Around half of the business enterprises operating in the country do not have permits, thwarting the government’s plans to effectively check revenue leakage.

The final report of the National Economic Census 2018 unveiled recently by the Central Bureau of Statistics shows that 460,422 out of the 923,356 firms are not registered with any government agency. Most of the unregistered firms are wholesale and retail outlets and vehicle repair shops. According to the survey report, there are 498,069 groceries and auto repair shops in the country.

The economic census report is a letdown for the taxman who has aimed to increase the portion of tax revenue in the government's revenue receipts. The budget statement for the fiscal year 2019-20 says the tax base will be broadened by bringing all taxable economic activities under the tax net and controlling tax evasion and leakage.

In a bid to track revenue leakage, the government has made the permanent account number (PAN) mandatory for salary earners from the beginning of the next fiscal year. Investors in the secondary market with a turnover of more than Rs500,000 will also be required to possess a permanent account number.

The government has also enforced a number of provisions in value added tax through the budget statement to streamline tax collection. But the taxman has no concrete plan about what to do with the small and medium firms operating without a permit.

Bishnu Prasad Nepal, director general of the Inland Revenue Department, said they had taken into account the report of the Central Bureau of Statistics. “We will now create an action plan to bring unregistered firms into the tax bracket,” said Nepal.

A large number of accommodation and food service businesses are also off the grid, followed by manufacturing industries. According to the survey report, over 82,000 eateries and lodging businesses and more than 53,000 manufacturers have not obtained permits from the government.

Revenue generation is a perennial problem the government has to deal with, and to make up for shortfalls, it often tends to resort to ad hoc measures. Almost every year, the government struggles to meet its revenue collection target. The government has aimed to raise Rs838 billion out of the Rs1.31 trillion budget for the current fiscal year through taxes.

The government has focused more on local economic activities to generate revenue than import-based revenue sources as in the past. Keshab Acharya, who served as an economic adviser to the Finance Ministry, said a strong monitoring mechanism to bring unregistered firms into the legal channel could help the government achieve its task.

“Bringing unregistered firms in the tax bracket also means they can collectively contribute a large amount of tax revenue into the state coffers,” said Acharya. According to him, the existence of such firms could promote illegal transactions and misconduct that might adversely affect consumer welfare.