Report. A Study to Identify Sources of Revenue, Revenue Mobilization Capacity and Expenditure Needs in Mountainous (Himali) Districts.

Transcription

1 Report on A Study to Identify Sources of, Mobilization Capacity and Expenditure Needs in Mountainous (Himali) Districts Submitted to Ministry of Local Development Local Governance and Community Development Programme (LGCDP) Shreemahal, Pulchowk November 2010 Prepared and Submitted by: Communication and Management Institute (P.) Ltd. Maharajgunj, Kathmandu.

2 List of Acronyms and Abbreviations ADO Agriculture Development Office(r) AJDCC Adibashi Janajati District Coordination Committee CBS Central Bureau of Statistics DDC District Development Committee DFO District Forest Office(r) DIMC Decentralization Implementation and Monitoring Committee DLSO District Livestock Office DRILP Decentralized Rural Infrastructure and Livelihood Project DTCO District Treasury Controller Office DUDCC Dalit Utthan District Coordination Committee FCGO Financial Comptroller General Office FGD Focus Group Discussions FY Fiscal Year GDP Gross Domestic Product GoN Government of Nepal HDI Human Development Index

3 HP Health Post HR Human Resource LBFC Local Bodies Fiscal Commission LBFAR Local Bodies'(Financial Administration) Regulations LDF Local Development Fee LDO Local Development Officer LG Local Government LGCDP Local Governance and Community Development Programme LSGA Local Self Government Act LSGR Local Self Government Regulation LSGFR Local Self Government Financial Regulation MCPM Minimum Condition and Performance Measure MOAC Ministry of Agriculture and Cooperatives MOF Ministry of Finance, MOLD Ministry of Local Development MT Metric Ton MW Megawatt NER National Enrollment Rate

4 NTFP Non-timber Forest Product NGO Non-governmental Organization OECD Organization for Economic Cooperation and Development OSR Own Source PAF Poverty Alleviation Fund RRRSDP Rural Reconstruction Rehabilitation Development Project SHP Sub-health Post TADA Travel and Daily Allowance TDF Town Development Fund TOR Terms of Reference UNDP United Nation Development Programme VAT Value Added Tax VDC Village Development Committee

5 Table of Content S. No Content Page No Executive Summary i-v 1 Introduction Background Statement of the Problem Objective Expected Outputs Methodology Scope of Work Limitations 6 2 Macro Socio-economic of Himalayan Districts General Physical Structure Population Structure Land Use Poverty and Social Status Rural Infrastructure Poverty Incidence Food Surplus Literacy and Schooling Health and Sanitation Industrial Status, Communication, Banking and 9 Cooperatives 2.10 Production and Productivity Livestock Population and Production Export and Import 10 3 Legislative Framework and Local Policies Local Self-Governance Act DDC Structure Existing Sources of LGs Sharing Arrangements Local Administration Models Advisory Committee Central Level Advisory Committee 18 4 Mobilization and Expenditure Pattern Sources Analysis of Sample Districts Own Sources from Tax from Service Charge and Fee from Sales Other sources of own Income from Sharing Land Tax Grant Inter Local Bodies Partnership, Cooperation and 42 Collaboration 4.4 /Tax Rate Decision Pattern and Trend of Sample DDCs Expenditure from 43 Internal (R2) 4.6 Public from Mountain Region Tax and Non Tax of the public sector Total Public Expenditure by Government through Central and District Level Institutions during 2061/ /67: National, Mountain Region and Districts 47

6 4.6.3 Analysis of District Level Expenditure Expenditure in the Devolved sector Sectoral Public Expenditure in the Mountain Region Sectoral Share District Level Public Expenditure by the government in the mountain region Public Expenditure of MLD during 2061/62to 2066/66 (National, Mountain Regions and Mountain Districts) Expenditure in High Priority Sector in Mountain Region Recurrent Expenditure in Total Public Expenditure in Mountain Region Poverty Alleviation Fund and Expenditure in the Mountain Region Government Grants to DDCs 54 5 Issues and Challenge Issues on Mobilization Major Problems in Mobilization Major Issues and Challenge 60 6 Capacity Structure of Himalayan Districts in Expenditure 62 and Management 6.1 Organization Structure of DDCs DDC Administration in Sample Districts Collection Procedures its Impact on 65 Compliance Compliance Collection Procedures Impact on Compliance Capacity of Sample DDCs in Mobilization 67 7 Modeling and Projection Composition of Internal Source Expenditure GAP of DDCs Major Contributing Factors to Total Internal Theory of Projection Modelling Internal Growth Modeling and Projection 74 8 Conclusion and Recommendation Conclusion Recommendation Recommended Actions 83 Bibliography 86

