--By Madhukar SJB Rana

It is necessary to bring a unified legislation for budgetary limits to executive powers and the manner of accountability (of Ministers and Bureaucrats separately) along with procedures for maintaining transparency, providing data and analysis for enlightened debate and discourse in Parliament as well, monitored by the Parliamentary Committee on Finance. A rough draft Act was submitted by this author in late 2003. This now needs to be addressed for its pros and cons, needs and adequacy and promulgated by an Ordinance after due deliberations. The Korean and Indian legislations are very good examples for examining and drawing upon lessons. A desirable administrative innovation would be for all Senior Executives in the Ministry to enter into Management Performance Contract with the Minister and be accountable (a) to Minister for execution of Policies and Budget/s as per targets and (b) furthermore, the Secretary and Director Generals to be uniquely accountable to Parliament for omissions and commissions in the execution of the Financial Acts in their jurisdiction, and pursuance of the Directives and Recommendations of the Auditor General. This way the rule of the law will be safeguarded and thus, financial propriety will be advanced significantly.

Strengthen Revenue Forecasting & Analysis 

Continuous, data-based research and analyses needs to be undertaken on a sophisticated manner using well known forecasting models to have a precise, firm overview of the revenue potential for Nepal as well as estimating the revenue and identification of causes. 

These revenue forecasts must be made at the macro meso (functional) and micro (tax office) levels to obtain the fullest comprehension of the revenue potential based on the national and local economic structures. Local Tax Offices therefore, need, to be provided with simple forecasting models as instruments with which they can estimate the revenue potential of each district by total and type of taxes and other levies. Maximum effort should be made to garner ICT and GIS technologies locally. Local Tax Administrators should be duly encouraged, recognized and rewarded for such innovations. 

Such knowledge will improve the budgetary process with a solid framework (at both the national and local levels) as plan in Nepal are not built around sophisticated, scientific estimates of expected revenues-- rather based on expenditures based on each ministry’s demand that are customarily inflated with simple ‘guesstimates’ for revenue based in past trends and probable inflation. 

Reform Financial Administration Radically 

It can be underscored that along with financial and economic reforms, there is a need to restructure and re-engineer tax administration. 

What is desired is the creation of Tax Authorities — rather than having Departments within the Ministry of Finance -- that are autonomous from the Ministry of Finance and made professional, free from political patronage. Such innovations in Peru and Zambia, for example, had revolutionary impact on resource mobilization where tax collection sky rocketed despite reducing the tax burden on the citizens! 

This administrative reform will go a long way in creating the desirable ‘managerial civil service’ in Nepal and the revenue service cadres fully empowered and competent as tax professionalized to be able to mobilize up to 20% GDP as revenue by 2018. With this ratio of Revenue to GDP, foreign aid will not be calling the shots any longer: and we could have inclusive growth and development pursuing the national, rather than international, agenda. 

When this happens, politics will take on a new meaning as party Manifestos will, then, be of worth and substance relying on national fiscal innovations rather than foreign aid-dictated policies and projects. More time and effort of the Ministry are spent to cater to the needs of foreign aid which contributes 3-4% of GDP only as compared to the private sectors that contribute 9-10% of the national economy with their suggestions for growth, employment and consumer protection. 

Costing and Cost Control Modalities 

Another shortcoming in the budgetary process is the acute ineffectiveness of monitoring with a view to link the outputs with the inputs. This way financial and economic accountability will be more widened and deepened. The measurement of the efficiency, effectiveness as well as impact of the budget on a sector, program or project will be possible and will generate new policies from well grounded experience.

Eventually, as important sectors of the economy move toward a sector programming approach -- a veritable missing link in our planning process (due to the domination by the NPC and the ineffectiveness of the ministerial planning and coordination divisions) would be to innovate toward programme/performance budgeting for which costing studies and cost control mechanisms are vital innovations. When this will be achieved, no more will our planners be swamped by the irony of more P1 projects thanP2; and P2 than P3 ones! With very few of them being dropped to save the ‘face’, , of the ambassadors and their aid bureaucracies! We will be able to move rapidly towards the desired ‘managerial civil service’ alluded above—without which all dreams of double digit growth rates will remain mere naïve fantasies.

Lower Direct Taxes, Abolish VAT Threshold, Raise Average VAT Rate to 15% (but with Differential Rates for Products and Services) and Levy Agricultural Income Tax.

Fine-tuning of taxation rates is necessary. Dividend tax should be abolished to encourage savings and investment. More retailers and wholesalers should be made to participate into the tax net and provided incentives must be provided to the local governments to mobilize the informal sector. Perhaps they may be allowed to levy, subject to central audit of the proceeds, a nominal turnover tax of say 0.5% of monthly turnover of local business not registered in PAN. 

In order to advance fiscal devolution, agricultural income above Rs 200,000 per annum per household should also be taxed at 50% of the non-agricultural income tax. The proceeds should be 100% handed to the local governments at the ratio of 75% to the VDC and 25% to the DDC to make it politically palatable.

A massive public relations campaign should be engaged at the national level to motivate landlords-- the urban middle class self employed lawyers, doctors, engineers, consultants to pay their taxes. Tax brokers should be registered to guide tax payers and fill tax simplified returns. 

Land Bank, FDI in Retail & Resident Tourists 

Revisit the policy of Land Banks as a method for agriculture commercialization, including inviting FDI in retail trade and allowing foreigners to buy apartments as ‘resident tourists’. 

(Former Finance Minister Rana is currently a professor at SAIM)