Revenue collection hit by import curbs amid falling foreign exchange reservesSluggish capital spending and liquidity crunch also blamed.
The government and the central bank’s efforts at reigning in imports amid depleting foreign exchange reserves and surging balance of payment deficit have started to hit the government’s revenues.
Nepal’s revenue is heavily dependent on imports with the government aiming to collect over half of the total targeted revenue from customs offices.
The government plans to collect Rs1,050.82 billion in revenue this fiscal year 2021-22 with an aim to collect Rs530 billion from customs offices.
But the customs offices are struggling to meet the collection target with imports slowing down in the last few months especially after the central bank announced a number of measures to discourage non-essential imports.
“The collection target for Baisakh (mid-April to mid-May) for the Department of Customs is Rs44 billion,” said Punya Bikram Khadka, information officer at the department. “Till Baisakh 24 [May 7], we have been able to collect just Rs29 billion.”
With the government closing international borders 72 hours before the May 13 local elections, Khadka does not think his office will be able to meet the collection target.
In the first five months of the current fiscal year, the customs department had collected more than its target, according to Khadka. But with the government tightening imports especially of vehicles and non-essential goods which were major sources of revenue, the revenue collection has taken a hit.
For example, in December last year, the central bank made it mandatory for importers to maintain a 100 percent cash margin for opening a letter of credit (LC) to import certain scheduled goods.
As per the Nepal Rastra Bank, traders need to maintain a 100 percent cash margin to import alcoholic drinks; tobacco; silver; furniture; sugar and foods that contain sweets; glucose; mineral water; energy drinks; cosmetics; shampoo; hair oils and colours; caps; footwear; umbrellas; and construction materials such as bricks, marble, tiles and ceramics, among others.
Importers of motorcycles and scooters and diesel-powered private automobiles also need to maintain a 50 percent cash margin with banks for opening letters of credit.
And the central bank’s yet another directive issued on February 9 increased the number of import items requiring 100 percent cash margin to 43 while it fixed the cash margin needed for importing four types of goods at 50 percent.
“These measures discouraged the import of revenue-generating items and affected the revenue collection,” Khadka said.
As of May 7, the department was expected to collect revenue worth Rs431 billion. “We have collected Rs419 billion,” said Khadka. “Overall revenue target for the customs department by the end of Baisakh is Rs441 billion. “As international borders are closed ahead of the local elections, meeting the target is almost impossible.”
Since mid-December last year, the monthly import figures have been falling. In the mid November-mid December period, Nepal imported goods worth Rs188.1 billion. And in the following four months, imports stood at Rs160.9 billion, Rs148.1 billion, Rs161.27 billion and Rs158 billion, respectively, according to central bank and customs department statistics.
Khadka said that meeting the target for the entire fiscal year will also be a herculean task if not impossible because the impact of the complete ban on the import of 10 types of products is yet to be seen. “There will not be a large-scale deficit in revenue collection against the target though,” he added.
In late April, the government imposed a complete ban on the import of all kinds of readymade liquor [excluding raw materials], readymade cigarettes and tobacco products, and snacks like Lay’s potato chips and Kurkure, a crunchy snack.
The government has also banned the import of diamonds, excluding those used as industrial raw materials. The government has also banned the import of mobile phone sets costing more than $600 and colour television sets of over 32-inch screen.
Imports of jeeps, cars and vans, except for ambulances and hearses, have also been banned. Likewise, the import of motorcycles above 250 cc, all kinds of toys and playing cards have also been banned.
Not only revenue collection through the customs offices, tax offices responsible for collecting tax generated from internal economic activities have also reported a fall in collection against their targets.
This has raised questions if internal economic activities have also slumped along with worsening indicators of the external sector of the economy.
According to the Inland Revenue Department (IRD), it failed to meet the revenue collection target by over Rs32.75 billion by the third quarter of the current fiscal year that began in mid-July 2021. It collected Rs342.69 billion against the target of Rs375.44 billion as of mid-April, according to the IRD.
IRD Director General Ritesh Shakya told the Post last month that two factors could be responsible for the lower revenue. “One is continued sluggish capital spending, which has affected the VAT liability,” said Shakya. “And the liquidity crunch in the banking sector has affected economic activities.”