7 Annexes: Annex 1 a : Annex 1 : Annex 2: Annex 3: Annex 4 : Annex 5: Annex 6 : Annex 7: Annex 8 : List of Persons Met Mountain Districts by development Regions and Zones Projected Population 2010, Households Number, Population, Employment Status and Population Range in VDCs (2001) in Mountain Regions and Nepal Projected Population 2007, Households Number, Population, Employment Status and Population Range in VDCs (2001) by Districts Ethnicity (%) National, Mountain Belts and Mountain Districts Population of Religion by Development Region Total Area, Area of Holdings and Type of Land Land Use Pattern by Ecological Belts and Mountain Districts Ecological and Physiographical Division of the Districts of Nepal Annex 9: Human development index by Region, 2001 Annex 10: Human development index by Sellected Mountain Region, 2006 Annex 11: Annex 12 Annex 13: Annex 14: Annex 15: Annex 16 : Annex 17: Annex 18: Social and Economic Development Status National, Mountain Regions and Mountain Districts (Continued from Agriculture) (Continued from Literacy Rate) (Continued from Number of Work Force) (Continued from NER in Primary Level) Number of Cottage & Small Scale Industries Registered (Up to F.Y. 2065/66) by Type Number of District and Ilaka Post Offices 2008/09, Nationa, Mountain Regions and Districts Number of Commercial Bank Branches, Finance Company and Development Bank (Mid-Jan 2010), National, Mountain Regions and Districts Annex 19: Number of Cooperatives (2063 Chaitra, Registered in Department of Cooperatives),, Mountain Regions and Districts Annex 20: Annex 21: Annex 22: Annex 23: Annex 24: Annex 25: Production of Cereal Crops, 2008/2009 National, Mountain Regions and Districts Production of Cash Crops, 2008/2009 National, Mountain Regions and Districts Production of Pulses Crops, 2008/2009 National, Mountain Regions and Districts Production of Fruits, 2007/2008, National, Mountain Regions and Districts Livestock Production, 2008/2009 National, Mountain Regions and Districts Continued Livestock Population, 2008/2009 National, Mountain Regions and Districts Annex 26: Public -Tax and Non Tax: Annex 27: Total Public Expenditure , National, Mountain Regions and Districts

8 Annex 28: Annex 29: Annex 30: Annex 31: Public Development Expenditure , National, Mountain Regions and Districts Public Capital Expenditure , National, Mountain Regions and Districts Public District Level Development Expenditure ,National, Mountain Regions and Districts Public Expenditure in Devolved Sectors ,National, Mountain Regions and Districts Annex 32: Sectoral Public Expenditure 2004/05 and 2007/08 Annex 33: Sectoral Public Development Expenditure 2004/05 and 2007/08 Annex 34: Public Capital Expenditure 2004/05 and 2007/08 Annex 35: Sectoral District Level Public Development Expenditure 2004/05 and 2007/08 Annex 36: Public Expenditure of MLD 2004/ /09, National, Mountain Regions and Districts Annex 37: Prioritized Development Expenditure 2004/05 and 2007/08 Annex 38: Annex 39: Annex 40: Annex 41: Annex: 42 Annex 43: Annex 44: Annex 45: Annex 46: Annex 47: Economic Head wise Public Expenditure 2007/08, National, Mountain Regions and Districts Table District wise Programs and Expenditures Carried out by Poverty Alleviation Fund (PAF) Annex 40: Total by Source of Selected DDCs of Mountain Region (Real) (revenue modeling) : Total by Source of Sample DDCs of Mountain Region for Projeciton : Total by Source of Sellected DDCs of Mountain Region (in Nominal Term)or Projection Tax and Nontax Sources of revenue in Himali Districts b. Nontax source Service charges and Fees Nontax source Sales Sharing Sharing Annex 48: Total revenue of Sample Districts (2062/ /67) Annex 49: Annex 50 : Annex 51: Annex 52: Public Generation -Tax and Non Tax: (In Million Rupees) DDC Expenditure from Internal (R2) in Himali Districts Total District Level Development Expenditure projection Mountain Regions and Districts Projection of Resource Gap for Himali Districts for next 5 years

9 Tables Table 3.1: Sources of LGs 12 Table 4.1: Major 5 sources of revenue 20 Table 4.2: Main 5 stable sources of internal revenue 22 Table 4.3: Unpredictable sources of local revenues 23 Table 4.4: Unstable sources of local revenues 24 Table 4.5: not yet collected by DDCs provisioned in the law 25 Table 4.6: Least important sources of revenues in district in terms of yield 26 Table 4.7: Administratively feasible own revenues sources 27 Table 4. 8: Local revenues sources difficult to administer 28 Table 4.9: Structure of revenue by sources 28 Table 4.10: Own Source of Sample DDCs from Tax 31 Table 4.11: Own Source of Sample DDCs from Service Charge and Fees 33 Table 4.12: Own Source of Sample DDCs from Sale 34 Table 4.13: Own Source of Sample DDCs from Other Sources 35 Table 4.14: Own Source of Sample DDCs from Sharing 36 Table 4.15: Structure of 40 Table 4.16: GON Grants to Sample DDCs 41 Table 4.17: Sample DDC Expenditure pattern and Trend from Internal (R2) 45 Table 4.18: Public revenue from Mountain Region 46 Table 4.19: -Tax and Non Tax : Table 4.20: Total Public Expenditure 2061/ /66 47 Table 4.21:, Public District Level Development Expenditure 48 Table 4.22: Public Expenditure in Devolved Sectors , National, Mountain Regions and Districts 49 Table 4.23: Sectoral Public Expenditure 2061/62 and 2064/65 50 Table 4.24: Sectoral District Level Public Development Expenditure 51 Table 4.25 Public Expenditure of MLD 52 Table 4.26: Prioritized Development Expenditure 52 Table 4.27:Public Expenditure by Economic Heads 53 Table 4.28: District-wise Programs and Expenditures 54 Table 4.29: District Development Committee Grant 55 Table 5.1: Stated Problems in Collection in districts 57 Table 5.2: Reasons for the deviations between budgeted and collected revenue 58 Table 6.1: Major Mode of Collection in Sample District 66 Table 6.2: Capacity Assessment of Administration in Sample DDCs 67 Table 7.1: Internal (own plus revenue sharing) Composition 71 Table 7.2: Internal Modelling 74 Table 7.3: Projection of Sankhuwasabha District 76

