As a part of the ambitious revenue target for this year’s fiscal budget, Finance Minister Dr Baburam Bhattarai announced VDIS provision last October in his budget speech. Four months have passed by and still the business community is scrambling to come to terms with this new provision. Initially, they deliberately neglected the government’s request to comply with VDIS provision. If this were not the case, then there would not have been a flurry of compliance during the last days of the scheme, which has now been extended until March 13.
Tax revenue forms the basis for government expenditure. It is the duty of the government to provide public goods and facilitate private sector participation in the economy. It is also the duty of citizens to pay taxes so that the government could fulfill its duties. Despite simple rules and low rates, tax revenue collection in Nepal is one of the lowest in South Asia. This is partly due to bureaucratic inefficiency and corruption. A much bigger problem lies in the tendency of some high-income earners and businesspersons to evade taxes.
It is ironic that businesspersons are needlessly clamoring against VDIS. They are apprehensive of revealing sources of their income and assets. What baffles me the most is that why anybody should be reluctant to reveal the total worth of their assets and income to government and pay taxes accordingly. This is the fundamental responsibility of a citizen, who in turn expects public goods such as defense, infrastructure, education, and health care, among others, from the government.
Any excuse for tax evasion is no less than cheating the nation. There is nothing wrong in disclosing one’s earned income and assets to appropriate authorities and pay taxes based on regulations passed by the parliament. The government estimated that 10,000 individuals, mostly from the business sector, have failed to disclose income and pay taxes. I believe this figure is an underestimation given the level of bureaucratic efficiency and missing trail of information about earned income and assets. Out of 10,000 individuals from whom the government requested compliance to VDIS, so far, only about 2000 have come to its terms. The government aims to collect Rs 2 billion revenue through VDIS and encourage (if not enforce) disclosure of Rs 20 billion worth of income and assets. The government expects to collect Rs 142 billion as tax revenue this fiscal year.
The existing tax rates are relatively lower than in regional counterparts. The corporate income tax rate in Nepal is 20 percent, which is the lowest rate among SAARC nations. Moreover, total tax rate (as a percentage of profit) is around 34 percent, which is half the rate prevailing in India. Still, the business community is finding it hard to fulfill their basic duty as responsible citizens of the country. It has a strange habit of initially taking such issues flippantly, wait until the last minute, and then plead for fairness and assistance when the state prods them. Their laxness and inability to enhance competitiveness of exportable products has already cost the industrial sector dearly. Moreover, their tendency to operate under a protected buffer such as preferential trading, special permits, and partially exclusive access to markets has made the whole country vulnerable to the tides of globalization. The business community only learns it the hard way!
Toward the end of first deadline of VDIS, one individual disclosed property worth Rs 1 billion and paid 10 million in taxes. How reckless is it to hide so much income and assets and not pay Rs 10 million in taxes for years? Hundreds of such individuals have amassed income and assets without disclosing them to the proper authorities. With an extra Rs 2 billion, the government could provide healthcare and education to millions of citizens. It could build new infrastructure and repair crumbling ones to connect production sites with markets and help businesses decrease transportation costs. It could invest in new hydropower projects to supply badly-needed energy to the industrial sector and households. The more revenue the nation generates, the more its capacity to invest in public goods.
The government’s expenditure has been well above revenue generation. As a percentage of GDP, tax revenue, total revenue, and expenditure amounted to 10.3 percent, 14.9 percent and 16.7 percent respectively. This resulted in negative fiscal balance of 1.8 percent of GDP. This sort of shortfall is usually bridged with foreign assistance, which comes with many strings attached to it. Dutifully paying taxes would help lower outside assistance and lessen unfavorable strings and policy restrictions.
Tax evaders should be prosecuted under the law if they fail to comply with VDIS even after the extended deadline. Hats off to the Finance Minister and Inland Revenue Department for their persistent effort to implement VDIS! The business community and those that owe taxes to the nation should also dutifully clear dues as all other responsible citizens do.
(The writer is studying at Dickinson College, USA)
sapkotac@dickinson.edu
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