- Anirudra Neupane
The Government of Nepal seems to be planning to increase the size of the annual budget for F/Y 2012/13. The government might be justifying the proposed increment from the perspective of economic philosophy that every rise in the government expenditure on productive activities has a multiplier effect on the country's economic growth and development.
However, increase in the size of the budget is criticised for its negative effect on the economy as increased recurrent expenditure, including transfer payments, might raise inflation beyond the limits. On the other hand, increase in government expenditure should primarily be in line with increase in domestic revenue. Therefore, the government should have analysed the consequences of the proposed increase in expenditure on one side and the possibility of increasing domestic revenue on the other.
Difficult proposition
The finance minister a month back shared the government's plan to increase the size of the budget by increasing domestic revenue by up to 35%. The government seems to be confident that the additional revenue can be generated by broadening the tax coverage and through slight changes in the tax rates. It is believed in Nepal that a timely budget itself contributes at large in raising tax revenue.
The government might, therefore, have thought that it would not be difficult to realise the proposed growth in total domestic revenue without significant additional effort as there will not be any difficulty in issuing this year's budget on time. This can be accepted to some extent, but it may not be easy to raise revenue largely from the existing administrative structure and political environment.
As the election is approaching, the political parties and their leaders want to raise funds for the election campaign. For this propose, tax evaders can be good friends of theirs than those who comply with the tax laws. The government has to compete with the political parties in directing the taxpayer's money to the government treasury in the form of tax by limiting the flow to the political parties' treasury in the form of donations. This is no easy task.
The government without support from the political parties cannot increase the tax rates. It is a serious issue in a liberal democracy that only the people's representatives can change the tax rates through legislation. Thus, the current government should prefer executing the current tax laws effectively to levying new taxes or raising the tax rates.
Nepal has adopted a highly consistent taxation policy based on our commitment to global and regional economic groups, including the WTO, SAFTA and BIMSTEC. Reducing the tax rates and increasing the tax coverage are the crux of the policy we have adopted. This principle is compatible with our commitment to the international community. In this context, no government can raise the tax rate at its discretion. Besides, we have to further reduce the rate of customs duty from the current optimum rate of 80% on imports to comply with the WTO provisions.
Income in Nepal is charged comparatively low, but it is also not easy to increase it. We have an interesting example where in F/Y 2009/10 the government decided to levy an additional 10% tax on the income of individuals for a part of the income above 2.5 million instead of openly stating that the tax rate would be 35%. It is because such an increase contradicts with the WTO provision. On the other hand, increase in the tax rate does not ensure increase in revenue as a higher rate leads to more tax evasion. Thus, increasing the tax rate is not an easy option.
If the taxes are paid from a variety of sources, the government is said to be in a safe zone. In such a condition, reducing the revenue from a source can be supplemented by an increase from another source. In the case of Nepal, our revenue is highly dependent on VAT. If revenue from VAT declines, it automatically results in a decline in the total government revenue. Increasing the tax coverage is increasing the number of taxpayers and sources. However, the policy of increasing the tax coverage takes a long time to give results.
We have been following a policy of broadening the tax coverage for more than a decade, but records show that only about 3% of the people are paying direct taxes. As an initiative to increase the income tax coverage, the Inland Revenue Department (IRD) launched a PAN number distribution campaign in 2009. However, no tangible growth in taxes has yet been observed. In F/Y 2008/09, the elected Maoist-led government, through a finance bill endorsed in Parliament, levied an education service tax of 5%, but it failed to implement it. It has still not been effectively implemented even after decreasing the rate from 5% to 1%. Similar is the case with the health service tax.
These evidences are sufficient to reach the conclusion that it is not the right time to expand the area for taxation as the current transitional government is not strong enough for this. The only way the government can increase domestic revenue is through the effective implementation of the existing income tax law and policies. After the IRD started taking action against those involved in tax evasion through fake tax invoices, this practice seems to have been controlled to some extent.
But there is another serious issue, that of under invoicing. Customs, excise, VAT and ultimately even income tax are being evaded through under-invoicing. It is not easy for the wholesale or retail stores to issue a VAT bill as they get an invoice only on a small portion of their purchases because of unscrupulous importers at the customs point. As long as under-invoiced imports continue to get customs clearance, any effort to encourage consumers to take the VAT bill on their purchase will have no result. If the government looks into this issue seriously, it will not require much effort to increase domestic revenue at least once.
Bringing more tax payers within the tax net can be the next area of intervention. The IRD itself is capable of increasing income tax revenue if it so desires. For example, the IRD can make it mandatory for all law firms to compulsorily file their annual tax returns. This may bring large chunks of untaxed income to the tax bracket within a year. This applies to some other professionals like engineers, software developers and others who earn but don't pay income tax mainly because the tax administration ignores such evasion.
To tax this section, no amendment is needed on the existing tax law, including increases in the tax rate. The IRD should have a good data base of high earning professionals in Nepal in the business or academic field. NGOs/INGOs are now good paying employers after the banking institutions. The tax administration should also set its eyes on this sector although some NGOs are good at deducting taxes on their payments and depositing them in the government treasury.
Transparency
The tax administration needs to be more transparent. There are complaints about the performance of the customs administration. It is because there is a tangible tax leakage at the customs points. Modern tools and techniques, advanced systems of monitoring and supervision and other administrative tools are turning ineffective in controlling, in particular, the practice of under-invoicing.
People don’t have the patience to wait for a stable government to bring positive changes in the economic condition as stability has become a day dream for the Nepalese. On the other hand, the government is not capable of changing as per the expectations of the people. Therefore, it needs to raise domestic revenue through effective implementation of the existing tax laws, focussing more on compliance than coverage and spending the revenue so raised on productive activities without much publicity
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