10 Executive Summary A Study to Identify Sources of, Mobilization, Capacity and Expenditure in Mountainous (Himali) Districts is being undertaken to analyze the total revenue for the last five years, analyze the internal revenue for the last five years, analyze the total expenditure for the last five years and analyze the total expenditure from the internal revenue; and estimate total revenue, internal revenue and expenditure for the next five years with identification of revenue and expenditure gaps. A. Purpose and Background The overall objective is to undertake analysis of the existing situation regarding the various aspects of internal revenue mobilization of DDCs in the Himalayan region and recommend reform measures to make the revenue mobilization more reliable, transparent and taxpayer friendly with a view to enhance own-source revenue generation. The study was undertaken by a team of professionals from Communication and Management Institute with support and guidance from Ministry of Local development, Local Governance and Community Development Programme. The approach used was literature review, Focus Group Discussion, and visit to 4 sample districts (Sankhuwasabha, Sindhupalchowk, Jumla and Darchula). B. Himalayan Districts Out of 75, 16 are Himalayan districts in Nepal. These districts are characterized by limited accessibility, scattered settlements and low population density, slow pace of development and overall prevalence of mass poverty. This region accounts about 7% of total population of Nepal with an annual growth rate of 1.6 percent. There are only two municipalities in the region. The HDI (0.361), life expectancy (52.55), adult literacy (36.1%), and per capita GDP (1114 US $ - PPP) indicate the low level of socio-economic development of the region. In addition, Himalayan districts have very limited road access and four district headquarters have no road connectivity. C. Socio-economic Scenario Agriculture farming and livestock rearing are main economic activity though subsistence in nature and low productivity. Only 4% of land is cultivated for agriculture and 12 districts out of 16 have food shortages by about 20%. Agriculture land modernization and commercialization of the agriculture and livestock sector is in infantry stage. Export of cash crops (in east), carpets, herbs, Yak cheese, fruits like apple, walnut is some of the products from farming. Livestock farming is an integral part of livelihood and has high number of stock per capita. Market accessibility is a major hindrance for commercialization followed by slow spread of technology and its adoptability by local farmers. In recent years, the non-timber forest products especially the collection and sale of Yarcha Gumba has remained seasonal economic activity in some of the districts. i

11 Other valuable herbs and aromatic plants are also available for supporting livelihood of the people in this region. Low level of economic activity has also affected the revenue generation of local governments in this region. D. Sources of Internal revenue generation is not uniform in terms of structure of source and amount within the region. Himalayan DDCs have very limited bases for revenue generation. Tax base is very limited due to accessibility and market for local products. Eastern mountain districts raise some amount of tax from the commercial export of agricultural products (including aromatic product such as Rudrakshha). In mid and far western districts (except Darchula), export tax on NTFP is a major source of tax revenue. Sindhupalchowk district which has access and market raises significant amount of tax from export of mine and river mine products. Sales are another source of revenue of the Himalayan districts but revenue generation opportunity is not evenly distributed. Sale of gravel, sand, boulder etc is one of the major sources to Sindhupalchowk, whereas it is almost non-existent in many of the Himalayan districts. No districts have been able to sale swept wood in the region. sharing has remained the main source of internal revenue of Himalayan districts. sharing from land registration and transfer is distributed to all districts and more predictable as well. The royalty sharing from tourism is limited to some of the districts only (from mountaineering, national parks and restricted area). The royalty sharing from hydro-electricity revenue is not available in farwestern districts and irregular and very low in mid-west region. It is also very low in eastern districts as well. The revenue sharing from forestry (timber and NTFP) is more significant and regular in mid and far west. E. Contribution of Internal in DDC expenditure The expenditure pattern reflects that about 40 percent of DDC expenditure is recurrent and 60 percent as capital investment. In recurrent expenses, about 10, 19, and 8 percents expenses are incurred in employee, operating and daily allowances. About 35% of capital investment is made in infrastructures. The DDC budget allocation and disbursement in the devolved sector is less than 2% in the region. In the public revenue side, less than two percent is contributed by this region, whereas this region receives about 5.5% share of public expenditure. The trend of such expenditure in the region is increasing (22.3% per year) as against national average (20.8%). ii

12 F. Institutional and Human Resource Capacity DDCs of Himalayan districts have low level of institutional and HR capacity to effectively manage revenue generation in more transparent manner. Though the LSGA has provided authority to raise revenue from tax and non-tax sources yet the efforts so far made is transactional approach only. There is no serious effort in raising revenue in the districts. DDCs do not have systematic accounting, record keeping and reporting practices hence creating obstacle to project revenue potentials in the districts. G. Major Issues and Challenges The major issues and challenges in revenue mobilization in the Himalayan districts are identifying new additional sources of revenues, supporting LGs from the centre to increase revenue by building their capacity, focusing towards potential yielding revenue sectors, authorizing LGs to fix the tax rate based on socio-economic conditions and suitability without limiting autonomy of the DDCs to fix tax rates, introducing practice of revenue planning, increasing attention and efforts on local revenue of the line agencies in their respective sectors (i.e. forests, mining and land registration), making LB revenue suggestion central committee pro-active in resolving the issues of local revenue at central level, making attitude of LGs proactive in revenue administration, setting up proper organization for revenue administration, building capacity of human resources and maintaining revenue records. H. Expenditure Projection Expenditure has been projected on the basis of district expenditure data available from the FCGO; and the stated growth rate of national expenditure and projected inflation in the current Three Year Plan of the Government. The Government outlay projection for capital expenditure (more or less analogues to development expenditure) is being consistently maintained at 15%. Internal revenue source is a very small part in the mountain districts; they are likely to have additional 1 to 1.5 % impacts in the total district level development expenditure. Based on all these, a growth rate of 16% per year (in nominal term) has been applied for projecting the development expenditure at the district level I. Internal Growth Projection Approaches applied for the growth projection are based on some smoothening framework and commonsense, as described below i. Data were converted in real terms of 2010 price to take care of the inflation effects up to 2010 ii. Application of the moving average growth rates for the period 2006/7, 2007/8 and 2008/9 was applied. iii

