KATHMANDU: The government has been pushing forward initiatives such as reform, expansion, and facilitation in the tax sector for some time now. This year, the government continues to emphasize creating tax policies that are favorable to the private sector.
As a result, competition to appeal to the private sector has intensified with each change in government.
Past administrations have worked quickly to reform laws in order to promote investment in the private sector. The policy and program priorities, as well as the appropriation bill for the upcoming fiscal year, place special emphasis on boosting private sector investment.
Last fiscal year, the government led by Pushpa Kamal Dahal ‘Prachanda’ made attempts to amend certain Nepal Acts to make them more favorable to the private sector, particularly regarding investment facilitation.
However, the private sector has long demanded further amendments, citing that several existing laws hinder investment and security.
Looking toward the upcoming budget, various private sector organizations have again presented their demands to Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel, particularly around tax facilitation and concessions.
These organizations have submitted written requests ranging from expanding the scope of personal income tax to reducing taxes on profits made by private sector businesses.
Private sector’s suggestions for tax reform
Three key private sector organizations have formally suggested Finance Minister Poudel consider their recommendations in the budget:
Federation of Nepalese Chambers of Commerce and Industry (FNCCI): The FNCCI has called for the implementation of a unified revenue law code to ensure stability and policy consistency.
Finance Minister Paudel has expressed the government’s commitment to resolving the issues faced by industrialists and businessmen, addressing concerns raised in various forums, starting from parliament.
They have also proposed reducing income tax on manufacturing industries by 5 percentage points over the next five years, and tax exemption if 40% or more of profits are reinvested in the same company.
They suggest individual income tax should not exceed 30%, and that individuals should be exempt from taxes up to NPR 800,000, with couples receiving an exemption up to NPR 1,000,000.
Confederation of Nepalese Industries (CNI): This CNI has urged the finance minister to declare the next ten years as an “investment year” to promote growth in the private sector.
They also propose that the legal system be amended to match customs rates on finished goods, and that the practice of customs book entries be abolished. Furthermore, they recommend removing the duplication of Sections 57 and 95 of the Income Tax Act and gradually reducing the income tax rate on profits to 10%.
Nepal Chamber of Commerce: The Chamber has suggested implementing a multi-rate system for Value Added Tax (VAT), with different rates for common consumer goods and luxury items.
They recommend introducing a VAT threshold, abolishing the TDS deduction for VAT-registered individuals, and removing the requirement to deposit a tax dispute guarantee when approaching the administrative court.
Additionally, the chamber calls for the creation of a permanent Tax Settlement Committee to resolve revenue-related disputes, capping advance income tax at 1%, and recognizing transaction prices at customs rather than the reference price.
Government’s position on tax reform
The government has prioritized making tax policies more favorable to the private sector. Finance Minister Poudel has consistently emphasized the need to promote private sector growth.
The policy and program for the upcoming fiscal year highlight measures to support private sector investment, including the creation of a business-friendly environment through policy reforms and simplified procedures.
In the policy program, the government has outlined that it will implement the recommendations of the High-Level Economic Reforms Suggestion Commission and continue with reforms initiated by ordinances.
“Entrepreneurship and private investment will be promoted through policy reforms initiated by the government to improve the business environment,” the policy document states.
Additionally, the government has emphasized the importance of making taxation policies more favorable for the private sector, further aligning with the demands of the business community.
The bill outlines that while tax evasion will be strictly controlled, necessary amendments will be made to clarify ambiguities in tax laws.
Finance Minister Paudel has expressed the government’s commitment to resolving the issues faced by industrialists and businessmen, addressing concerns raised in various forums, starting from parliament.
“Since the formation of the current government, we have made significant efforts to address the long-standing problems of the private sector, including law amendments, and we are moving forward with the necessary decisions for implementation. The government will incorporate the report provided by the Economic Reforms Suggestion Commission,” Minister Paudel said while meeting the suggestion group of the Chamber of Commerce on Monday.
Experts’ take on private sector-friendly tax reforms
Economist and tax expert Dr. Chandramani Adhikari notes that the government’s approach to tax reform is not new.
“In the past, the government has raised the issue of tax reform and expansion when presenting the budget, but the actions have often gone in the opposite direction,” he explains.
“Policy reforms should be focused on the interests of small, medium, and micro-industrialists and entrepreneurs. While the private sector is advocating for large businesses, the government must mediate to ensure that the demands are being met at the grassroots level,” he states.
“It cannot be assumed that the government will implement these changes just because they are mentioned in the policies and programs. We’ve heard similar promises before, such as tax reform and expansion, but the outcome has been the opposite.”
Dr. Adhikari points out that there are currently 22 types of taxes at three levels, and 36 types of taxes when including fees. “Shouldn’t there be at least two rates for Value Added Tax, instead of just one?” he questions.
He further emphasizes that there is no social justice in the current VAT system and advocates for tax reforms that ensure both revenue growth and convenience for the public.
“Even a wage earner is paying social security tax, but is he benefiting from it? The income tax rate has also reached 39%, which discourages people from earning. We must consider that many are evading taxes as a result.”
Dr. Adhikari stresses that these issues should not just be mentioned in the budget speech, but should also be addressed in the Economic Act, the Value Added Tax Act, and the Income Tax Act.
He suggests the government address the many hurdles faced by businesses, such as the need to register in multiple places and the complexity of tax payments.
“Administrative barriers should be removed, the Companies Act should be amended, and there should be provisions to ensure that no tax is charged if a business hasn’t conducted any activities,” he says.
“We need to facilitate the youth and middle-class businesses. The law should apply only to those who can afford to comply, not to those who cannot.”
He also proposes a minimum tax structure for medium and cottage industries. Dr. Adhikari agrees with the private sector’s call to maintain current customs prices but suggests that the state should monitor these prices effectively.
“Policy reforms should be focused on the interests of small, medium, and micro-industrialists and entrepreneurs. While the private sector is advocating for large businesses, the government must mediate to ensure that the demands are being met at the grassroots level,” he states.
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