Transcript Political Economy of Nepal`s Tax Regime

Political Economy of Nepal’s
Tax Regime
Mahesh Banskota
Institute of Integrated Development Studies,
Kathmandu Nepal
9 August 2010
Structure of Presentation
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Political Situation in Nepal
State of Economy
Overview of Budget Conditions
Policy Environment and Policy mapping
Political Economy of Nepal’s tax Regime
Political Situation in Nepal
• Long years of violence , monarchy
abolished, CA elections, Fragile coalitions,
Struggle for another Interim Government
going on
• Some parts of the country still under
armed groups ,
• Development activities slowly restoring
infrastructure damaged during conflict
• Confidence restoration still a long way
State of Economy
• Per capita GDP low
• Lowest in S Asia and among the lowest in the
world
• Growth modest - 1.05% ( per capita )1996/97 –
2006/07 period
• HDI improved, poverty decreased , but
inequality went up
• Remittances becoming important almost 20% of
GDP ( from India and elsewhere ) but global
slowdown reducing growth
Contributions to GDP Growth
Many Adverse Factors Affecting
Economic Activities
• Floods in the East, Poor Monsoon, Daily
Power cuts ( sometimes for 16 hours
/day), deteriorating labor relations, unrest
in the Terai,
• Investors worried about extortion, death
threats, kidnappings
• Private investments declined to lowest
levels in recent past
Overview of Budget Conditions
• Tax revenue
• Increased post-1990
• Stagnated around 9% between 1994/95 and 2005/06: MAOIST CONFLICT
• Started growing post-Maoist conflict
•Non-tax revenue
• No improvement since 1990
• Stagnating around 2% to 3%
CURRENT FISCAL SITUATION
Source: Economic Survey 2008/09 MOF
• 1988/89: 10%, nation on the cusp of democracy
• 1990/91: Democracy in 1990
Subsequent Economic Liberalization
Deficit start lowering
POLICY ENVIRONMENT AND POLICY
MAPPING
• Better understandings of policy
making- at its different stages of its
formulation, decision making and
implementation- could help improve policy
making and contribute to its effectiveness
• Is it society centered with greater role of
classes, interest groups, parties and
voters or is it State-centered with greater
role of technocrats, bureaucrats and other
state interest groups or is it more pluralist
and open for any organization to
participate?
Different Actors
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State and non state,
formal and informal, legislators, political parties,
executive,
judiciary,
business, unions,
media and civil society
The nature of the political, economic and
social environment?
• The political context - participation, the playing field
for different actors, the policy space, the constraints,
compromises , political leaders
• The economic environment - liberal economic policies
, difficult economic decisions , conditions of donors
• The social environment - social interactions , who is
benefiting and who is suffering?
• Policy responses - Reaction of the bureaucracy, the
public can be muted or ,vociferous and violent ,crises
situations
Political Economy of Nepal’s Tax
Regime
• A limited fiscal landscape – large poor
rural population, small formal sector,
widespread illiteracy, open border with
India and unregulated and undocumented
border trade and movement,
• Weak government – unstable government,
no political commitment for development,
politicized bureaucracy, and limited
capacity to evaluate, monitor and enforce
Political Parties
• multi party politics, unstable governments, 2010 budget
approval has suffered, little focus on substantive issues
• Maoist came to power in 2008, their budget also towed a
similar line although the FM Speech was described as
the “most analytical “
• Motivated by “individual projects” in constituencies
• Technical support for Budget discussion in parliament
non existent
• Most active role played by few economists from the
respective parties
Performance of Past Policies
• fate of most policies in Nepal ?
• It is not enough just to get the technical
aspects of the plan correct – increasingly
look at political issues especially after
MultiParty
• different organizations were in the driving
seat
• assumptions about the resources were
misplaced
• multiple stakeholders who had different
Executive
• Objective is to see that state apparatus
continues to function
• Demand for resources collected by line
agencies
• Links between planning and budget
• Incremental approach, less contentious
• Capacity limitations in budget formulation
and implementation
Policy Change: Imposition of Tax on
cooperatives
• In 1995, (?), government imposed a tax of 30% on cooperative
incomes without differentiating the types of cooperatives.
