TOPICS: Offsetting Nepal’s tariff-cutting pledges

Nepal applied for accession (as per Article XII of WTO) and became 147th member of WTO on 23 April 2004 through the process of accession negotiations.

Nepal has made several commitments. Some are directed towards enhancing multilateral trade arrangements, while the others are focused on providing market access to foreign suppliers of goods and services.

As per the commitments, 208 items will need reduction in the tariff rates in the range of 5 to 90 per cent, within the period ranging from 3 to 10 years. On an average, Nepal’s bound rate is 51 per cent for agriculture up to the year 2007 and 42 per cent by 2013, and it is 39 per cent for non-agricultural manufactured products up to 2007 and 24 per cent by 2013, and removal of special duty, local development tax and agricultural services levy by 2013.

Nepal depends heavily on trade related taxes. Trade based revenue contributed nearly 35 per cent of total revenue in FY 2003/04. Many argue that tariff reduction would lower Nepal’s revenue that will negatively affect the government’s ability to finance its development expenditure. Such shift in government expenditure will ultimately affect social services like health, education and drinking water. It is also argued that the losses accruing from the reduction/abolition of local development tax contrast with the objectives of local self-governance initiatives; therefore it may produce negative outcome for local and rural development initiatives.

However, many factors, including demand elasticity of importable commodities, revenue structure and reform strategy, play a vital role. If the demand elasticity of importable goods is higher, tariff reduction may lead to an increased inflow of imported commodities and, in such a situation, revenue loss due to the tariff cuts may be less than increased revenue because of availability of more units of imports for tariff imposition. In addition, administrative measures can improve enforcement and compliance that can lower smuggling and increase declared customs values.

In Nepal, the average applied tariff rate is considerably lower than bound rates. Therefore, the committed bound rate may not affect revenue adversely. But the kind of adjustment in the high tariff rates in various items may lead to huge losses. Presently, the rising security related and other regular expenses (unproductive) are compelling the government to limit the size of its development expenditure. It is affecting infrastructural development and poverty alleviation initiatives badly.

Therefore, search for and mobilisation of alternative sources of revenue and efficient allocation of government resources are needed. Strengthening of VAT, broadening of income tax base, compensation to VDCs and DDCs as grants, prudent public expenditure, management, corruption control, and improvements in governance system are essential to avert negative consequences of Nepal’s tariff reduction commitments at WTO.