A few years ago, Nepal resolved to restructure itself from a central form of government to a federal structure. The critics were staunch in their argument that federalism would not be successfully implemented citing examples from the failed federalism attempts of countries like China and Libya. Nepali economists and experts claim that in the current scenario Nepal cannot support and maintain a federalist state structure.
Making it to the news are recent examples of difficulty in implementation when clashes occurred between the state and provincial governments with arguments on distribution of power, authority and resources. This has also impacted the commerce sector as industrialists and businesses face problems with interstate, intrastate trade and taxation related issues.
The federal system is likely to encourage competition between the states paving the way for creativity and innovation in business. Municipalities and local bodies can play a supportive role in encouraging and enabling people to explore income generating activities in their areas. However, one must note that some of the states already have an advantage in terms of natural resources and infrastructure capabilities. If competition between states remains healthy, chances of increase in national productivity will be high. Towards this, the existing Competition Promotion and Market Protection Act, 2063 (2007) should be made clearer and effective to avoid monopolistic activities in the market which give rise to cartels, syndicates and price fixing tendencies.
Conducting business in a federalist structure allows people to choose the place of their business based on convenience, accessibility and maximum benefit. However, no major change has been observed in the business sector after the federal structure. Registration of a company has to be still done in Kathmandu, although business can be operated in other states of the country. Would a decentralized Company Registrar Office be possible in all seven states still remains a question mark.
Local level government bodies have been authorized to self-rule and make policies as per need. While this has its advantages, local authorities must remain within the jurisdiction demarcated by the constitution. Local authorities have been found to be imposing tax at will. Due to this, businesses are facing problems in paying taxes imposed by local authorities while transporting the goods from one state to another. This discourages business and investment in Nepal. It is very important to have clear tax laws. The imposition of tax by the states at their discretion will not only confuse but create conflict.
The states can make their own policies for constructing roads, managing electricity and legal compliances to attract foreign investments. There is a big need to update the existing Foreign Investment and Technology Transfer Act, 2049 (1992) to make it compatible with the federal system of the country.
To foster business, the gap of information between businesses and politics must be addressed. All information relating to Acts, Regulations and Directives enacted by sub-national authorities should be published. This will enable business people with easy access to information on changes in the taxation system and other necessary compliances. The central government adapted a digital system some years ago opening their websites making information accessible worldwide; sub nationals should also adapt to digitization soon. This will not only help domestic investors but also foreign investors.
The federal system has its pros and cons. If not implemented well, there will be division among people, chaos in sharing resources and an unstable economy. This is something Nepal can little afford in the fast paced dynamics of a globalized world.
Aparmita Shakya is an associate at Gandhi and Associates; currently involved with the Corporate Department in the team.