13 iii. The projection base was built on the chosen moving average for 2006/7, 2007/8 and 2008/9 as a base for 2010 as the expected base. iv. The study took a simple growth trend of 15% a year with an inflation of about 8% a year and real additional revenue effort of 7%, in general. v. In case of the land tax, the expected base revenue of 2010 has been put intact as an increase in the tax rate on land would not be practical and will not be politically acceptable due to the high poverty in the region. vi. In case of the revenue sub-heads for which a tax was not raised by a district, a small starting amount of Rs is set as a target, for the projection from the next year. J. Potentials of Sample Districts Jumla: DDC Jumla has potential to raise export tax on fruits (organic apple) once regular motor service to Surkhet and beyond is in operation. It has potential to raise revenue from export of goats and sheep. In sales, it has potential for selling sand, gravel and boulders from rivers though in small amount. Another potential source is entry fee for herbs collectors for which mandatory provision of identity is required to implement. Fishing licensing is also potential in Jumla district. Darchula: DDC Darchula has to do proper administration of herbs such as Yarcha Gumba. It has potentials to raise revenue from export tax on agriculture products and livestock. Besides regularization of mining and timber export is also possible to raise revenue. Swept wood sale could be another source of revenue. Sankhuwasabha: Export tax on timber from private forests is potential when regular motor services to the Terai are available. Regularizing mining activity can generate income through revenue sharing with GoN. River mine sale from major rivers have high potential for proposed Arun hydro-electricity project and associated road construction. Sindhupalchowk: Regularization of mining (slate) and provisioning of fee for tourism related activities such as bungee jump and rafting. Export tax on agriculture products and livestock has also potential for revenue. K. Recommendations management: All Himalayan DDCs needs to up-grade the status of internal revenue unit to a section with professional (officer level) staff. District specific revenue potential study and revenue projection and revenue mobilization planning is required to enhance the revenue of DDC. Periodic research on tax base and coverage has to be conducted in cooperation with line offices, private sector and VDCs. Periodic interactions with multi-sectoral stakeholders including local administration and Advisory Committee is required to get support from them. Provide autonomy to DDCs in raising revenue from the bases that are not under purview of Centre and LGs. DDCs have to revise the rates of tax, fee and charges in a regular interval considering inflation rate and market prices. Local bodies senior as well as staff involved in revenue generation have to be iv

14 trained on revenue mobilization, accounting and record keeping as per requirement. Publish revenue mobilisation and expenditure details to seek support to enhance revenue generation in the districts that will promote transparency and accountability, its administration and compliance. Partnership and Collaboration: Initiate partnership with private sector/individuals for raising tax/fee/charge (e.g. toll tax, selling sand boulder from a small pocket, service charge in river-crossing) on benefit sharing basis. DDCs can promote public private partnership in income generating projects or other revenue raising spheres as well. DDCs can increase their revenue not only with increased base through inter and intra-district coordination in revenue generation. Update the valuation of land in accordance with changes in land value, infrastructure development in close collaboration with District Administration Office, Land Office, Cadastral Survey Office and VDCs/Municipalities for land ownership transfer purpose. Monitoring and inspection: DDCs have to emphasize in monitoring and also inspection of the revenue sources and bases in regular interval. Environmental assessment of potential resources as prescribed by environmental laws has to be conducted for sustainability and complying with regulations. Policy and Laws: Review the existing policies on local revenue generation authority with a view to promote fiscal autonomy to the Himalayan districts. Regulate illegal export (timber to Tibet from the northern border): Inter-ministerial Coordination: Make clear about the revenue sharing (royalty sharing from tourist entry fee in buffer zones/conservation area, royalty raised by Nepal Mountaineering Association, Nature Conservation Fund). Disburse royalty timely from the hydro-electricity and tourism sector Establish strong coordination among ministries/departments with MoLD at the centre. The Ministry of Finance has to facilitate revenue sharing process in more predictable manner ensuring timely disbursement of the revenue sharing. v

