The three tiers of government in Nepal currently extract around 50 different taxes. This massive web of taxation includes income tax, value-added tax, customs duties and even specialised charges like pollution control and digital service taxes. Despite this aggressive extraction of capital from the public, the national treasury remains in a precarious position with a deficit of Rs179.48 billion as of late May. Citizens find themselves trapped in a paradox whereby the state demands a significant portion of their income while providing crumbling roads, inadequate healthcare and unreliable public utilities.

The scale of the tax burden in Nepal is now among the highest in South Asia. Most goods and services carry a 13 percent value-added tax, while personal income tax rates soar as high as 39 percent. The middle class is particularly squeezed as the quality of community schools and public hospitals remains so low that private alternatives are the only viable options. Even the national health insurance programme faces significant arrears with the government owing over Rs16.87 billion in payments to providers. Under such circumstances, it is unsustainable to expect continued compliance from a population that receives so little in return.

Fiscal reports reveal a trend of slowing revenue mobilisation and missed targets. Average annual revenue growth has plummeted from nearly 15 percent before the pandemic to a mere 8.7 percent in recent years. The ratio of federal revenue collection to the GDP has also slipped from 21.5 percent to 19.3 percent. The underlying structure of the Nepali economy remains precariously narrow and overly dependent on external factors. Nearly 45 percent of total tax revenue is derived from imported goods, which leaves the national budget vulnerable to global supply chain disruptions. The impacts of the conflict in West Asia highlight how the rising fuel prices and logistical interruptions could further erode revenue collection in the coming months.

The economy has failed to sustain average growth above 4 percent, weakening consumption across all sectors. The informal economy continues to represent a large portion of national activity, often unmeasured and untaxed. Compounding these issues is the burden of multi-year contract liabilities exceeding Rs1.03 trillion. Only a small fraction of the state’s financial obligations is funded in the current budget, creating a massive carryover of debt. If these imbalances are not addressed, the government may eventually be forced to borrow money simply to repay existing debt. Such a cycle would place immense pressure on future generations and threaten the long-term sustainability of public finances.

Resolving this looming fiscal crisis requires an immediate shift from aggressive taxation to administrative efficiency and economic expansion. Many taxpayers currently face confusion regarding where and how much they owe due to a lack of transparency and multiple payment channels. Simplification and digitisation of the tax system must be prioritised to eliminate overlapping laws and contradictory regulations. Tighter control of revenue leakage and the aggressive expansion of the tax base are essential. While an immediate reduction in tax rates might be impractical given shrinking income sources, the government must move toward an integrated tax system that eventually allows for lower rates. Capital spending must be revitalised to stimulate domestic demand and increase the real size of the GDP. Only by fostering a robust economic environment and proving the value of public services can the state hope to restore public trust in levies. Transparency and a commitment to spending discipline are non-negotiable.