The total revenue collection of the government, including the amount to be transferred to provincial and local governments, in the fiscal year 2023-24 that ended on July 15 stood at Rs1058.90 billion. It was short of the Rs1422.54 billion target by Rs363.64 billion or 25.56 percent. The total government revenue in the previous fiscal year was Rs957.35 billion, against the target of Rs1403.14 billion, a whopping shortfall of 31.77 percent.

The trend is equally pessimistic in the current fiscal year. The revenue target is Rs1419.3 billion. The average collection per day, which should be at least Rs3.88 billion to meet this target, is only Rs2.53 billion. As of September 22, or in 69 days of the fiscal year, the total collection is only Rs178 billion, which should have been around Rs269 billion. It is barely 12.58 percent of the annual target against the expected 19 percent to have been collected by now.

A macro trend is apparent. For years, the government has shied away from setting a revenue target above Rs1400 billion. This revenue-GDP ratio has rapidly declined. In the last five years, the average annual revenue shortfall has remained at least 25 percent off target. This is a grave cause of concern mainly because there is no sign of substantial improvement in the collection. The traditional sources of revenue are shrinking, and the government appears completely clueless or impervious in exploring new revenue sources or expanding the existing tax base.

Such a low revenue collection has made the country's public financial management challenging. The government is resorting to borrowing without hesitation. As of mid-September, Nepal’s public debt reached Rs2.52 trillion. The government borrowed Rs104 billion only in the past two months. The public debt-GDP ratio climbed to 44.34 percent from 28 percent a decade ago. Nepal's current GDP is Rs5.704 trillion.

Tax reform

The proponents of state-led growth often seem to focus rather monolithically on distributive justice and expenses on every facility, such as health, education, infrastructure and social security, which the state should staff. They also argue that the rich should be taxed more to generate revenue for the same. Nevertheless, a mammoth caveat in this redistributive model is that it does not prescribe a recipe to expand the private sector growth, which produces more riches and enlarges the tax net.

A key agenda in the ten-principle Washington Consensus, which the socialists of state-led growth schools view as 'the' theoretical weapon to globalise neoliberalism, is tax reform. The third principle of the 'theory' is categoric in stating: “Reforms should broaden the tax base and remove tax exemptions that exclude some politically connected taxpayers and organizations. Broadening and simplifying taxes can promote efficiency, improve tax collection, and reduce tax evasion.”

Nepal's tax reform has comprehensively failed. A recent report prepared by a 'high-level committee' commissioned by the Ministry of Finance has pointed out that Nepal's tax-paying process and the tax system are complex. Tax compliance and tax risk management are suboptimal, and the implementation of key revenue-related laws—income, excise duty, customs and value-added tax (VAT)—is compromised by the weak and non-committed revenue administration.

The practice of tax rate adjustment through annual fiscal bills has only added to policy instability and unpredictability. The tax exemption is ad hoc and massive, causing an estimated loss of about Rs200 billion annually. Lack of digitisation, automation and poor database management of the taxpayers have left loopholes for taxpayer-tax officer collusion and led to large tax evasion.

This report states that the number of corporate taxpayers is only 261,815. However, the annual report (FY 2022-23) of the Inland Revenue Department data shows that the number of VAT-registered firms is 308,000, permanent account number (PAN) registration is 1.87 million, and registration on excise duty is 116,000. Individual PAN registration is 3.37 million. But regular taxpayers, including salary and wage earners, are estimated to be only about 2 million. This is indicative of a very narrow tax base.

Tax justice

The tax-to-GDP ratio in Nepal is about a quarter of its GDP, which is considered a high rate of tax imposition. But the fact is, the larger portion of the economy, in a rough estimate of about two-thirds of it, is a shadow economy or in no way accounted for in GDP calculation, which shows the ratio to be disproportionately high.

Tax justice comprises two complementary ideas. First, the nation-state must adopt a progressive tax policy, meaning that those earning more should pay more. Also, the portion of direct tax earnings for the state should invariably be higher than the collection from indirect taxes. This is because indirect taxes like the sales tax service tax, VAT, excise duty and customs duty on goods are uniformly applicable to the poor and the rich.

However, direct taxes like income tax, corporate tax, land revenue, capital gain tax and expenditure tax are levied only on those who earn. They constitute only about one-third of the total tax collection in Nepal. Similarly, the tax rates based on the income slab that ranges from 1 percent of income to 39 percent are considered stratified in many levels and too high for salary and wage earners, whereas the capital gain tax from the land and property transactions is not properly implemented.

The concept of redistribution of wealth through appropriately designed tax policies, or redistributive justice, has also been blatantly compromised by the Nepali state. The state's objective should be to reduce inequalities in consumption, income and wealth among the population by redistributing the wealth and providing public services and social security to the marginalised and deprived sections. According to an OXFAM report, the income of the richest 10 percent of Nepalis is more than three times that of the poorest 40 percent of the population. The poorest 20 percent have only 4 percent of the wealth.

Some policymakers recommend drastic measures like taxing based on wealth accumulation and imposing inheritance tax on ancestral properties. This is easier said than done. However, without substantially improving the revenue base, the state will soon be unable to finance regular/recurrent expenditures, let alone ensure redistributive justice.