Kathmandu, June 6

The imposition of value added tax on imported products and transport services and introduction of policies to expand the government’s tax net in the new budget is set to lead to a spike in inflation.

Prices of a few consumer items may rise in the coming days following upward revision in taxes on a host of goods and services ranging from food items to daily essentials.

Rising prices, caused by a change in tax rates or withdrawal of tax rebates, are likely to make it difficult for the government to contain inflation at six per cent in the next fiscal as proposed by the budget for fiscal 2019-20.

Posh Raj Pandey, a trade economist, told THT that prices would definitely rise after the government imposes VAT on transport services, directly affecting public. “The business community will transfer this indirect tax to consumers. Prices of goods and commodities used for daily consumption will rise accordingly.”

He clarified that with the introduction of VAT on transportation services, prices of practically all goods would rise as the cost of transportation of goods would have increased.

In addition to introduction of VAT on transportation services, the budget has also introduced VAT on electric rickshaws, auto-rickshaws, nutrela soya and wheat flour and customs duty on books.

The government has also increased customs duty from five to 30 per cent on chicken, milk products, coffee, tea, water, sugar, liquor, juice, pea, junk food, tarpaulin, steel, footwear and playthings.

Pavitra Man Bajracharya, president of Nepal Retailers Association, said prices of food items like fruits, rice, vegetables, imported meat, oil and flour would increase.

However, the government has reduced the amount to be deposited for reviewing VAT, excise duty or customs duty from 33 per cent of the total value of goods to 25 per cent of the value.

“The government has changed the tax structure and introduced VAT on a few items in a bid to support domestic products and export-oriented products with a focus on maintaining trade balance,” said a high-ranking official from the finance ministry, seeking anonymity.

Though the government aims to increase VAT collection from the market through this provision, the new rule will still be ineffective if suppliers and consumers collude to try and avoid paying VAT.