Budget fails to usher reforms in tax system

Kathmandu, June 20

The federal budget 2018-19 has failed to introduce major reforms in the taxation system of the country as the compliance gap is high due to lack of transparency, lack of capacity in the tax administration and high cost of tax collection,according to experts.

Speaking in a programme titled ‘Budget 2018-19 and Tax Justice’ organised by the South Asian Dialogue on Ecological Democracy and Alliance for Tax and Financial Justice, economists and experts said that the federal budget has done nothing to promote a fair tax system in the country. The government has raised the rates of indirect taxes, which will ultimately affect social well-being and raise inflation, according to Binaya Kumar Kushiyait, professor, Central Department of Economics, Tribhuvan University (TU).

“The share of direct tax in total tax collection is just 30 per cent and that is why expansion of tax rate cannot be justified,” he stated.

The finance minister has tried to take credit by introducing a progressive tax system for individual income tax, however, he has overlooked expansion of tax net. The price of daily essentials is expected to increase due to increase in tax rate and withdrawal of value added tax (VAT) rebate facility, as per experts.

Uddhav Pyakurel, assistant professor of Political Sociology at Kathmandu University, said that the government has tried to take the middle-income people into confidence by introducing the new tax slab of 10, 20 and 30 per cent. Those who earn above Rs 400,000 annually have to pay 10 per cent for the next Rs 100,000 above the threshold of exempted amount and 20 per cent for the next Rs 200,000. “Though the government is oriented towards taxing those who earn more higher, which is also known as ‘progressive taxation’, the share of individual income tax in the total tax is negligible,” he said.

Citing that a wide range of businesses are out of the VAT net, the finance minister had to focus on increasing the compliance gap and expanding the net instead of increasing tax rates, he added.

However, another professor of Economics at TU, Umashankar Prasad, said that the federal budget has introduced a progressive and realistic tax system as it has levied health hazard tax on sales of cigarettes and liquor. Similarly, it has tried to create an opportunity for domestic industries to grow as excise on the intermediate goods has been increased.

However, he added that the country’s dependence on capital, technology, employment and products explains how fragile the Nepali economy is. “The unsustainably growing trade deficit, weak foreign currency reserves, lack of employment opportunities in the country and weak production base were mentioned in the ‘whitepaper’ of the government but the federal budget could not address the structural challenges of the economy.”

Economists at the programme have said that the success of the country’s first federal budget will depend on its execution. The country is poor in the execution of the budget, especially the capital expenses, which is necessary to bring about changes in the livelihoods of the taxpayers, according to Keshab Raj Khadka, professor of Economics at Tribhuvan University.

The government has set a target to raise revenue collection (consolidated) by 35 per cent to Rs 945.13 billion in the next fiscal from Rs 730 billion in the current fiscal.