Nepal - Taxation
The principle sources of domestic revenue are customs tariffs, value-added taxes (VAT), excise duties, and income taxes on personal and corporate incomes. There are also local development taxes, as well as license and registration fees for houses, land and vehicles.
The VAT was introduced in November 1997 as a reform designed to replace sales taxes and most excises. The "octori," a traditional local tax on trade, was also eliminated at this time. Five years after its introduction, however, the VAT had yet to be completely implemented, as indicated by a finding that whereas net taxes from VAT have increased 65% over the first five years, refunds have increased by a factor of 23. The VAT rate is 10% collected at every stage of selling goods and services. Small business with annual turnover of less than NR 2 million (about $25,000) are not required to register for the VAT, but businesses who import more than NR 10,000 (about $130) at a time, must register. Goods exempted for the VAT include primary food stuffs, agricultural products, and industrial machinery, though the government plans to reduce this list as part of its Economic Reform Plan for 2002/03. There is no VAT on goods for export, nor on raw materials imported by an export promotion industry, nor the products of such an industry.
Excise taxes are applied mainly to goods deemed hazardous to health, such as alcoholic beverages, cigarettes and soft drinks. In January 2002, a new Excise Act went into effect that raised rates slightly as part of the government's effort to pay for increased security expenditures since 2001.
On April 1, 2002 the government put into effect a new Income Tax Act, replacing the previous act of 1958, and developed in close cooperation with the IMF. The new act covers all sources of income—from employment, business and investment—and encourages current year self-assessment and pooled depreciation. In July 2002, personal income tax brackets were adjusted upward somewhat. With these adjustments, there are two tax tiers, 15% and 25%. For individuals, income below NR 65,000 (about $850) is exempt, and for couples, NR 85,000 (about $2100). The highest marginal rate, 25%, applies to income above NR 140,000 (about $1850) for individuals, and NR 160,000 (about $2000) for couples.
Companies engaged in construction, transportation, manufacturing and power generation are subject to a 20% corporate income tax, whereas financial institutions are liable for 30%. All other businesses are assessed at 25%.
About 11.1% of state revenue comes from state-owned businesses and property. Under the Industrial Enterprise Act and the Foreign Investment and Technology Act, industries that install pollution-control, environmentally-friendly technology are eligible for a rebate of 50% of its investment from taxable income. After the equipment comes into operation, 10% of gross profits can be deducted from taxable income.
In addition to regular taxes, the government has imposed a number of "security surcharges" to deal with the increased security expenditure needed to deal with the intensifying Maoist insurgency. Special fees of 3% have been added to the taxable income of individuals, couples, companies, partnerships and non-resident taxpayers. Surcharges of 1% to 3% have been applied to imports, plus a NR 1 (about $.013) per liter tax has been added to petroleum products. The government also mounted a voluntary disclosure of income scheme (VDIS), which had questionable results. Over 3,000 new taxpayers were registered, but a simultaneous decline in bank deposits suggests more taxable income was being hidden than disclosed.
Since 1997, Nepal has received technical support in implementing its tax reforms from the Danish International Development Agency (DANIDA) and German Technical Cooperation (GTZ). In 2002, these agencies were working in an alliance they called Revenue Administration Support (RAS). The major structural reforms in which the RAS has assisted were the merger in late 2001 of the Department of Taxation with the VAT Department to form the Inland Revenue Office, and the subsequent consolidation of the 40 income tax offices and 17 VAT offices into 21, one-point-of-service, Inland Revenue Offices distributed around the country. In their division of labor, DANIDA has been supporting the mergers and the implementation of the VAT and the new income tax, while GTZ has focused on the development of Nepal's income tax/VAT system software, and the introduction of the new income tax.
Improvements in revenue collection though 2002 have been minor, however, coming, as they must, in the context of Maoist uprising that targets and competes with the government's tax collection efforts, but also into a culture of pervasive tax evasion, smuggling, and arbitrary tax assessments. Total domestic revenue reached 11.4% of GDP in 2001/2, the same as for 2000/01, and well below the target set by the government of 12.8%. The budget for 2002/03 set the goal for domestic revenue at lower, and, perhaps attainable, 11.9%.