• Taxing cooperatives only in urban locations
• Taxing cooperatives onli in five larger urban areas
• Reduction in the tax rate from 30% to 20%
• Making the tax applicable to only those cooperatives that paid
dividend above a certain level
• Currently cooperatives in only five biggest urban centers are
supposed to be paying taxes.
• According to the Associations of Cooperatives, all the cooperatives
have been suggested not to pay any tax.
• The resistance against the tax is still going on
Non State Actors
• Business groups – no direct or organized
pre budget discussions, individual inputs
solicited, focus on specific problems, taxes
• Professional Associations – no direct or
organized role, some eminent economist
involved in pre budget discussions
• Unions work through their parties mostly
on post budget issues – taxes
• The Media – role in post budget
discussions has increased considerably
External Actors
• Major role in budget process especially the
development budget
• Policy Influence through supply of
resources but also conditions for aid
• Diverse group, coordination
• History may show major role in
improvement of fiscal capacity, discipline,
planning and management
Extent and nature of Influence
• State Actors – Recurrent expenditure -once
provided difficult to cut back , Some role in
Revenue Mobilization ( commitment )
• Development Expenditure –Significant role of
External Actors ( Donors ) in making resources
available, while state actors can influence
where and how it is used
• Non State Actors – roles limited except when
taxes seriously affects them
Political Factor, Earmarked
Revenue and Budgetary Support
• Revenue –Monsoon and Donors
• Expenditure -Large deviations between
budget estimates and actual spending
• Strong systematic biases – overspending
on salaries and under spending on
everything else
• Leakages and delays in allocated funds
release and arrival at destination 9very
important to find out ? )
Fiscal federalism and
decentralization – key political
factor
• Major discussion ongoing in federalismethnic rather than administrative
federalism
• Historically decentralization efforts have
faced uphill battle with the centre –
bureaucracy with support from politicians
Fiscal Politics in Action
• Tax on Cooperatives
• Moaist Finance Minister cuts festival grant
• Public outcry on Minister Cash Grant to
Persons Marrying WIDOWS
TAX ON COOPERATIVES
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1.District Level Cooperative Unions 134
2. Tertiary Level Cooperative Unions 5
3. National Cooperative Bank 1
4. National Cooperative Federation 1
• two stakeholders(government) are eager
to impose the tax, two (Federations) are
just as eager to oppose it and the
remaining three ( all government) are
almost neutral or prefer to say that their
overall influence with either those
imposing the policy or convincing those
who are opposing the policy is low.
Chart 3.5 Force Field Review
for Tax on Cooperatives
Forces in favor of PAY
1MoF commitment for
Tax (***)
2Commercial Banks
paying taxes (***)
3Public pressure from
those who lost their
savings to cooperatives
(*)
4MoAC position on Tax
(*)
Financial Intermediaries
5( Business entity)
independent of coops(**)
T
T
A
X
O
N
C
O
O
P
E
R
A
T
I
V
E
Forces in favor of NOT PAY
1.National cooperative
federation (***)
2.National Saving and
Loan Cooperative
Union (***)
3.Political parties (
may do so through
sister organization) (*)
4.District association
of cooperatives (***)
5.Central cooperative
Bank(*)
Chart 3.4
Importance/Influence Mix – Tax on
Cooperative
High Importance/ Low influence
High Importance/High Influence
A
National Planning Commission
Ministry of Agriculture and Cooperatives
B
Ministry of Finance
Nepal Rastra Bank
Business Houses
Political parties
Donors
C
D
Members of the union
Federations of Cooperatives
Low Importance/ Low influence
Low importance/High Influence
• “Fiscal policy has remained prudent.
• welcomes the government’s plan to reduce the
domestically financed fiscal deficit for 2009/10 to 26
billion Nepalese rupees according to the authorities’
definition (equivalent to a net domestic financing of 1.6
percent of GDP).
• Revenue collection has been impressive in the past few
years, but expenditure should be oriented more toward
investment, which requires enhancing implementation
capacity.
• Statement of the IMF Staff at the Conclusion of the
2010 Article IV Discussions with Nepal Press Release
No. 10/74
March 8, 2010
Summary
• Incremental
• Weak Internal Demand
• Large deviations between budget and
actual
• Under estimating salaries and
overestimating everything else
• Large leakages
• Tax Increases focus on limited urban
consumers
Institutional Reform