Book Review (Spotlight Weekly)

Municipal Money

A tax expert examines ways of strengthening the municipal finance system

By A CORRESSPONDENT

Local governance has become a very popular term in public policy debates. But municipal finance and the reform process initiated in the sector have hardly been examined and explained with the urgency they deserve. At a time when everyone is raising questions of transparency and accountability, tax expert Rup Khadka has analyzed the entire accounting system within these parameters.

Municipalities have been playing a very important role in Nepal, representing local government units in urban areas where the organization fulfils the demand for public service. In the last few years, the municipalities have also become an integral part of policy formulation and the financing of small projects.

"Municipalities have potential tax base due to the concentration of economic activities in the urban centers. Since the municipalities are in a position to manage their local affairs, including management of the fiscal affairs, reform of local finance implies putting priority on the reform of municipal finance," says Khadka.

Because a standard financial system is lacking, the country has seen rising cases of malpractices and an expansion of unsettled accounts. In absence of a strong financial system, it is impossible to expect local bodies to become more effective and transparent. Whether in the annual report of the auditor-general or those of donor agencies, a transparent financial system is the pre-eminent call of the moment.

Amid the growing voices in favor of a more systematic financial system, Khadka's book comes as another forceful plea. Khadka begins his book with an introduction to municipal finance. He explains the background, municipal functions, social services, general urban services, public utilities, sources of financing municipal expenditure, taxes, rationale of municipal taxes, cannons of municipal taxation, types of municipal taxes, non-tax sources, grants and loans.

In this second chapter, Khadka discusses the municipal expenditure system, sources of financing municipal expenditure, taxes, revenues, non-tax revenue, grants and other process of budget formulation in Nepal.

From evaluating the controversial octroi system to writing about other facets of the system, Khadka has made every effort to explain and elaborate the whole process of municipal taxation and its implications.

Nepal has made great progress in developing sound sub-national fiscal systems. Especially, the reforms of 1999 have brought major challenges in the fiscal management of the municipalities. After the abolition of octroi, the municipalities have seen many difficulties.

"For any reform to be successful, it has to be based on a solid analysis of what exists and where one wants to go. This is done in the first two chapters, with the first chapter providing the essence of fiscal federalism in a nutshell, to serve as guideline for both, the evaluation of the existing system and the design of a reform," says Professor Dr. Horst Zimmermann, Marburg University, in his foreword.

In the third chapter, Khadka explains the evolution of municipal taxes and discusses the creation, revision, rationalization and reform aspects. Chapter 4 explains the existing structure and operation of municipal taxes. In this chapter, Khadka discusses land revenue, house and land tax, integrated property tax, rent tax, professional tax, vehicle tax, entertainment tax, commercial video tax and advertisement tax.

The author also analyzes the factors and variables affecting the whole tax system. Khadka has also suggested ways of exploring the untapped potential of property taxes. The book serves as a pressing reminder of the significance of municipal finance and suggests ways of making the most out of it.

Municipal Finance In Nepal
With Special Reference to Taxation
By Rup Khadka
Published by Center for Study and Research for Good Governance,
Kathmandu, Nepal, 2002
Price: Rs. 425
Pages: 151