Moving towards a cashless, faceless, and paperless tax administration, with mandatory online filing, can not only increase tax collection and control corruption, but also significantly improve transparency and efficiency
As Nepal moves into a phase of relative political stability, the country has a rare opportunity to shift its focus towards long-term economic reforms. Among these, tax policy reform is central to ensuring sustainable and steady growth. A predictable and transparent tax system is essential not only for mobilising domestic resources but also for attracting foreign direct investment and strengthening business confidence. In this context, Nepal should aim to establish at least a decade-long assurance of tax policy stability, enabling investors and entrepreneurs to plan, assess risks, and make informed financial decisions.
Despite tax revenue contributing more than 80% of government income, Nepal's fiscal system faces deep structural challenges. The informal economy, estimated at nearly 40% of GDP, significantly limits the tax base and reduces the effectiveness of revenue mobilisation. At the same time, Nepal's tax-to-GDP ratio remains around 17-18%, indicating untapped potential without necessarily increasing tax rates.
The structure of taxation is another concern. Nepal relies heavily on indirect taxes, with value-added tax (VAT) alone contributing nearly one-third of total tax revenue. While efficient for collection, such taxes are inherently regressive, as lower-income households spend a larger share of their income on consumption. This raises concerns about equity and inclusiveness within the tax system.
Revenue leakages further weaken the system. Weak enforcement, limited monitoring, and institutional inefficiencies allow tax evasion, smuggling, and informal trade to persist, particularly along Nepal's open border with India. In addition, poor estimation of domestic demand for certain goods often results in excessive imports, some of which are informally re-exported to third country without proper documentation, leading to further revenue loss.
Political stability provides an ideal environment to introduce long-term tax predictability. A stable tax regime enhances investor confidence, encourages domestic entrepreneurship, and supports consistent economic planning leading to estimated regular growth. However, predictability must be complemented by strong regulatory frameworks and institutional capacity.
Digital transformation offers a powerful solution to many existing challenges. Integrating systems across key institutions, including customs, inland revenue, and post-clearance audit mechanisms, can enable real-time tracking of goods and transactions. Ensuring interoperability between these online systems can reduce tax evasion, track mobility of stocks, control black marketing, and minimise revenue leakages. Moving towards a cashless, faceless, and paperless tax administration, with mandatory online filing, can not only increase tax collection and control corruption, but also significantly improve transparency and efficiency.
Equally important is building trust between the state and taxpayers. International experience shows that countries with higher transparency and accountability achieve better tax compliance. Establishing a visible linkage between taxes paid and public services delivered – along with clear assurance of how public funds are utilized –can strengthen public confidence and voluntary compliance.
Reforming Nepal's tax system also requires a stronger focus on equity and realism. A uniform VAT system disproportionately affects low-income groups; therefore, introducing differentiated VAT rates or targeted relief mechanisms for essential goods could make taxation more equitable. Similarly, direct taxation policies could be refined to consider household size and economic conditions, ensuring a fairer distribution of the tax burden.
Budget preparation must also become more realistic and implementable. Policymakers should engage stakeholders, assess taxpayers' paying capacity, and align fiscal decisions with actual economic conditions and business cycles. Public expenditure should prioritise productive sectors, particularly capital investment, to ensure long-term economic returns.
Effective tax reform must be complemented by responsible fiscal management. Public debt, whether domestic or foreign, should be mobilised for productive investments aligned with national priorities. Experiences with underperforming infrastructure projects, such as international airports with low utilisation potential, highlight the risks of inefficient resource allocation, where repayment burdens ultimately fall on limited government revenues that may dominate strength of reforming tax policy.
At the same time, trade regulation must be strengthened. While recent efforts to control imports are encouraging, broader issues of smuggling and informal trade remain. Improved border management, better coordination with neighbouring countries, and stricter monitoring can help address these challenges. Additionally, accurate estimation of domestic demand can prevent excessive imports and reduce opportunities for informal and illegal re-exports.
Nepal must adopt a comprehensive approach to tax reform that integrates policy stability, institutional strengthening, and technological innovation. Expanding the tax base by formalising the informal economy, improving compliance through transparency, and leveraging digital tools for monitoring and enforcement are critical steps forward.
Ultimately, tax reform is not just about increasing revenue, it is about building a system that is fair, predictable, and accountable. When taxpayers trust that their contributions are used effectively, compliance improves, and the foundation for sustainable development becomes stronger.
In conclusion, Nepal's political stability presents a timely opportunity to transform its tax system. By focussing on predictability, equity, transparency, and efficiency, the country can create a fiscal framework that supports investment, strengthens governance, and drives long-term economic growth. Without such reforms, stability alone will not be sufficient to secure Nepal's financial future.
Ghimire is Under Secretary at the Ministry of Federal Affairs and General Administration (MOFAGA)