through public borrowing, foreign aid, and intergovernmental financial transfers.
Financial Transfers and Fiscal Gap Reduction
Intergovernmental transfers are critical for minimizing fiscal gaps in federal systems. They ensure equitable resource distribution and enable lower-tier governments to meet their expenditure needs. Key mechanisms include:
- Fiscal Equalization Grants: Allocated based on expenditure needs and revenue capacity to promote equity.
- Conditional Grants: Provided for specific projects or programs, with compliance to federal/provincial conditions.
- Complementary Grants: Support infrastructure projects, allocated based on project feasibility and cost-sharing.
- Special Grants: Address specific needs, such as basic services, balanced development, or uplifting marginalized communities.
The NNRFC determines the amount and criteria for these transfers, prioritizing equitable redistribution, regional balance, poverty reduction, and disaster response.
Revenue Sharing Structure
The Intergovernmental Fiscal Management Act, 2074, outlines the revenue-sharing framework among federal, provincial, and local governments:
| Revenue Type | Federal (%) | Provincial (%) | Local (%) | Remarks |
|---|---|---|---|---|
| Value Added Tax (VAT) & Excise Duty | 70 | 15 | 15 | Equally distributed among all provinces and local bodies |
| Natural Resource Royalties* | 50 | 25 | 25 | Distributed among federal and relevant provincial/local bodies |
*Royalties from mountaineering, electricity, forests, mines/minerals, water, and other natural resources are reviewed every five years by the NNRFC.
Legal and Institutional Framework
Constitutional Provisions
Under the Constitution of Nepal (Articles 60 and 251), key provisions include:
- Equitable distribution of federal revenue among all government levels.
- Provision of fiscal equalization, conditional, complementary, and special grants.
- NNRFC’s role in recommending transfer amounts based on expenditure needs and revenue capacity.
- Depositing grants into respective consolidated funds.
Legal Provisions
- Intergovernmental Fiscal Management Act, 2074: Defines procedures and criteria for grants and revenue sharing.
- NNRFC Act, 2074: Outlines NNRFC’s role in recommending fiscal equalization and conditional grant criteria.
- Other Laws: Complementary Grant Procedure, 2081; Special Grant Procedure, 2075; and provincial grant procedures.
Institutional Arrangements
- NNRFC: An independent constitutional body responsible for recommending financial transfers and criteria.
- Inter-Governmental Fiscal Council: Chaired by the Finance Minister, facilitates coordination among federal, provincial, and local governments.
- National and Provincial Coordination Councils: Ensure intergovernmental coordination for financial transfers.
Budget Proposal for FY 2082/83
The budget for FY 2082/83 (2025/26) includes:
- Revenue Sharing: NPR 165 billion allocated to provinces and local bodies.
- Financial Transfers (Grants): NPR 417.83 billion, as per Article 60 of the Constitution.
| Grant Type | Provincial (NPR Crore) | Local (NPR Crore) | Percentage (%) |
|---|---|---|---|
| Fiscal Equalization | 6,066 | 8,897 | 35.8 |
| Complementary | 328 | 1,006 | 3.2 |
| Conditional | 3,035 | 21,146 | 57.9 |
| Special | 327 | 978 | 3.1 |
Complementary Grant Procedure (2081)
Complementary grants support infrastructure projects with the following criteria:
- Project Cost Limits:
- Rural/Urban Municipalities: NPR 1–7 crore
- Sub-Metropolitan/Metropolitan Cities: NPR 3–15 crore
- Provinces: NPR 10–30 crore
- Submission Process:
- National Planning Commission issues a call for proposals by Mangsir end.
- Provinces/local bodies submit proposals via electronic systems by Magh end.
- Provinces submit up to 10 projects, local bodies up to 3.
- Only pre-prepared projects are eligible.
- Allocation Ratios: Vary by province (e.g., 70:30 for Karnali, 40:60 for Bagmati) based on internal revenue, economic status, and infrastructure indices.
Enhancements and Challenges
(Added for enhancement: Nepal’s intergovernmental transfer system has been strengthened by digital platforms like LMBIS, PLMBIS, and SuTRA for transparent grant management. However, challenges include inconsistent revenue-sharing criteria, limited local revenue capacity, and delays in fund disbursement.)
- Strengths: Constitutional backing, independent NNRFC, and clear legal frameworks ensure equitable resource distribution.
- Challenges:
- Limited revenue-raising capacity at provincial and local levels.
- Regional disparities exacerbate horizontal fiscal gaps.
- Administrative delays in grant allocation and utilization.
- Lack of awareness among local bodies about grant procedures.
- Recommendations:
- Enhance digital platforms for real-time fund tracking.
- Strengthen capacity-building programs for local officials.
- Standardize revenue-sharing criteria to reduce disparities.
- Explore AI-based analytics for efficient grant allocation (inspired by global practices).
Conclusion
Intergovernmental financial transfers and revenue allocation are vital for Nepal’s federal system, ensuring equitable development and fiscal autonomy. By addressing fiscal gaps through grants and revenue sharing, Nepal promotes balanced growth and service delivery. Continued reforms, digitalization, and capacity building will enhance the system’s efficiency and transparency, aligning with national development goals.
References
- Constitution of Nepal, 2015 (Articles 60, 251).
- Intergovernmental Fiscal Management Act, 2074.
- National Natural Resources and Fiscal Commission Act, 2074.
- Complementary Grant Procedure, 2081.
- Special Grant Procedure, 2075.
- Ministry of Finance, Government of Nepal.
- National Natural Resources and Fiscal Commission.