15 Chapter One Introduction 1.1 Background Local governments are the primary level government that imparts services to the people. According to the principle of subsidiarity, local governments are those bodies that are easily accessible by the local people and easy for them to effectively participate in governance matters and services they provide are easy, simple, prompt and transparent. On these bases, state devolves the work responsibility and power to the local government. Whether they are countries of Unitarian governance system or the Federal governance system, there is equal importance attached to local self-governance and there are local governments in both types of system. Decentralization in Nepal has a long history and the process has undergone significant changes over time. Post 1990s till 2003 period can be considered as the landmark to the development of decentralization process in the country, when various reform measures were initiated to strengthen the devolution. Amore systematic attempt with a legal base was followed since 1999 after the promulgation of Local Self Governance Act, LSGA provides basic framework for fiscal decentralization that covers expenditure assignment, revenue assignment, intergovernmental fiscal transfers and local borrowing. After the political change of 2006, the Interim Constitution, 2007 clearly spelled out the structure and principle of local self governance in the country. It also focuses on the accountabilities of the local government in terms of local resource mobilization, revenue sharing, intergovernmental fiscal transfer, and accountability mechanism at local level. Similarly, the constitution emphasizes a balanced and uniform development throughout the country providing special consideration to the advancement of socially and economically backward communities. In a similar vein, it recognizes the local self governance practice that has been continuous since the enactment of Local Self Governance Act, 1999 (LSGA) and Regulation, 1999 (LSGR). The LSGA has clearly mentioned the fundamental principles of local governance, devolution of powers, roles, duties and responsibilities of the local governments linked with centrally provided and locally generated resources. However, the assigned revenues are inadequate to meet the local expenditure requirements. Nepalese local governments (LG) often use too many unproductive revenue sources that barely cover the costs of collecting them. On the other hand, LGs in Nepal are giving little attention to explore and exploit local opportunities to raise more revenues rather looking centre for higher amount of 1

16 resources. Similarly, the Government of Nepal (GON) continues to allocate gradually higher budgets and revenue sharing to the local governments to meet the gap of fiscal requirements at local level. GON also introduced formula and performance based grant system and higher incentives for the LGs which deliver better performance as per the stated legal frameworks. The slow pace of socio-economic and infrastructure development in the Mountain districts demands higher amount of resources covering development needs of the Himalayan region. For this purpose, this study intends to explore revenue potentials of the Himalayan districts 1 covering east to west (Taplejung to Darchula). 1.2 Statement of the Problem The sources of funds of District Development Committees (DDCs) in the Himalayan Region includes annual block grants and conditional grants from GON, revenue sharing and contributions received from different donors and a small proportion of this covered by locally generated tax and non-tax revenues. LSGA/R provides similar revenue tax and non-tax sources to all DDCs irrespective to their location in the different geographical regions. These sources are mostly based on natural resources like mine base, forestry base, and river base. The natural resource sometimes can have a big economic value in one region if it is directly linked with the market access; whereas, it may not have economic value if it does link with the market. The amount of revenue raised by Himalayan DDCs from the internal sources tends to account for a small proportion of their annual budget. As a result, the ability of these local governments to set and achieve their own development targets and priorities are severely limited. One of the reasons pointed out for the low level of revenue mobilization from internal sources is that the LSGA permits many sources of raising taxes for DDCs in the Himalayan region, but some of these are not potential revenue yielder in the true sense. On the other hand, it is also found that the DDCs and VDCs have not collected revenues from the sources assigned to them even when the potential for raising revenue from such sources is high. One of the reasons attributed to the low level of internal revenue mobilization is the inappropriate assignment of revenue sources, which are not potential revenue yielder. The underlying principles behind any assignment of revenue sources to LGs is the ease in collection and administration and that the source assigned should yield substantial revenue. 1.3 Objective The overall objective is to undertake analysis of the existing situation regarding the various aspects of internal revenue mobilization of DDCs in the Himalayan region and recommend reform measures to make the revenue mobilization more reliable, transparent and taxpayer friendly with a view to enhance own-source revenue generation. More specifically the objectives are: 2

17 i. Analyze the total revenue for the last five years and estimate for next five years ii. Analyze the internal revenue for the last five years and estimate for the next five years iii. Analyze the total expenditure for the last five years and estimate for the next five years iv. Analyze the total expenditure from the internal revenue and estimate for the next five years 1.4 Expected Outputs The outputs expected from this study are: i. Data collection on and analysis of the following aspects of the internal revenue mobilization system of DDCs carried out: a. Available tax and non tax sources, b. Bases and rates applied in these sources, c. Institutional capacity of revenue administration, d. collection procedures and its impact on compliance, e. System of revenue projection, and f. Trends in own-source revenue collection ii. iii. iv. Different aspects of existing system of revenue practiced in the DDCs assessed and evaluated and weaknesses in the functioning of the system identified. Trend of overall revenues and expenditures for the last five years Inter LBs partnership, cooperation and collaboration explored. v. Possibilities for the enhancement revenue collection identified vi. Reform measures in the above areas recommended. 1.5 Methodology During the inception phase the study team developed the approach and methodology for the study based on the Terms of Reference provided by the Local Governance and Community Development Programme (LGCDP). To answer the provisions of the TOR a wide range of quantitative and qualitative data was collated. Four districts (Darchula, Jumla, Sindhupalchowk and Sankhuwasabha) were identified as sample districts for field visits and study. However, secondary data of all sixteen districts were consulted for socioeconomic analysis and Macro analysis. For the analysis of the revenue expenditure gaps and model building for revenue projection, the number of 3

