Constitutional Provisions of Taxation In Nepal

Constitutional Provisions of Taxation: Taxation and Financial Powers in Nepal

By: Dinesh Joshi

Introduction

The Constitution of Nepal, 2015 provides a clear framework for the exercise and distribution of taxation and financial powers among the Federal, Provincial and Local Governments. The constitutional framework aims to preserve the autonomy of each level of government while maintaining an organized and equitable financial system.

1. Levels of Government

Article 56 of the Constitution of Nepal, 2015 establishes three distinct levels of government: Federal, Provincial and Local Government.

1.1 Federal Government

The Federal Government of Nepal is the highest level of government. It is responsible for national policies, foreign affairs, defence, monetary policy and overall governance. It functions through ministries, departments and other government agencies.

1.2 Provincial Government

Nepal is divided into seven provinces, each having its own government responsible for areas such as provincial administration, education, health, transportation and provincial laws.

The Provincial Government is led by the Chief Minister as the executive head and the Governor as the ceremonial head appointed by the President. Each province also has a Provincial Assembly to legislate on provincial matters.

1.3 Local Government

Local government consists of 77 districts and 753 local units, including metropolitan cities, sub-metropolitan cities, municipalities and rural municipalities.

Local governments are responsible for local governance, infrastructure development, education and public services. They are headed by a Mayor in municipalities or a Chairperson in rural municipalities.

2. Distribution of State Power — Article 57

Article 57 distributes powers among the different levels of government, particularly with regard to taxation and financial management.

Federal Government

Federal powers are vested in matters listed in Schedule 5, including:

• Customs Duty

• Value Added Tax (VAT)

• Excise Duties

• Corporate Taxes

Provincial Government

Provincial powers are vested in matters listed in Schedule 6, including:

• Land registration fees

• Vehicle tax

• Entertainment tax

Concurrent Powers of Federation and Provinces

Schedule 7 contains matters shared by the Federation and Provinces, including income-tax sharing and excise duties.

Local Government

Local powers are vested in matters listed in Schedule 8, including:

• Property tax

• House rent tax

• Business tax

Concurrent Powers of All Three Levels

Schedule 9 provides for joint financial management responsibilities of the Federal, Provincial and Local Governments.

Laws made by lower levels of government must remain consistent with Federal laws.

3. Residual Powers — Article 58

Article 58 provides that matters not expressly included in Schedules 5, 6, 7, 8 or 9 fall under the jurisdiction of the Federal Government.

Therefore, new forms of taxation or financial matters that are not specifically assigned by the Constitution are controlled by the Federal Government.

4. Exercise of Financial Powers — Article 59

Article 59 establishes further rules regarding the exercise of taxation and financial powers across the different levels of government.

Legislative Authority

Federal, Provincial and Local Governments may enact laws, prepare budgets, formulate policies and implement plans relating to financial matters within their respective jurisdictions.

Federal Oversight

The Federal Government may establish policies, standards and laws applicable to Provincial and Local Governments, particularly in areas involving concurrent powers.

Budgetary Process

Each level of government prepares its own budget according to timelines and procedures regulated by Federal law.

Equitable Distribution of Natural-Resource Revenue

Revenue derived from natural resources must be distributed fairly. A portion may be allocated to affected regions and local communities through royalties, services or goods.

Local Investment in Natural Resources

Where a local community seeks to invest in natural resources, priority is to be given to such investment subject to legal provisions.

Foreign Assistance and Loans

The Federal Government has exclusive authority to obtain foreign assistance and loans, with the objective of maintaining macroeconomic stability.

Fiscal Discipline

The Constitution provides for laws regulating budget deficits and maintaining financial discipline at all levels of government.

5. Allocation of Revenue Sources — Article 60

Federal, Provincial and Local Governments may levy taxes on matters falling within their respective economic jurisdictions and may collect revenue from those sources.

Major Revenue Sources

6. Overall Process of Formulation of Law

Based on the powers granted by the Constitution of Nepal, the Government of Nepal promulgates a Finance Act every year.

The Ministry of Finance prepares and submits the estimate of revenue and expenditure to the Federal Parliament on 15th Jestha every year, in accordance with the Constitution. In practice, the Finance Minister presents the Finance Bill to the Federal Parliament for approval.

7. Formulation of a Finance Act

The main procedural stages in the formulation of a Finance Act are:

Step 1: Presentation of Finance Bill

The Finance Bill is presented in the House of Representatives on 15th Jestha every year under Article 110(1).

Step 2: Presentation to the National Assembly

After approval by the House of Representatives, the Finance Bill is presented to the National Assembly under Article 111(2).

Step 3: Consideration by the National Assembly

Within 15 days of receiving the Bill, the National Assembly sends it back to the House of Representatives, with or without recommendations.

Step 4: Presidential Certification

After receiving the Bill from the National Assembly, the House of Representatives sends it to the President for certification.

Step 5: Finance Act

After certification by the President, the Bill becomes an Act known as the Finance Act.

8. Tax Recovery Before Presidential Certification

Under Section 3 of the prevailing Tax Recovery Act (Samayik Kar Asuli Ain), 2012, tax may be levied with immediate effect before certification by the President, subject to specified validity periods.

