Federal Ministry for Economic Cooperation and Development. Evaluation Division Bonn, March 2003

Transcription

1 Federal Ministry for Economic Cooperation and Development Evaluation Division Bonn, March 2003 Summary of the Series Evaluation Tax systems and revenue authorities in developing and transition countries as an instrument of poverty reduction Field Study Advisory Services to Fiscal Administration in Nepal The opinions presented in this study are those of independent external experts 1

2 German Development Cooperation with Nepal Summary of the Series Evaluation Advisory Services to Fiscal Administration in Nepal Summary Within the framework of German development co-operation (DC), the GTZ is assisting the project Support of Fiscal Administration in Nepal, which is designed to bring about an improvement in the fiscal system and its administration. At the beginning of the second phase the project has led to a merger with a similar Danish project operated by the Danish organisation DANIDA. The joint project is now called RAS (Revenue Administration Support). The aims of RAS, DANIDA and GTZ are almost identical: The administration (and/or staff) works effectively and efficiently. DANIDA is focussing on value added tax, the organisational structure and implementation of the taxation system, whereas GTZ is looking after the development and use of EDP and providing advice regarding the implementation of the new income tax act. The German contribution to the project has been the object of the evaluation by the BMZ. However, the results and impact of RAS were also considered. Besides evaluating the project, the experts were also expected to provide conclusions and recommendations on whether fiscal systems and revenue administration in developing and transformation countries do indeed constitute a sensible area of development co-operation, especially with regard to poverty reduction. The BMZ is investigating this issue in a crosssection analysis of experience made with tax-related projects in Bosnia-Herzegovina, the Dominican Republic, Nepal, Nicaragua and Tanzania. Nepal is one of the poorest countries worldwide. It suffers from chronic budget deficits. The tax share in GDP is extremely low. In the past the state had mostly covered its financial needs from indirect taxes and duties. Development co-operation contributions constitute an important part of state revenue. The fiscal administration is considered to be inefficient and corrupt, as is the country s civil service as a whole. With the support of the project Nepal has fundamentally reformed its tax system over the past years. In 1997 the value added tax (VAT) was introduced, in 2002 a new income tax law entered into force. The VAT-administration was merged in 2001 with the general fiscal administration. A new organisational structure and modern IT ensure more effectivity and efficiency. Findings In its 10 th development plan ( ) which is at the same time the official PRSP, Nepal has made it a goal to ensure economic growth and good governance and to promote the social sector. The overarching target is poverty reduction. To achieve this, a stronger mobilisation of own resources is envisaged. Special importance is attached to reforming the fiscal system and the revenue administration. Poverty reduction is also a target of German development co-operation. The 2015 Programme of Action explicitly mentions measures to improve the revenue situation. A performance-enhancing tax policy and an efficient fiscal administration are mentioned as starting points for DC. The project target is in line with these objectives. However, it is too ambitious as the project will not ensure a state of total effectiveness and efficiency. It was correct to consider the population as a whole as target group. The Nepalese Ministry of Finance acts as executing agency. The factor endowment of 3 million for a duration of 6 years was adequate, staff equipment in the second phase too weak. The joint project with DANIDA is a model example of international donor co-ordination. There was no model or concept to serve as a basis. The participants showed a high degree of innovative capacity and flexibility in the planning and implementation of activities. Although the 2

3 merger was not a proper one, formally speaking, with joint leadership and financing, the project can rightly be considered as a homogenous project. In fact, Danes and Germans work together in one office and appear under the joint logo RAS. There is a homogenous planning of activities and a corresponding division of labour. The merger was made easier by the fact that the originally separate projects complemented each other well in technical terms and had co-operated with the same project-executing agency. The GTZ contribution should, however, not have relinquished its own adjusted operational planning after the merger. As a result it became difficult to identify the contributions and check their impact. Noticeable deficits were identified in project management in the field of income tax advisory services either non-existent or too late. The GTZ contribution focussed on the development and application of a user software for fiscal administration. This was done on a modular basis. The development work was done by a local private firm. Delays occurred which deferred application by a good six months, a fact which is not uncommon in the field of IT. However, this meant for the GTZ contribution that the necessary comprehensive training got under time pressure. Furthermore it will be difficult to enable the partner organisation to carry on the project and expand IT under their own responsibility once the project has been finalised, i.e. to establish ownership. As for the rest, the results of the joint project work are remarkable: 2 separate revenue administrations were merged into one, the number of revenue offices was cut down from 57 to 21. All fiscal administration offices have basic computer equipment and are networked among each other. Every taxpayer has one standard tax reference number for all types of taxes. The whole fiscal administration is functionally organised, descriptions of functions and staff allocation plans are available. Each revenue office has a service point for taxpayers. Implementation regulations and work instructions for the new taxes have been drawn up. A great number of further training measures were and still are carried out. Curricula have been prepared for a systematic basic and further training. This means for the partner organisation a pronounced increase in effectiveness and efficiency. The merging of the two administrative branches does not only entail a reduction of cost but also a much more efficient taxation procedure. The performance of the administration improved, mostly due to automation. The organisational reform brought about a clear-cut division of responsibilities and simpler control procedures. Staff qualification was improved. The foundation stone for an institutionalised internal administration system for basic and further training has been laid. However, the project has not been able to achieve a clear improvement in the motivation of the fiscal administration staff. Poor pay and inadequate staff management are the reasons why corruption remains a major problem for the efficiency of fiscal administration. Since 1997 tax revenue has increased noticeably. The share of taxes in GDP rose from 8.6 % to 9.4 %. Naturally, this is not the result of the project alone, but a causal link is traceable at least regarding the revenue increase from sales tax by 60 %. State expenditure for development projects have also risen, although not as much as the revenue increase. This is due to the rapid increase in cost for internal security measures in Nepal following the Maoist rise. The general environment for economic activities has improved, by and large, as a result of the fiscal reform: lower tax rates, more transparency, growing competition among staff, more reliable automatised procedures enhance the investment climate and legal certainty. This will have a positive impact in the longer term, once the present risks arising from the internal political situation and the decrease in tourism have been eliminated. But it will also be important for the state to continue to fight corruption resolutely and effectively. State action in the field of taxes has become more transparent and reliable, proceedings and responsibilities have become more transparent for citizens, and administrative acts are easier to check and rescind. Automation has rendered administrative processes more uniform and permanent. At present, however, the target group does not yet perceive the impact of the project activities. An enquiry among taxpayers within the framework of the evaluation has shown that people continue to be afraid of high burdens and arbitrary administrative action. 3

