WHERE DOES THE TAXPAYER’S MONEY GO?

By B360 Correspondent

Government's revenue collection has been increasing sharply each year with high growth rate. The government aims to collect Rs 730.05 billion in the current fiscal, which is 29% growth compared to the revenue collection target of the last fiscal 2016-17. This higher growth is despite slow economic expansion in the country. Average economic growth of the country stands at around 4% in the last ten years, however revenue collection is on a steady incline. According to the Ministry of Finance (MoF), revenue to gross domestic product (GDP) ratio has almost doubled in the last ten years. Revenue to GDP ratio stood at 13.2% in fiscal 2007-08 and which increased to 24% in fiscal 2016-17. Revenue to GDP ratio is high in Nepal among South Asian nations. It has increased by six folds in the last decade from Rs 107.63 billion in fiscal 2007-08 to Rs 609.17 billion in fiscal 2016-17, as per MoF. Increase in revenue collection has gradually reduced Nepal's over dependence on foreign aid as a source of budget financing. However, the government has not been able to mobilise the tax payer's money in wealth creation (capital formation) as a large chunk of the budget allocated for development projects remains unspent.

Effective and efficient use of taxpayer's money

With increase in tax collection, the country's reliance on foreign aid for budget financing comes down. Size of the government's budget in fiscal 2007-08 was Rs 168.99 billion— Rs 93.74 billion for recurrent expenditure and Rs 75.25 billion for development programs. The government's recurrent expenditure has been heavily increased by more than six times in last 10 years to Rs 617.16 billion in fiscal 2016-17 along with increase in capacity to mobilise revenue. The government had presented a budget of Rs 1048.92 billion, in which Rs 617.16 billion was under recurrent expenditure, Rs 311.95 billion for capital expenditure and Rs 119.81 billion for repayment of foreign loans and financing of state-owned corporations. Recurrent expenditure further skyrocketed in the current fiscal as the government started fiscal transfer to local bodies since this year. Of the total budget of Rs 1278.99 billion, Rs 803.53 billion has been allocated under recurrent expenditure. Recurrent expenditure - money that goes for salary, allowances of the civil servants and grant to local bodies - has also been swelling. Better utilisation of the taxpayer's money has always been a concern but the government has not been able to assuage this public concern. While a large chunk of the budget allocated for development projects remain unspent, it has been found that the MoF has been providing fund assurance to small projects to plead with influential politicians and state actors at the end of the fiscal.

VIEWPOINT

Saurabh Jyoti Revenue Committee Chair, FNCCI

“The tax laws have made the tax administration powerful and discouraged taxpayers even for seeking legal treatment. Taxpayers have to set aside 50% of disputed revenue amount as bank guarantee to file a case in the court”. The government is over reliant on import based tax. Over 44% of the total tax collected from imports is in the form of customs tariff, value added tax (VAT), excise, other taxes like pollution tax and road maintenance tax among others. The government is overtly focusing on import based revenue. As a result, the country's production base is gradually being distorted over time. The government fails to provide tax incentives for the production sector which is must to be competitive in production. Higher tax rate is one of the major reasons for high cost of production which has discouraging investors from industry, agriculture, hydropower due to low rate of return. If the government revises tax rates for the production sector, rate of return from the production based industry will be moderately higher and this will help attract investment to expand production base that generates jobs and minimises inflation. It is an irony that the customs duty of some of the finished products is lower than the raw material. This is enough to understand how friendly our taxation system is for investors inside the country. FNCCI has repeatedly advised the government for a differential treatment for the production sector for some years till the country's production base is enhanced but the government has not been giving due consideration to this. On other hand, the tax laws have made the tax administration powerful and discouraged taxpayers even for seeking legal treatment. Taxpayers have to set aside 50% of disputed revenue amount as bank guarantee to file a case in the court. This provision has been discouraging taxpayers to go lodge a case against the revenue amount determined by the tax administration, this provision needs to be scrapped immediately. Another major aspect of, better utilisation of tax payers money, the country is lagging behind due to yawning gap of infrastructure. Development of infrastructure can be instrumental in unleashing the economic potential because better infrastructure is critical to bring down production cost.

