Dr. Ashok Shumshere J.B.R.
The government participation or rather interference was very strong in
the beginning during the Rana period. During those days, there were very few
industries other than that
of the cottage type and
they were under stringent supervision.
After 1950-51, economic planning as an approach to development was discussed. Finally, in 1956, the First Five Year Plan (1956-61) was announced. The Tenth Five Year Plan (2002-2007) has visualized that the number of taxpayers would level 2,50,000 by the end of the plan period. The premier direct tax-income tax-is estimated to be around 19.0 per cent of the total revenue and 3 per cent of the gross domestic product (GDP) during the fiscal year 2008/09.
During the Tenth Plan, the proportion of revenue to GDP was targeted to reach 14 per cent by the final year of the plan. By the end of the Three Year Interim Plan 2007-2010 (TYIP 2007-2010) the proportion of revenue to GDP achieved 16 per cent. The proportion of direct tax/GDP, indirect tax/GDP and non-tax/GD achieved 4.16 per cent, 9.6 per cent and 2.2 per cent respectively. In the same way, the amount collected through indirect tax was Rs 10887.32 crores and Rs 25881.62 at the end of the year.
The objective of three year interim plan to increase the revenue collection through the means of efficiency, transparency, advanced IT system and providing trustworthy revenue management. It has focused its strategy on the following: (a) To develop equity based tax system by maintaining stability in the fiscal policy (b) To expand and strengthen tax base through the creation of investment-friendly environment (c) To check tax leakages by identifying appropriate loophole area and (d) Develop effectiveness in resource mobilization by broadening tax base to maximize revenue collection.By the end of the three year interim plan (2010- 2013) period, the estimated proportion of revenue to GDP would reach upto 26 per cent. In the same way, estimated proportion of direct tax/GDP, indirect tax/GDP and non tax/GDP would level 7.4 per cent, 16 per cent and 3.3 per cent respectively.
The estimated gross
domestic product is targeted at 140460.8 crores and the amount of collection
expected to be realized
from indirect tax is targeted at Rs 22474.31crore and
Rs 10491.63 crore from direct tax at the end of
the year. The direct and indirect tax ratio is targeted
to be 1:2.14.
Nepal’s tax structure is unbalanced and heavily controlled by indirect taxes, which is regressive by nature. The tax effort ratio (TER) is estimated to be 15.7 per cent of GDP, lowest in the South Asian region as of fiscal year 2008/09. Although the tax burden is relatively higher in Nepal with the application of the per capita income principle, tax elasticity as per cent of GDP is found to be below unity referring to low tax burden and giving rise to plenty of scope for further improvement in taxation. Nepal’s
tax system is constrained by procedural complexities, lack of transparency and simplicity, vague tax laws and tax is more or less settled on by negotiation between taxpayers and tax authorities generating a huge amount of compromise which is directly benefited by the politicians and the affluent class.
Negligence and exploitations in taxation are rampant and are often safeguarded by the politicians.
Reforms in taxation are, therefore, a challenging suggestion with great risks and uncertainties in Nepal. The fabulous growth in revenue collection during and after the conflict should not be viewed in isolation as success condition, for revenue structure is entirely based on import duties and VAT on imported goods. The size of imports is significantly intensifying each year due
to an increasing population attached to changing
patterns of demand with rise in income.
The growth in customs duties and VAT is not a success pointer in the true sense, but clearly an apparent reflection of underdevelopment. Alternatively, contribution of direct tax is one of the significant indicators, in addition to other parameters of economic development.
The major challenge confronting Nepal’s tax system is how to gear up tax effort ratio from the existing 16 per cent to a minimum level of 18 per cent or even higher without creating additional burden on the taxpayers. The specialized tax system calls for raising significant revenue to the treasury not by increasing tax rates in an upward direction but by expanding the legal base of taxation especially by eliminating too many tax-shelters, concessions, rebates, deductions, exemptions, increasing voluntary compliance by educating the taxpayers, raising tax elasticity, and improving overall competence of the tax administration.
Unquestionably, there is a great need for incessant reforms in the tax system and keep the vision that the tax administration is tax policy. A well-organized tax administration is a remedy to bribery in the tax system. Tax farming may be optional strategy to activate internal revenues but usually pertinent only for a developed economy.
Dr. Rana is a senior