The current policy aims at mobilizing maximum internal resources through voluntary tax compliance, creating an investment-friendly environment, developing investigation process to make revenue leakage control effective, making non-tax revenue contribution an important source of total revenue collection, attracting investment in hydroelectricity and huge infrastructure works, and emphasizing on trade facilitation by developing simple and transparent work procedure through the use of information system in customs clearance process. The need to harmonize these objectives with other relevant policies becomes meaningful when we review other government documents.
The objectives of the revenue policy has been elaborated in the Three Year Interim Plan or TYIP (2007/08 - 2008/09) by proposing to establish an independent Revenue Board; reviewing tax rates including those of non-tax revenues; adjusting tax system according to the regional, sub-regional and global agreements; and strengthening institutional processes to improve revenue system by making tax administration efficient and cost-effective.
Reviewing the existing practices of revenue mobilization reveals that the government’s emphasis is largely on meeting revenue growth targets. The country has failed in sustaining minimum growth rate by establishing link between revenue generation and expenditure management.
MAOIST GOVERNMENT
The Maoist government in the budget speech for the year 2008/09 had covered a broader mission to achieve revenue goals by making revenue administration efficient and transparent. The policy aimed at acceleration of the country’s economy toward industrialization, maximum mobilization of internal resources for a self-reliant economy, broadening tax bases instead of raising tax rate, export promotion by attracting domestic and foreign investment, providing protection to domestic industries and conservation of natural resources, strengthening of tax administration by making it more efficient, giving special priority to the infrastructural projects, providing relief to the disadvantaged groups of society affected by inflation, strictly monitoring market and control of illegal trade, controlled sale and distribution of health hazards goods, rationalization of revenue rates committed in bilateral and multilateral agreements, and directing means and sources toward productive sectors.
The present budget also aims at increasing internal sources by significantly increasing the tax net and administrative capacity. The budget commits to mobilize external resources for large physical and infrastructure projects such as rural infrastructure, agriculture, social sector and inclusive development. The budget presumes, in the long run, emphasis will be given to build a self-reliant national economy without the need of foreign assistance.
The absence of a prudent policy guideline has created a problem in complying with government’s priority policy announcements. Therefore, the policy implementation is not very satisfactory. It is learnt that under the overall supervision of Secretary of Finance at the Ministry of Finance (MoF) and a team of high-level professionals constituted by the Office of Auditor General, a revenue policy is being developed. Frequent sharing of information between these groups should be maintained.
REVENUE STRUCTURE
The ratio of revenue collection to the gross domestic product during the Tenth Plan (2002-2007) period remained at 11.6 percent. TYIP has a target to mobilize revenue by 13.6 percent of the GDP. To achieve this target, the Plan aims at maintaining revenue growth rate during the Plan period at around 16 percent (TYIP, 2007). During the first year of TYIP (FY 2007/08), the revenue to GDP ratio jumped to 13.1 percent. This growth was due to the increase in customs duties, VAT, excise duty, increases in income tax and non-tax revenue (NRB, Current Macroeconomic Situation, 2008/09). The year 2008/09 remained relatively comfortable with regards to meeting revenue target. The revenue to GDP ratio moved up to 14.9 percent. Following figures show revenue structure of two fiscal years:
Source: Calculated from NRB’s Macroeconomic Indicators.
Source: Ibid, 2008 and 2009.
Reviewing the existing practices of revenue mobilization reveals that the government’s emphasis is largely on meeting revenue growth targets. The country has failed in sustaining minimum growth rate by establishing link between revenue generation and expenditure management. For making policy adjustments, a regular enquiry in the changes in revenue and expenditure structure and their impact at the household level is necessary.
After each policy announcement, the government is found to revert back because of pressures from vested interest groups and politicians. There are several references some of which include, withdrawal of Education Service Charge, charges on Crude Palm Oil, and helplessness to control leakages in customs and VAT. Presently, the pressure is mounting from boulder exporters.
Under-invoicing and under-declaration, and reporting of different product code or HS Code for the application of low rate customs are some of the factors for revenue leakages. Some districts such as Tatopani, Jhapa, Saptari, Siraha, Bara, Parsa, Nawalparasi, Kapilvastu, and Kailali are notorious for the movement of goods from points other than customs check post. The leakages are common in sugar, electronic items, apparels, steel utensils, etc.
Most retailers avoid giving invoice. Often, it is reported that supermarkets use software to record different sets of transaction for VAT. Besides this, credit claim or refund claim is made for which there is no VAT return submission by the seller. In some of the purchases by foreign offices from Nepali market, the examinations reveal, that traders do not keep VAT payment records while claiming VAT refund. The reason VAT is increasing is largely because of the proper compliance by institutional organizations such as Nepal Telecom, Nepal Oil Corporation and other public companies. The VAT office complain members of Nepal Chambers collectively pay peanuts as VAT, but all of them collect in full from the customers.
There have been several cases of misuse of stickers by alcohol producers. Under-reporting of production is another problem by manufacturers who show losses most of the times. The input-output ratio analysis by Internal Revenue Department is very poor.
There is under-reporting of profits by using different accounting techniques. During investigations, it has been found that non-formal, non-corporate sectors keep two sets of books of accounts.
VAT exemption list is too long and there is pressure to make it even longer. Exemption in VAT may assist taxpayers to also under-report incomes. The MoF has a defined Revenue Exemption Policy for exercising discretionary authority granted by law and is used for medical, emergency relief, educational and other relevant purposes. The review of such practices can also provide some clues on leakages for strengthening revenue administration.
Nepal’s economic condition does not allow it to waste scarce resources, the way it had been doing in the past. Every rupee of government expenditure should be used as efficiently as possible. We must examine the link between government expenditure and revenue with the progress and stability of private sector economy. Therefore, to achieve the lofty ideals stated in the manifesto of political parties, an effort to develop revenue policy is needed that can ensure high levels of employment and income.
bishwambher@yahoo.com
Related story
Diversifying Government Revenue