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Shishir Kumar Dhungana, Revenue Secretary, Ministry of Finance

“The government is planning to cross check the financial statement of taxpayers submitted to banks when they avail loans against the financial statements submitted to the tax office. This will prevent taxpayers from developing separate bookkeeping for different purposes and the country will also know the real business efficiency of its taxpayers”. The government has made several reforms in the taxation system so far to make it more scientific, taxpayer friendly and follow an international taxation system. Taxpayers can declare the tax amount and file accordingly. Tax administration cross checks their bookkeeping only when in doubt that the declaration made by the taxpayer is false. Our major objective is to develop a tax system which has less hassles so that the potential taxpayers can also come into the tax net. We called this taxpayer friendly tax system. Instead of increasing tax rates, the government always prioritises on expanding the tax net. Another major area where we are focusing on is to reduce the cost of tax collection. The government holds intensive discussions with the private sector while formulating and executing new tax policies because they are the major stakeholders of the government’s tax policies. We sit on talks with private sector representatives while formulating the budget every year. There is a permanent mechanism in the government to advise on the issues of taxes, that is Revenue Consultation Committee, which has the provision of private sector representation. The government frames mid-term and long-term tax policies and strategies based on the recommendations made by the Revenue Consultation Committee. Reform is a continuous process and there is a lot of space for reform in the tax system to make it more friendly towards investors (both domestic and private), along with leakage control among others. However, one beauty of Nepal’s taxation system is the high contribution of indirect taxes like Value Added Tax (VAT) in revenue collection. We believe that rising share of indirect taxes will not hurt the investment environment in the country. The government is planning to cross check the financial statement of taxpayers submitted to banks when they avail loans against the financial statements submitted to the tax office. This will prevent taxpayers from developing separate bookkeeping for different purposes and the country will also know the real business efficiency of its taxpayers.

Table 1: Status of capital expenditure in last few yearsHowever experts deem this practice to be wrong. "The government cannot spend a single penny without the consent of the parliament," said former Finance Secretary Rameshwore Khanal, "The MoF has also been providing money to lawmakers for the development of their electoral constituencies. This practice in fact is wrong and promotes pork barrel politics." He further said that the government needs to invest in mega infrastructure projects through multi-year contract allocating certain amount of resources every fiscal. Financing such projects can create synergy for the economic development of the country, according to Khanal. "Instead of expanding resource allocation for development projects, the government has been misusing the taxpayer's money through distributive programmes, for foreign junkets of leaders and high ranking officials and health-treatment facility of the near and dear ones of ruling parties and influential leaders." Private sector leaders also emphasise that the government should set a target for the execution of development projects as they do for revenue collection. "The government needs to launch 'carrot and stick' policy in tax administration to execute development projects on time," said Pashupati Murarka, Immediate Past President of the Federation of Nepalese Chambers of Commerce and Industry.

Reform in tax system is a must

The government has introduced a modern tax system in the country with cooperation from the International Monetary Fund (IMF). It is based on the Organisation for Economic Cooperation and Development (OECD) model tax convention. The country's income tax act was formulated with assistance of the IMF. Later in 1996, Nepal introduced Value Added Tax (VAT) which is a tax levied at the consumer end. These are major steps in the tax regime in the country. However, tax enforcement is a major challenge. Although the government is over reliant on imports for revenue collection, there are numerous problems with customs and tariff rates high on imported goods. This has led to rampant under invoicing on imports and unauthorised trade. This also creates havoc on price uniformity of the same goods cleared by customs at different check points. [caption id="attachment_4718" align="alignnone" width="549"] Table 2: Tax to GDP ratio (comparative figures)[/caption] Likewise, VAT enforcement is a major challenge due to lack of effective market monitoring from the tax administration. The government has been facing shortfall in VAT collection in recent years. Tax exemption for commodities like, flour, edible oil, mobile sets, pellet feed has also been largely misused, as per the report of the Auditor General. The government has been providing tax exemption on certain goods and raw-materials to control unauthorised trade and to protect domestic industries and promote production base in the country. Since the enforcement of a federal system, there is fear of double taxation among the private sector as there will be various layers of the government - local, provincial and federal, which could discourage the private sector from investment.

Tax capacity

The government's revenue collection target has seen a constant increase in the past years. However, the government has not assessed the actual tax capacity of the taxpayers. Currently, tax to GDP ratio stands at 23.8 percent as of fiscal 2016-17, which is high among the South Asian economies including India. The government needs to rethink the tax capacity. Officials of the MoF admit that tax to GDP ratio is quite high for a least developed country like Nepal. It is believed that the low taxation could provide opportunity for investors to expand businesses. Higher taxes cause low rate of return in business, which ruins the investment climate, according to private sector players.

Incentive for taxpayers

The government provides incentives for staff under revenue administration to meet the revenue target. There are also various awareness programmes to bring more potential taxpayers into the tax net. The tax payer is however not taken into due consideration. "The government has to invest in providing better facilities and dignity for taxpayers during ax submission to encourage people and firms to come under the tax net," said Saurabh Jyoti, Revenue Committee Chair of the FNCCI. "Taxpayers also need to be incentivised and recognised."