KATHMANDU: The High Level Tax System Review Commission (HLTSRC) has prepared its report regarding tax system in the federal structure and said that the central government should retain the power to levy major taxes — value added tax (VAT), income tax, customs duty, excise, among others. It has reasoned that only the central government will be able to collect such major taxes effectively.

HLTSRC has also said that the power should be allotted to the provincial and local government after considering the effectiveness of these authorities in collecting other taxes.

HLTSRC has envisaged that road and vehicle tax, house and land registration tax, natural resource taxes, education and health service taxes can be effectively levied through provincial government. Similarly, house and land tax, entertainment tax, business tax, among others can be efficiently levied by the local government.

It has also envisaged reconstruction tax to generate resources for rebuilding of the nation in the aftermath of devastating earthquake of April 25.

“For this, the government can levy certain percentage surcharge on taxable income (income tax) and import of luxury goods (in customs tariff) for next two fiscals, and that can be levied promptly from coming fiscal,” said Rup Khadka, chairman of HLTSRC.

In addition, the commission has also said that the government can utilise the resources from the idle funds, namely, welfare funds of the Nepal Army and Nepal Police, Foreign Employment Welfare Fund, Rural Telecommunication Development Fund, among others, for the reconstruction.

While the country has to trim down its negative list under South Asian Free Trade Area (SAFTA) by another 20 per cent by 2015, the government should ask for few more years to reduce the negative list during this critical juncture, as per the report.

Moreover, for the long-term, the government should gradually strengthen the VAT as the major tax and adequate reforms are needed in enforcement of VAT. Reportedly, one-fourth of the revenue is being leaked due to under invoicing in import and other flaws in the market like traders’ unwillingness to issue bills during sales. VAT is the major source of government income at present, amounting to one-third of the total revenue. By plugging all the loopholes, its contribution can easily be increased up to 40 per cent of the total revenue, as per the report.

According to HLTSRC, there are high chances of misuse in the rebate of tax and VAT. Hence, the commission has suggested the government to end tax rebate in mobile phones, garments, matches, tyre-tubes, flour, mustard oil, milk, sugar, tea, among others.

“Governments around the world normally extend facility of tax rebate for the benefit of low-income groups, but such facilities are largely misused — not only in Nepal but in other countries as well, explained Khadka, adding, “Hence, the government should spend for the targeted groups through the budget and scrap the tax rebate provision as it is not a practical solution to uplift the poor.”

As per HLTSRC, the government can extend the threshold of VAT as well. This is because among 141,000 taxpayers under the VAT net, 92 per cent of the VAT is being collected from 30,000 taxpayers whose annual turnover is up to Rs 10 million. As per the existing provision, individuals and firms with annual turnover exceeding Rs two million need to be registered at the Inland Revenue Department.

HLTSRC has also said that the individual income tax (IIT) slab needs to be expanded and the 15 per cent IIT should be lowered and fixed at 10 per cent only.

The commission will submit the report to the Ministry of Finance on June 30.