4 Most citizens show themselves uninformed of the fiscal reform and the project work. This shows the need for DC projects to be made known and presented to the target group. Recommendations A joint project, too, needs a plan of operations and it must be possible to monitor the impact of the German contribution. Efforts for an organisational embedding of the reforms in the partner organisation are of great significance. This applies especially to the IT component. An outphasing plan for a smooth handing-over and continuation of IT activities must be drawn up quickly. IT training measures for the staff must be given priority in terms of organisation and implementation. BMZ and GTZ should take a decision without delay on the envisaged extension of the project duration. This can be financed from residual funds. It would be more appropriate, however, to extend the project with additional funds and the best possible staff equipment. General conclusions for tax-related projects Tax-related projects must be recognised as an effective instrument to enhance good governance and improve the general economic environment. They are in line with the development policy targets of the German government and other important donors and are suited to become a DC priority area. The starting point for tax-related project advice is fiscal legislation (= revenue and/or financial policy) or fiscal administration. A mix of both is often useful and makes sense. A tax-related project should incorporate advisory service priorities. Thus, tasks can be planned, monitored and are feasible. This is contradicted by the concept of a Resource Centre which only reacts to requests or mandates of the partner. Issues such as basic and further training and automation are especially suitable for fiscal administration projects. Besides, there is a multitude of other subjects that might have a positive impact, e.g. audits, execution and organisation. The privatisation of fiscal administration can constitute an independent new project concept. A linking between tax and non-tax issues (e.g. commercial and company law or staff management) in one project means an overtaxing of the project, in principle. It is very important and sensible, however, to have a thematic co-ordination and co-operation if a separate project is envisaged for each subject. Special attention should be devoted within the overall framework to the following aspects in the planning of fiscal administration projects: - situation of the civil service who is of crucial importance for the project work - situation of the civil law, especially commercial and company law both of which are of special importance for taxation - situation of the finance constitution (legislative, revenue and administration authority for taxes) and a revenue sharing system - situation of financial control and/or audit offices The project target must be clearly defined. The target: staff (or administration) work effectively and efficiently can be found in many fiscal administration projects although such a wording is rather vague. The definition of effectiveness and efficiency in fiscal administration is extremely difficult and controversial. Moreover, the objective of a 100 % effective and efficient administration is not a realistic one. What can be achieved, however, is a measurable improvement in efficiency and effectiveness. 4

5 The project should be staffed in line with real needs. If not enough funds are available, the targets and results must be designed less comprehensively. Advisory priorities should in principle be provided by a long-term expert, not necessarily a German one. In individual cases, local experts may meet the job specifications. Nonetheless, the German expert will have a better standing from the outset. Fiscal administration projects should be classified as long-term projects, which means: a minimum duration of twice three years in principle, with an extension option of up to another three years. Tax-related projects should, as a rule, select the country s ministry of finance as projectexecuting agency to ensure maximum impact. Public relations work is indispensable for monitoring the effect. The target group should be informed about the existence and the objectives of the project. This can be done, however, only through, or together with, the project-executing agency. This allows conclusions to be drawn on the impact on the target group. Donor co-ordination must be integrated into the planning. It is awkward to try and do this later in the field. It would be useful to have instruments for the management of joint projects (interstate co-ordination points) and model agreements. All in all, the RAS should serve as a model of good donor co-ordination in DC because of the flexible and creative co-operation among all participants. Co-ordination of the various German development organisations should be considered already at the planning stage of measures to be implemented. Basic data Start of project October 1997 Allocated amount in million 3 BMZ division responsible 203 Organisation charged with implementation GTZ Time span of evaluation 10 Jan. 03 to 21 Jan. 03 5