Municipal Non-Tax Revenue
Expansion Needed For Better Output

By Rup Khadka

MUNICIPALITIES can generate revenue from non-tax sources, such as user charges, regulatory fees, rental incomes and income from the sales of local resources. These sources have been important in the context of the present ‘fend-for-yourself’ environment.

Efficiency

Municipalities provide such public services as water, sewerage, electricity etc., which are generally not so attractive for the private sector. There has been a growing emphasis on the finance of these services through user charges. User charges are justified on both the efficiency and equity grounds. Since the imposition of user charges reduces the wasteful use of municipal services, it promotes efficiency. Besides, imposition of the user charges on the users of the services on the basis of actual use of municipal services is also justified from an equity point of view. Since user charges are based on the quantity consumed by each user, they give local governments a clear indication of the level of service preferred by citizens. User charges also can be used to influence private behavior toward socially desirable ends.

Municipalities also can generate some revenue from some regulatory fees. It may be necessary to take approval of the municipalities to construct buildings and to set up industries, business or profession etc. in the municipal area. Municipalities can charge some fees to recover their administrative costs or they may even levy such fees as regulatory fees on revenue earners.

Similarly, municipalities can generate some rental income from the users of the municipal property. For example, municipalities can develop market areas or construct shopping complexes and rent them out to any persons or organisation and charge rent from their users.

In Nepal also, municipalities are authrised to generate reveue from such non-tax sources as user charges, fees, rents and income from the sales of local resources. For example, they are empowered to levy service charges on the user of services provided by them and charge fees on valuation of fixed asset and building permit. They can construct toilets, swimming pools, guesthouses, market places, and gymnasium and collect rent from their users. Municipalities also receive some income from the sale of sand, gravel, boulders etc.

Municipalities do not generate much revenue from non-tax sources. For example, in 1998/99 they generated Rs. 189 million from non-tax sources. Of the non-tax sources, service fee was the biggest source providing Rs. 45 million, which was about 24 per cent of total non-tax revenue. Municipalities also generated Rs. 26 million from the building permit fee. Rents from market, shops and buildings provided Rs. 22 million revenue. Building permit fees and rental income from market/shops/buildings were the second and the third largest sources of revenue, providing about 14 and 12 per cent of the total non-tax revenue, respectively.

Not all municipalities use all non-tax sources and not all sources are equally important from the revenue point of view for each municipality. However, it is critical to generate additional revenue through non-tax sources considering existing composition of revenue under which municipalities generate more than 80 per cent of their total tax revenue from the local development fee. This is because the future of the local development fee is uncertain in the context of the possible entrance of Nepal to the World Trade Organisation. It is, therefore, necessary to develop property taxes as their major source of revenue. But it would not be possible to develop property taxes over night. Property taxes alone would not be sufficient to generate required revenue for the municipalities anyway.

Municipalities should adopt a general policy to finance private goods and services, which can be sold in units and benefit only to their users through user charges, which are justified on both the efficiency and equity grounds. Municipalities can also maintain graveyards and cremation grounds and impose user charge for this Similarly, they could also manage public toilets and charge from their users.

Periodic Review

Municipalities should levy fees for the provision of their service. Such fees also could be levied on persons or organisations for the conduct of trade in the municipal areas. Similarly, municipalities should make attempts to generate revenue through rental income from shops and markets owned by them. Rent must be reviewed periodically to keep pace with inflation.

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