18 districts used varied depending on the availability of the data from the secondary sources. In addition, expert assisted participatory Focused Group Discussion (FGDs) was organised in Kathmandu with the politicians/ LDOs/planning officers of the Himalayan districts by using structured questionnaire. FDGs concentrated on the potential revenue sources, problems in raising revenue, expenditure pattern etc. The quantitative data was drawn from secondary sources, mainly the published and unpublished records of Government of Nepal (GON), revenue sharing entities (Land Reform, Forest, Tourism, and Electricity related agencies), Financial Comptroller General Office (FCGO) and local bodies associations. These enabled levels of revenue flow, relationships between revenue and budget allocations and operational factors to be assessed. In addition, policy and strategic trends and decisions during the period were reviewed, as well as an assessment of results, again drawing on published material triangulated across a number of sources. The main data sources used were: Official records of DDCs of the sample 4 districts. Reports/publication of GON, local bodies associations and other professional agencies related to Himalayan districts. Publications and related database of the Central Bureau of Statistics (CBS), Ministry of Finance (MOF), Ministry of Local Development (MOLD), Ministry of Agriculture and Cooperatives (MOAC), Local Bodies Fiscal Commission (LBFC), Poverty Alleviation Fund (PAF) and FCGO. Key research publications. The documentary data was supplemented with qualitative information based on a structured questionnaire, semi structured interviews and Focus Group Discussions-FGDs (as mentioned earlier). Annex 1.1 lists all those who were interviewed or participated in the FGDs. The questionnaire was filled in by 32 respondents including representatives of political parties, ex-ddc Executives, Local Development Officers (LDO), engineers and staff of local bodies. Semi structured interviews were held with 16 district level officials. The interviews enabled key issues to be explored in greater depth and local bodies specific aspects. After the interviews study team members discussed the notes to ensure respondents' responses were recorded correctly and in a comprehensive manner. FGDs were conducted in Kathmandu, Darchula, Jumla, Sindhupalchowk and Sankhuwasabha districts with groups of DDC officials, political party representatives and civil society. The FGDs enabled wider views on the revenue mobilisation and on aspects of the questions to be explored, and allowed triangulation with interview based and documentary evidence. The team has spent considerable time analysing the interview notes and other data. Projection for the revenue and expenditure for next five years is based on a combination of judgmental and trend analysis methods. 4

19 Data on real internal revenue of the sample districts were collected from the district records and used for revenue forecasting. Whereas, published data sources has been used to forecast revenue for other Himalayan districts. Due to scanty, erratic and irregular nature of LGs data, moving average of the stable three years of past five years has been taken from the real revenue data to analyse trends for the revenue projection for next five years. Similarly, growth forecast of the national periodic plan for the next three years and inflation rate published by Nepal Rastra Bank has been used to forecast next five years' expenditure needs of the Himalayan districts. 1.6 Scope of Work The study specifically included the following tasks (as per TOR): Consultative meetings with the key officials from various governmental and multilateral/international organizations and professional organization of Local governments were carried out during sharing of inception report and in other occasions. Designed a comprehensive questionnaire/data collection sheet in order to collect data about internal resources generated by DDCs, trends in their collection, and to get feedback from the field with a view to assessing and identifying weaknesses in the functioning of different aspects of the revenue system of these local bodies. Carried out field missions in the selected sample DDCs. Ascertained the causes leading to the high and low level of revenue generation of sample DDCs. Assessed and evaluated the existing system of revenue practiced in the DDCs on the basis of analysis of available data and information collected from the field covering aspects such as trends in own-source revenue collection (aggregated and disaggregated), available tax and non tax sources, bases and rates applied in these sources, institutional capacity of revenue administration, revenue collection procedures and its impact on compliance, level of collection efficiency and utilization of revenue sources assigned, status of the implementation of the revenue authorities, and possibilities of enhancement revenue collection. Analyzed the overall revenues and expenditure trend for the last 5 years. Identified weaknesses and possible measures of reform in the different aspects of the functioning of revenue system of DDCs. Explored revenue potentials and expenditure for next three years, and discussed these with local stakeholders in order to check their level of realism during field consultations. Recommended policy reform and other practical measures with a view to streamlining the overall system of revenue administration of these local bodies. 5

20 1.7 Limitations Despite the thorough methodology, and extensive use of available secondary data for all the 16 districts by going beyond the four districts stipulated in TOR for the analysis of various subcomponents, the study team would like to note a number of limitations. Firstly, it was not possible to undertake primary data collection in an extensive way and the quantitative assessment was dependent on the secondary data available. This was not always comprehensive due to scanty, erratic and irregular nature of LGs data. Secondly, the time available restricted the number and depth of interviews and discussions and the depth of sector coverage. Thirdly, record of the revenue mobilization was limited in all the visited districts and baseline data was not available as the LGs have not yet carried out study on revenue mobilization in the Himalayan region. 6

21 Chapter Two Macro Socio-economic Scenario of Himalayan Districts 2.1 General Physical Structure Situated between 26 o 22' N to 30 o 27' latitude and 80 o 4' E to 88 o 12' E, Nepal is a small country with area of Sq KM. It has varied climate and physiological structure. Altitude of the country varies from less than 100 meter (m) to 8848 meter. The country has been divided in three geographical regions i.e. Terai, Hills and Himalayan (Mountain). The Himalayan region contains high mountains and Himalayas with altitude ranging above 3300 meter above sea level, which rises high with perpetual Himalaya snow above 5000 meter. The country borders in North with China and in the rest of the three directions with India. The axis length of the country is 875 Km. North-south width varies between 130 to 240 Km. The country is divided politically in 75 districts and five regions (Eastern, Central, Western, Midwestern, and Far Western) majority based on river basins. The Himalayan districts (mountain region) which this study covers include 16 districts 2 and they are comprised in all regions. Four Himalayan district headquarters ( Humla, Mugu, Dolpa and Solukhumbu) are still not connected by motor-able roads. Mountain Districts by Development Regions Development Region Districts Number Eastern Taplejung; Sankhuwasabha; and Solukhumbu 3 Central Dolakha; Rasuwa; and Sindhupalchok 3 Western Manang; and Mustang 2 Mid Western Dolpa; Humla; Jumla; Kalikot; and Mugu 5 Far Western Bajhang; Bajura and Darchula 3 Total Mountain 16 Nepal 75 Source: Classification Used by NPC 2.2 Population Structure Himalayan region constitutes about 7 percent of the population of Nepal. Currently, about 2.8 million people (projected for 2010 based CBS survey of 2010 and a medium variant prescribed by CBS) live in the region. About a third of that lives in central mountain region. Small number (1.5%) lives in western mountain 7

