BUDGET : Looking for vision, touch of reality

Kathmandu, July 1 :

Taxation, treated as the milking cow for the national coffer, has no holy status in Nepal and remains poignantly fragile. An archaic mindset of employees and a weak administrative mechanism define its character for the moment.

Since the country started the budget making exercise in 1952, revenue collection mechanism has remained mostly narrow-based and unscientific in its approach.

Those who need to pay taxes are not paying. Issues such as simplicity, elasticity and equity in tax collection are missing even today despite all the tall talk about globalisation and liberalization.

Of the total national revenue collection, the contribution of direct tax stands at 20 per cent, while indirect taxes make up the rest 80 per cent.

The government has to work out an effective mechanism to address the ailing fiscal structure and expedite mobilisation of resources without sacrificing the role of maintaining law and order. It must ensure development expenditure increases and so does productivity, visibly.

While presenting the budget for fiscal year 2006-07, Dr Ram Sharan Mahat, has to introduce bold measures in controlling corruption in revenue administration. He needs to replace the ‘obsolete and outdated’ brains to achieve the expected revenue growth and please taxpayers.

Every taxpayer has a hope that the finance minister will clarify the incentives to be given to taxpayers so that employees involved in tax collections would not torture them using their ‘discretionary powers’, through the budget.

A survey done by one of the business associations shows that if employees do not indulge in corruption, production cost of exportable goods will drop by two per cent.

Even in import, customs duties can be reduced without hitting revenue collection.

Due to lack of compliance, revenue collection has not been as per the target, commented Prof Bishwambher Pyakuryal, president of Nepal Economic Association (NEA).

It is a matter of serious concern that those institutions who are not authorised to collect Value Added Tax (VAT) are collecting VAT. This is creating severe distortions, said Prof Pyakuryal.

Therefore, there is an urgent need for an ‘integrated expenditure policy’ by ensuring effective compliance in resource generation and expenditure, said Prof Pyakuryal.

He suggested finding out of more non-tax revenue sources to boost national revenue. Similarly, alternative auditing system alongwith strengthening of the existing tax system need to be introduced. Prof Pyakuryal said that the total share of Nepal’s non-tax revenue in total revenue is lower compared to Bhutan.

As per government’s latest statistics, the share of non-tax revenue to the total revenue collection has gone down to 15 per cent, compared to 20 per cent in the previous fiscal.

Uday R Pandey, secretary general at Garment Association of Nepal (GAN), expressed his serious concerns over taxation saying that whatever policies are formulated by the government, are found to be patchy when it comes to actual implementation. Department officials act on their own that has created serious trouble for taxpayers. Therefore, flat tax is the right option to correct anomalies seen in the tax administration, Pandey suggested.

Revenue collection is not encouraging now and reported to be below the target set by the Tenth Plan. Therefore, current revenue growth of 0.5 per cent has to be increased to meet the revenue growth of 14 per cent targeted by the 10th Plan.

On the revenue collection front, there is a dismal growth thanks to conflict and weak administration mechanisms. The government’s target in the current fiscal year stands at Rs 81.88 billion, which is difficult to meet.

What is dangerous is that the recurrent expenditure is increasing while development expenditure is getting squeezed. The collection of revenue for the last eleven months is Rs 59 billion upto June 15 out of the estimated at Rs 81 billion.

In the fiscal year 2004-05, recurrent expenditure was 69 per cent while the development (capital) expenditure was only 31 per cent. It shows that there is terrible trend in revenue and expenditure pattern at a time when revenue generation is hovering around 0.5 per cent growth even after peace talks being held between the seven party alliance and the Maoists.

According to projections of different departments, the ministry of finance has projected the amount would be around Rs 74 billion out of Rs 81 billion in this current fiscal. It has made downward revision in revenue growth rate from 13.5 from 14 per cent, which is difficult to meet.

However, considering the conflict situation, revenue is unlikely to be more than Rs 70 billion, which is 89 per cent of the target. To improve revenue needs effectiveness in voluntary compliance and permanent peace.

Of the targeted Rs 37 billion development expenditure, only Rs 16 billion has been utilised so far which shows that development is moving at a snail’s pace.

If there is no surplus for matching funds for development activities, finance minister won’t get foreign loans and grants at a time when revenue growth is registering a dismal growth.

Government’s revenue in the fiscal year 2002-03 stood at Rs 56 billion, Rs 62 billion in 2003-04 and Rs 71 billion in 2004-05.

In the current fiscal year’s first 11 months, revenue has been collected at Rs 59 billion only.

The others reasons for weak revenue mobilisation has been attributed to low economic growth, decelerated VAT collection, low customs duty and lower collection of dividends by state-owned corporations.

Though the VAT rate has been increased to 13 per cent from 10 per cent, it has not been reflected in real revenue generation, thanks to weak collection mechanisms. The government machinery has totally failed to collect VAT as per the target despite its tremendous potentials.

For Nepal, foreign aid is still needed as the country is going through a transition phase in terms of economy and politics. However, the biggest challenge for the finance minister in the coming budget would be to formulate workable revenue proposals.