The Finance Ministry has verbally assured the Nepal Oil Corporation that it would compensate for the reduced prices of diesel and petrol prices but has not yet confirmed how it would do so, even a week after the government decided to slash fuel prices by “adjusting taxes”.

When Minister for Industry, Commerce and Supplies Dilendra Prasad Badu announced price cuts of Rs20 per litre in petrol and Rs29 per litre in diesel, he had also said that equivalent amount of taxes would be reduced on import of these items.

But the Finance Ministry has not yet taken any decision on reducing taxes while the Nepal Oil Corporation (NOC) has been paying all the existing taxes.

“We have been verbally notified that we will be reimbursed the cost of reducing the prices of diesel and petrol but how and when the government would do so has not been clear,” Binitmani Upadhyay, spokesperson for NOC told the Post.

Even Finance Ministry officials are not sure how it would be done.

“I don’t know whether the NOC would be compensated with tax deduction or other means at the moment,” said Rajeshwor Gyawali, chief of the corporation coordination division at the Finance Ministry.

The move, however, has raised some questions, as even in six working days the government has not been able to provide clarity on a decision it took, with experts calling it ad hocism.

At a time when the government has banned import of some key revenue-generating items including vehicles, petroleum products are the major contributors to the state coffers.

The government earned Rs118.82 billion in various taxes levied on fuel in the first 11 months of this fiscal year.

But at the same time, it drew flak for high taxes as prices of petroleum products continued to soar, hitting the public hard.

The NOC expects to pay a total of Rs125 billion in taxes in the current fiscal year.

“After announcing a reduction in taxes, the government appears to be calculating the cost which it should have done before the announcement,” said Bhanu Acharya, former auditor general.

“The government should also have worked on how it would bring down the prices of goods and services along with the reduction in petroleum prices.”

Even though the government on June 25 rolled back transport fare hikes effected after petroleum prices were increased on June 19, there are no concrete efforts towards curbing ballooning prices of goods and services in the market.

“The government’s announcement was an out-and-out ad hoc decision which is also clear from the fact that it has not yet come up with any implementation procedure and it also does not seem to be aware of the financial consequences of its announcement,” said Achyut Wagle, a professor at the Kathmandu University School of Management.

Experts say the announcement on fuel prices is just one case, as the government appears unserious about not only the potential revenue losses and its effects on budgetary programmes.

The government has announced the budgetary programmes based on the estimate of resources including that to be generated from the import of petroleum products.

“If the government plans to reduce taxes on certain goods, it should be aware of how it would finance the budgetary programmes and what are the alternative ways for generating revenue,” said Bimal Koirala, a former chief secretary. “When you are reducing taxes on one of the most important revenue generating items, alternative sources of income should also be explored at the same time.”

Experts say that the government could think of ways other than tax cuts for compensating the NOC for the price reduction.

“A better option would have been cutting down unwanted expenditures. But the government has announced many distributive programmes when there is a resource crunch,” said Acharya. “If you erode the revenue bases by cutting taxes to solve the immediate problems, it will be difficult for the government to again increase tax bases in the future.”

Experts say that by taking ad-hoc decisions, the government itself has lost its credibility.

They said that the ad-hoc nature of decision-making would bring policy instability, affecting the investment climate in the country.

“If the government pursues ad hocism while taking decisions without giving a proper thought to the consequences, it erodes public’s faith in the government,” said Acharya.

“Losing trust in the government means investors think twice before investing, and economic activities also suffer.”

There is a long list of such ad hoc decisions the government has taken.

For example, the government announced that it would slash customs duty on the import of sanitary pads by 90 percent.

Now, domestic manufacturers of sanitary pads are fretting as they believe the decision could lead to a complete collapse of Nepal's sanitary pad industry as local producers would be unable to compete with imported items.

Following the reduction in the duty, importers of sanitary pads should now pay just 1.5 percent of customs duty from 15 percent earlier.

There are around 40 small- and large-scale sanitary pad makers in Nepal with a total investment of around Rs6 billion, according to the Sanitary Pad and Diaper Manufacturers’ Association.

Finance Minister Janardan Sharma has defended the government’s move saying that he only tried to address the long-standing demands that the duties on sanitary pads be brought down.

Experts say that the government appears to have failed to take into consideration the potential impact of such a decision on domestic industries.

“Not only sanitary pads, there are thousands of goods where there is high duty on raw materials and low duty on finished products,” said Wagle. “Although there is the option of treating all raw materials holistically by keeping the import duties on them lower compared to the finished products, the government has been selective so as to fulfil the vested interest of certain people.”

The government is also facing criticism for not making payments of insurance coverage for Covid-19. When the pandemic hit the country, the Insurance Board introduced the policy of Covid-19 insurance. But insurance companies have not paid the claims since April 2021 arguing that the government has not paid them.

The government has a liability of over Rs10 billion, according to the Insurance Board. But it has not allocated funds to clear the liability in the budget for the next fiscal year 2022-23.

Concerns have been raised about its impact on the credibility of the insurance sector.

“This is another example of the government's decision making process without planning,” said Wagle. “It was a populist decision taken at that time without caring about its cost.”