22 region. Other regions have the population between 18 to 24 percent. 95 percent of the total population of the Mountain Region lives in the rural areas. There are two small municipalities (Bhimeswor in Dolakha and Khandbari in Sankhuwasabha district) holding about 5% of the population. Population growth in the mountain region is about 1.6% a year, much less than the national average of 2.3 % over the last decade. Population growth in the Mountain Region is lower due to climate effects and out-migration from the region due to hardship. Ethnicity-wise, about a third of the populations are Chettri followed by Tamang (12%), Brahmin 10%, and Sherpa, Rai and Newar 4 to 5% each. About 70 percent of the population are Hindu, and one fifth Buddhist, 9 percent Kirat and rest the others. Unemployment is about 5% and people going destination abroad is about 3%. Refer to Annex 2, 3 4 and 5 for details. 2.3 Land Use Most of the land area of the region is a difficult terrain bone with about 35 % slope land and almost 60% high mountains with snow most of the time. Agricultural land constitutes of only 4% of the total area. Agricultural land area is about 208 thousand hectares for population of 2.0 million in Per capita land area is about 12% higher than the national average. However, the crop productivity is very low and most of the districts are food deficit. Of the total land area in the region, about one third is snow, one fourth forest, 10 percent agricultural and grass land (with about 60% grass land in it), barren land 24% and shrub 8%. Because of the presence of grass land in abundance, livestock is one of the agricultural occupations in high mountains. Refer to Annex 6, 7 and 8 for details. 2.4 Poverty and Social Status Government of Nepal does not estimate separately the GDP and per capita income of the regions. UNDP estimate based on 2001 data indicates that HDI of Mountain district is much lower (0.386) compared to that of Nepal average (0.471). Among the 16 districts Jumla, Kalikot and Mugu in the Mid-western region and Bajhang and Bajura in Far-western region is the lowest (table 10). Likewise education index of the region is lower (0.296) than Nepal (0.385) and in the CBS ranking of the districts compared to Kathmandu as 1 (table 3). Per capita income (PPP) of the region is Rs (90%) as against 1310 of Nepal. However, the income of Manang, Mustang, Rasuwa and Solukhumbu is much higher than the Nepal average. If these four districts are separated, the situation of the region is further worst. Refer to Annex 9 and 10 for details. 2.5 Rural Infrastructure Rural infrastructure is very poor in the region. Irrigated Area is only about 3% of the agricultural land. Road infrastructures is about 1000 Km and constitutes only 8

23 about 6% of the roads in the country despite mountain area being about one third in the country. Black topped road is only about 190 Km. Most of the parts are inaccessible. Still four districts headquarters are not connected by road. Refer to Annex 11 for details. 2.6 Poverty Incidence Food Surplus Poverty incidence is 42% as against 31 % percent in the country with maximum poverty incidence ranging to 66% in some Ilakas (sub-district of Mugu). Poverty incidence is high in most of the districts, with highest in Kalikot followed by Taplejung and Rasuwa (Table 2.3). There is acute food shortage in the region. Twelve out of sixteen districts are in food deficit. Edible food grain production per year per capita in the region is about 151 Kg. Food deficit is about 20% of the requirements. Stunting is high as 61% and underweight are almost half. Refer to Annex 12 for details. 2.7 Literacy and Schooling. Literacy in the region is only about 43% and is 10 percentage points behind the national average (2001). Illiteracy in some villages goes high up to 99%. Midwestern and Far-western region have the highest illiteracy rate. Education status 2009 shows that there are about 5600 schools in the region. They represent about 11 percent of the total schools in the country. Net enrolment has progressed well to 95%. Student per teacher at primary and secondary level is 43 and 37 % respectively, not much different from national status. While the population of the region is about 7%, student in the primary school is about 8% of the total students in the country implying that schooling is fairly distributed in the region compared to the country. Refer to Annex 13 and 15 for details. 2.8 Health and Sanitation Household having access to toilet facility in the region is only about 41%; and access to the improved source of drinking water is for 73%. There are only a limited number of health institutions national record has shown only about 567 health care units in the region for a population of 2 million, implying about 4000 population to be served by a health care unit. There are only 53 doctors (38 thousand population per doctor), 821 Health assistants/ahw and only about 160 nurses in the entire mountain region. District health status varies significantly Refer to Annex 13 and 14 for details. 2.9 Industrial Status, Communication, Banking and Cooperatives Most of the industries are of small and cottage category. There are only 797 manufacturing units registered in the region by 2009, representing only about 2% of the total industrial establishment compared to cottage industry in the country. 9