The validity is:

• If replaced by the Finance Act, it remains valid up to the date of replacement.

• If a notice of repeal is published in the Nepal Gazette, it remains valid up to the date of repeal.

• In other cases, it remains valid for up to six months.

9. Formulation of a Finance Ordinance

When both Houses of the Federal Parliament are not in session and immediate action is required, the President may, on the recommendation of the Council of Ministers, promulgate an Ordinance.

The major provisions include:

• An Ordinance promulgated under Article 114 has the same force and effect as an Act.

• It must be tabled at the session of both Houses of the Federal Parliament held after its promulgation.

• If it is not passed by both Houses, it ceases to be effective.

• The President may repeal the Ordinance at any time.

• Unless already made ineffective or repealed, the Ordinance ceases to be effective 60 days after the day on which a meeting of both Houses is held.

10. How a Finance Bill Becomes a Finance Act

The enactment of a Bill into an Act follows the legislative procedure provided by the Constitution.

1. Drafting and Proposal

The Ministry of Finance or another relevant government body prepares a Bill covering new tax policies, changes in tax rates or modifications to existing tax laws.

2. Presentation in the Legislature

The Bill is introduced in the House of Representatives. The Finance Minister or another designated authority presents the Bill and explains its purpose and expected impact.

3. Discussion and Committee Review

Lawmakers examine the economic, social and legal implications of the Bill. It may be referred to a committee, such as the Finance Committee, for detailed examination and amendment. Public views, expert recommendations and stakeholder feedback may also be considered.

4. Voting and Legislative Approval

Members of the lower house vote on the Bill. If approved, it proceeds to the upper house for further review. The upper house may accept, reject or suggest amendments.

5. Presidential Approval

After approval through the legislative process, the Bill is sent to the President or Head of State for final assent. Once approved, it becomes law.

11. Development and Amendment of Financial Laws in Nepal

Financial laws in Nepal are developed and amended under the principle of fiscal federalism. The Federal, Provincial and Local levels have distinct but coordinated legislative processes.

These laws cover:

• Taxation

• Budgeting

• Financial management

• Intergovernmental fiscal transfers

Federal Level — Government of Nepal

Federal finance laws regulate major national taxes such as:

• Value Added Tax (VAT)

• Income Tax

• Customs

• Excise

They also cover the national budget, public debt and intergovernmental fiscal transfers. The federal process is extensive and involves a bicameral Parliament.

12. Development of Finance Laws

Stage 1: Proposal and Drafting

The Ministry of Finance, with expert consultation, initiates proposals using national economic data, budget requirements and international commitments.

The Revenue Advisory Committee, National Planning Commission and relevant financial institutions may provide technical recommendations concerning tax-base expansion, rate adjustments and structural reforms.

The drafting process involves the Ministry of Finance for policy matters and the Law Ministry for legal consistency.

Stage 2: Cabinet Approval

The fully drafted Bill is submitted to the Council of Ministers (Cabinet) for approval.

Cabinet approval provides official endorsement from the executive branch and is a prerequisite for introducing the Bill in Parliament.

Stage 3: Parliamentary Process

The Bill undergoes bicameral review. It is tabled in the House of Representatives for the First Reading because money Bills must originate in the lower house.

It may then be sent to the Finance Committee for detailed scrutiny, public feedback and proposed amendments before proceeding through further readings, debate, amendment and final voting.

Stage 4: Presidential Approval and Implementation

After passage through the legislative process, the Bill is sent to the President for authentication.

After assent, the law is formally published in the Nepal Gazette, which marks its legal enforcement date. Agencies such as the Inland Revenue Department (IRD) then begin administration.

13. Amendment of Finance Laws

Financial laws may be amended for various reasons.

Annual Amending Tool

The annual Finance Bill is the primary method used to amend finance laws. It can adjust tax rates, slabs and exemptions to align with the new fiscal year's budget.

Changes in Global Trade Agreements

Amendments may be required to modify customs duty rates and comply with international or SAFTA commitments.

Supreme Court Rulings

Interpretations of tax law by the Supreme Court may require legislative changes to address legal ambiguities.

Immediate Economic Crises

Major changes in inflation, trade or other economic conditions may require amendments to financial laws.

Ordinance Power in Emergencies

Under Article 114, when both Houses of Parliament are not in session, the President may, on the recommendation of the Council of Ministers, promulgate a Finance Ordinance. It has the same legal force as an Act but must be dealt with by both Houses within the constitutional period; otherwise, it lapses.

Conclusion

The Constitution of Nepal establishes a structured framework for taxation and financial powers across the Federal, Provincial and Local Governments.

Articles 56 to 60 and the relevant constitutional schedules provide the foundation for the distribution and exercise of financial powers.

The constitutional framework also establishes procedures for the formulation of Finance Acts and Finance Ordinances and provides mechanisms for developing and amending financial laws.

Understanding these provisions is important for students of accounting, taxation, finance, business and law, particularly for understanding Nepal's system of fiscal federalism.