Experts say slow growth in income tax indicates deteriorating health of the economy

KATHMANDU, July 25: Income tax collection saw a shortfall of 7.33 percent against the target of Rs 149 billion in the last Fiscal Year 2017/18. The revenue collection stood at only Rs 140 billion that had witnessed a whopping growth of 18 percent in the previous Fiscal Year 2016/17. 

However, going by growth percentage of income tax collection, there was a positive growth of 3.35 percent in the last fiscal year compared to the previous year. 

Officials of Inland Revenue Department (IRD) attribute the decline in the profits of banks and financial institutions (BFIs) and also fall in profits of some government enterprises including Nepal Oil Corporation behind this slow growth. 

Profits of the BFIs mostly fell after mergers. On top of that, the tax waiver policy for the merged BFIs led to low collection income tax, according to Narayan Bhandari, director at IRD. The details of the breakdown of income tax are yet to be analyzed. 

House rent collection stood at Rs 4.54 billion, which was also about 8 percent lower than the target. However, the tax from interest income increased to Rs 14.96 billion, which was an increment by 19 percent against the target. 

All other major indirect taxes -- Value Added Tax, customs duty and excise duty -- have posted over 20 percent growth. Value Added Tax posted a growth of 29 percent while customs and excise duties each posted a growth of 21 percent, according to the Ministry of Finance. 

Government collected total revenue of Rs 731 billion, which is a marginal surplus against the target. 

Shortfall in the income tax target and a slow growth in collection volume compared to the previous fiscal year does not bode well in the country’ economic health, according to experts. 

“This shows the country’s economic health is deteriorating. Investors’ earnings have declined in proportion to investments and productions have also seen a fall,” said economist Chandra Mani Adhikari. 

Adhikari further said: “Consumption-based import is growing while citizen’s saving capacity has remained low.”

The share of income tax in the total revenues is high in developed countries. But it amounts for only 27 percent in Nepal, indicating the country’s revenues come mostly from indirect taxes like VAT and excise duty in which every citizen has to pay taxes indirectly for consumption rather than savings and profits from income generating activities. 

Seconding Adhikari’s views, Ram Mani Duwadi, former deputy director general of IRD, stated that the country should not be heading toward a fall in income tax. “Tax on earnings should have a larger contribution to the country’s revenue to ensure that the country is heading toward progress,” said Duwadi. 

Retired government officials have stressed on the need for more surveillance on tax compliance to increase its share in the country’s total revenue. The current slowdown is also due to very few cases of income tax payment records audited by the IRD, according to a retired government official. Hardly two cases related to income tax out of 100 are audited by the IRD. The trend so far indicates that tax collection, which is based on the principle of self-declaration of income by the taxpayers and due payments, is not properly complied.

 
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