24 Likewise, as manufacturing establishments is very low; revenue generation from business taxes is nominal to DDCs. While mobile services and VSAT connection are available in the district headquarters, postal services are still the major means of communication. There are about 149 postal service office, 31 commercial bank branches with at least one in each district, and 630 co-operatives in the region. Refer to Annex 16, 17, 18 and 19 for details 2.10 Production and Productivity Major cereal productions in the region are Maize, Millet, and Wheat. Cash crop is majorly potato. It serves also as the staple food crop. Productivity of the region is low due to lack of adequate fertilizers and irrigation access. Food deficit is about 20%. There is also pulses production of about 11 thousand MT (about 4% of the national production). Both the cereals and pulses are imported in the region to cater both the population and tourists. Fruit production is about 58 thousand MT (29 Kg per capita) and is majorly Deciduous (70%). Apples production has gained popularity in recent decade. However, marketing has been a major problem. Refer to Annex 20, 21, 22 and 23 for details Livestock Population and Production Cattle, Yak, sheep and goat raising are also a major among the occupations in the region. High altitude regions are popular for yak, and goats raising for their livelihood. Moving down to the hill in winter and up in winter season with the livestock population is the general culture in high attitude regions. Total milk production is 50 Kg per capita and meat production 9.5 kg per capita in the region. Likewise, wool production is 121 kg. Egg production is 20 per head. The region is popular for cheese and wool production of high quality. Refer to Annex 24 and 25 for details. Parts of them are also exported Export and Import Traditional carpets, herbs, Yarcha Gumba and Yak cheese are the general export items of the region. However, the actual data is very scanty. Foods, pulses and productions of tourist items are the major export. There is high potential of production and export of herbs, apples, yak cheese, wool and hydro-power from the region at present. 10

25 Chapter Three Legislative Framework and Local Policies 3.1 Local Self-Governance Act Decentralization based on legislative and political commitment is indispensable. In Nepal provision for decentralization and local governments is explicitly provisioned in the current Interim Constitution of Nepal. LSGA and Regulations i.e. Local Self-governance Rules (LSGR), 2000 and Local Governments (Financial Administration) Regulation (LBFAR), 2007 are the main legal basis and provide the rules for decentralization and local governance system and practices in the country. The important features of these laws inter-alia are: Principles of local self governance is clearly mentioned in article 3 of the Act, Clear provision of LG's right to get grants from the centre, Clear specification of expenditure, taxing and borrowing authorities to the local governments, System of revenue sharing from the centre and among LGs, Provision of a Decentralization Implementation and Monitoring Committee (DIMC) and Local Bodies Fiscal Commission (LBFC), Provision for the creation of a Local Service, Provision for the establishment of a sectoral (subject) section in the local governments, and Partnership with civil society, NGOs and private sector LSGA provides broader framework for fiscal decentralization by assigning different roles and responsibilities to LGs followed by revenue raising authority from different tax and non tax sources and central government grants to minimise vertical and horizontal fiscal imbalances. The LGs are authorized to levy taxes on various activities namely utilization of natural and other resources, land and building, profession, entertainment, vehicles, property rental, etc. In addition to the revenue from tax sources, the LGs are also empowered to impose different types of fees and service charges on their service delivery. 3.2 DDC Structure LSGA article 221 has provisioned the structure of DDC revenue. It comprises different internal and external sources that include GON grants and budget; amount collected from taxes, fees and charges; land revenues shared by VDCs 11

26 and municipalities in the district; amount collected from sale or rent of DDC's movable and immovable properties, and interests, amount receipt from gift, donation, grants or aid from any person or institution; foreign aids; amount receipt from revenue sharing, fine and penalties, and income generating activities; borrowings from bank or other financial institutions; and others if any. 3.3 Existing Sources of LGs In order to perform the roles assigned to LGs, the governments (national and local) have to collect revenues in an efficient and appropriate manner, and allocate those resources effectively and efficiently. DDC as an intermediary local government can impose tax on the use of roads and bridges constructed from its own source or those formally handed over to it, export tax on local raw materials and tax on recyclable and waste materials. Another important source of internal revenue of DDC is the income from the sale of sand, soil, stone, aggregate and woods swept by river. Besides, DDCs could also collect different types of service fees and charges. In addition to this, DDCs are entitled to get revenue sharing from different sources of revenue collected by the government in respective districts on a derivative basis. The details of internal revenue authorities to all tiers of LGs are given in the table below. Table 3.1: Sources of LGs DDCs Municipalities VDCs House and Land Tax Land or Land Tax (25% to be shared with DDC) Integrated Property Tax Tax on the Utilization of Natural Resource (35 to 50% to be shared with Municipalities and VDCs) Taxes on the use of infrastructures such as roads, bridges, etc. Tax on the export of goods produced in the district. Tax on the recyclable and waste materials Tax on agricultural and animal products Service fee on the use of guest house, library, city hall and canals, embankments and dams Licensing and renewal charges on rafting, boating, and Tuins and fishing on rivers Recommendation Fee Vehicle Tax Entertainment Tax (cinema hall, video hall, cultural show halls and theatres) Rental Tax on property rented Advertisement Tax Business enterprise tax on specified industry, trade, profession or vocation Commercial video tax Parking charges Other charges including the charges for the valuation of immovable properties Recommendation Fee Charges on building permits 12 House and Land Tax Land or Land Tax (25% to be shared with DDC) Vehicle Tax Entertainment Tax (Cinema hall, video hall, cultural show halls and theatres) Rent and tenancy tax Advertisement Tax Business enterprise tax on specified industries, trades, professions or vocations Commercial video tax Tax on commercial exploitation of natural resources. Service Charges (sanitation, drainage/ sewerage, solid waste mgmt., etc.) Entrance charges (tourist places, parks, gardens, etc.) Approval and recommendation charges Licensing and Renewal Fees