The private sector has urged the government to introduce a competitive tax rate to prevent smuggling, which has become rampant in the bordering areas, hurting the government’s revenue largely.

Speaking at an economic summit titled ‘Fundamental Need of Economy: Joint Commitment from Political Leaders’ organised by Kantipur Media Group, in Kathmandu on Sunday, private sector representatives stressed the need for the government to introduce a progressive tax system citing the ongoing economic slowdown. They said such a tax system stimulates demand and spurs economic activity.

Tax policies normally influence economic conditions.

Kamlesh Agrawal, president of the Nepal Chamber of Commerce, said that Nepal and India share an open border, but the price difference in goods and services between the two immediate neighbours is 30-40 percent.

“[Cross-border] Smuggling is thriving due to the price differences.”

“To control the smuggling, the tax rates need to be made competitive,” said Agrawal. He was speaking on the theme ‘Issues of the private sector in budget, planning of policymakers’ during the first session of the summit.

According to him, India has a 5-6 percent goods and service tax on essential goods while taxes on luxury goods are high. But in Nepal, the government has imposed a 13 percent VAT on essential goods.

The private sector said that Nepal’s tax system is ‘upside-down’, meaning that people with lower incomes pay a greater percentage of their income in taxes than those with higher incomes.

Agrawal questioned whether it was logical to impose the same VAT rates on all types of goods in a socialist economy system, where the factors of production like labour and natural resources are under the control of the government. He called for flipping Nepal’s tax system from a flat tax model. “The tax rate on essential goods should be reduced.”

Agrawal said that all the political parties have committed to creating an environment for investment and economic development during the recently held Nepal Investment Summit, and now, the private sector is seeking to materialise the commitment.

The private sector views three reasons for the current economic slowdown. Firstly, the government discouraged the private sector by imposing an import ban.

Secondly, the slowdown in Nepal was due to the impact of the global economic slowdown.

And thirdly, the policies and politics in Nepal are unstable which make investors think twice and thrice before making an investment plan.

Nepal’s GDP has been projected to grow by 3.3 percent this fiscal year, mainly due to improvements in the tourism and hydropower sectors, according to the National Statistics Office.

The national statistics show the construction and manufacturing sector is in negative growth while retail and wholesale trade are at near negative growth. These are the major pillars of the economy that engage major parts of the private sector.

“So, in the upcoming budget, the government’s priority needs to be to end the economic slowdown and protect the private sector through policy reforms,” said Agrawal.

Rajesh Agrawal, president of the Confederation of Nepalese Industries (CNI), said that for the last two years, the private sector has been facing trouble. “Trade and business are in crisis. Entrepreneurs are in a dire situation.”

“Many small and medium entrepreneurs are leaving the country, especially to work abroad following the tight policies.” The external sector has recovered, but it has failed to revitalise the internal economy.

“The improving external sector is mainly due to a robust increase in remittances, and the government is happy. We should think intensely about why remittances are increasing,” said the CNI president.

“If we want to substitute imports and shift to production, then the government needs to bring stable policies. Without stable policies, it is difficult to invest as it requires a huge amount of money to open an industry,” he said.

Chandra Prasad Dhakal, president of the Federation of Nepalese Chambers of Commerce and Industry, said that investors are not confident to invest as they have doubts that the policies will change as soon as the government changes.

Dhakal said, for instance, the previous budget made arrangements for the merger and acquisition of banks. “This year’s budget changed that policy. This is just an example. There have been many such instances in the past.”

While the government may collect some taxes from mergers and acquisitions, it does not send a positive message to investors, Dhakal said. “The budget should address this issue.”

Dhakal said that the situation of the economic slowdown has arrived due to the government’s mindset that the private sector, which only looks for profits, should be taxed top-down.

Kalpana Khanal, a senior researcher at Policy Research Institute, a Kathmandu-based policy think tank, said that after Covid-19, the central bank had to opt for expansionary monetary policies and at the same time the fiscal policy too was expansionary as it was the demand of time.

“This caused the sharp rise in the credit-to-GDP ratio, which means higher credit expansion.”

The credit expansion, however, did not benefit the productive sector and instead went to the real estate sector. The profit was reinvested in the same sector. With this, banks and financial institutions have seen a rise in their non-performing assets as they fail to recover the loans.

According to Khanal, in recent months deposits in banks are increasing by 14-15 percent, while credit is increasing by a meagre 4-5 percent. This shows a slowdown in investment.

The tight monetary policies caused a fall in imports. “As the country’s revenue policy is directly linked to import, the government failed to collect revenue,” Khanal said.

She said that other challenges in the economy include policies and political instability.

Madhu Marasini, secretary at the Ministry of Finance, said that Nepal is a small open economy and that is why the impact of external factors makes the country’s economy vulnerable.

“This means any global uncertainty will hit Nepal’s imports as the country is now import-dependent. Our production base not only has declined, but also become less competitive,” he said. “We need to become self-sufficient. We need our agriculture to grow.”

He said that the country could not prosper by importing agri goods of Rs300 billion.

Bureaucrats are traditional and conservative by nature so they do not dare to make fundamental huge shifts, Marasini said, adding that the system is guided by a political system.

“The government is clear on not intervening much in tax, industrial and investment policies. We are here to facilitate businesses. If there is willingness from all political parties, the policies too will be favourable.”