Nepal - Politics, government, and taxation

The unification of Nepal in 1769 under the Shah dynasty of Gorkha failed to prevent 2 centuries of intrigue among the aristocratic families of Kathmandu. From 1846 onwards, hereditary prime ministers from the Rana family governed in the name of the Shah kings. Their downfall in 1951 led to a succession of governments appointed by royalty. Nepal had its first democratic elections in 1959, and the Nepali Congress Party governed until a royal coup d'etat, or takeover, a year later. The partyless system known as Panchayat followed. This comprised public assemblies at village, district, and national levels, who were ultimately accountable to the king. Undercurrents of political dissent periodically rumbled beneath the Himalayan kingdom's facade of tranquility, but it took an economic crisis, a coalition of political parties, and widespread urban demonstrations before the ruling Hindu monarch, King Birendra Bir Bikram Shah Dev, was forced to dismantle the Panchayat system in favor of a multiparty democracy within a constitutional monarchy in 1990. More than a decade on from the introduction of democracy, Nepal has failed to achieve political stability. The turmoil of years past echoes among antagonistic factions and has led to much discontent, particularly in the neglected countryside, where a Maoist insurgency has claimed over 1,600 lives in the 5 years from 1996. In June 2001, a massacre within the royal family, instigated by the Crown Prince, led to rioting and curfews in the Kathmandu Valley. The political situation remains fragile.

With the transition to democracy in 1990, the Nepali Congress Party was voted into power. Established in 1947, this party is the largest political organization in the country and has governed for most of the last decade. The old guard of political leaders, represented by Prime Minister Girija Prasad Koirala and Krishna Prasad Bhattarai, has held sway over this reform-oriented centrist party. The Nepali Congress had its roots in democratic socialism , but in the 1980s it modified its program to espouse a mixed economy. During a relatively stable tenure from 1991 to 1994, the party implemented various economic reforms that facilitated privatization and foreign investment, and attempted to improve public enterprise management.

Left of the political spectrum, communist parties briefly worked with the Nepali Congress during the revolution of 1990. Parties within this United Left Front Coalition, however, differed widely in their socialist ideologies. The centrist United Marxist -Leninist Party (UML), which supports the creation of a welfare state (a political system in which the government assumes primary responsibility for the social welfare of its citizens), is the second largest party in Nepal, and remains a potent force despite a damaging split in 1998. The appointment of a minority UML government in 1994 slowed the process of liberalization , and subsidies to public enterprises increased. Other parties include 2 factions of the monarchist National Democratic Party and the Nepal Sadbhavana Party, which is based in the Tarai region and favors closer economic integration with India. Political bickering has consumed the national agenda, resulting in 9 changes of government between 1991 and 2001. The struggle for political power has filtered down to public sectors , which have witnessed widespread corruption and politicization. Though inflation has remained moderate and the urban population has benefited from exposure to the global economy, there has been little progress in reducing rural poverty. If the current state of affairs continues, problems with law and order may seriously jeopardize the internal security of Nepal.

The political system is based on the British parliamentary system. The king is head of state, and, along with the Council of Ministers retains executive powers. There are 2 legislative bodies: the National Council and the House of Representatives. Members of the National Council are appointed by the House, the king, and an electoral college. Members of the House of Representatives are elected by popular vote for 5-year terms. The political party with a majority in the House of Representatives appoints the prime minister. The judiciary is headed by the Supreme Court, and is composed of a network of appellate courts and district courts.

Management of the Nepalese economy has changed significantly over time. Prior to the 1950s, while feudal overlords vied for economic gain at the expense of the rural population, little planned development took place. Under the Panchayat regime, a succession of 5-year plans attempted to impose government control over all aspects of the economy. However, against a background of poor infrastructure, the country's geographical difficulties, and the spread of corruption, the lot of the rural majority was little changed. Attempts to accelerate growth through increased government spending resulted in economic instability in the early 1980s. Under pressure from financial institutions such as the International Monetary Fund (IMF) and the World Bank (WB), certain structural reforms were implemented, which helped the growth of the private sector .

Before 1951, Nepalese administrations extracted revenue in the form of land tax and a tariff on foreign trade. Their reliance on middlemen reduced the revenue available and subjected traders and producers to exploitation that discouraged economic activity. Moreover, the income derived was rarely used for purposes of benefiting the economy. From the late 1950s, a combination of income, sales, and property taxes were introduced. Today, corporate tax stands at 25 percent, though certain industries are taxed at a maximum of 20 percent of their income. Income tax is progressive, with different exemption limits for individuals and families. Relative to average Nepalese incomes, income tax exemption is fairly high. Agreements are underway with other governments to avoid double taxation and encourage foreign investors. Government revenues have increased substantially in recent years, from just over 6 billion rupees in 1989 to a high of over 24 billion rupees in 1997, but falling to 17 billion the following year. Customs and consumption taxes (such as taxes of food and drink) have been the primary sources of revenue. A value-added tax was introduced from 1995. However, a weak tax administration, resulting in low tax compliance, limits this important source of development funds.

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