Recent and Upcoming Fiscal reform Mahesh Banskota Inputs provided by Mukesh Khanal is gratefully acknowledged Inputs provided by Mukesh Khanal is gratefully acknowledged

CURRENT FISCAL POLICY 2009/10 Broaden the Tax Base –Plugging leakages –Modernization of VAT Increase Tax Administration efficiency –Increase cost effectiveness –Increase transparency –Make the administration taxpayer friendly Negotiate double tax exemption treaties

NEPAL’S TAX PROBLEMS Tax Base narrow Rationalize Tax rates Inconsistent policy decisions Faulty legal provisions Excessively confidential departmental circulars Discretionary power of tax officials Non-compliance of taxpayers Arbitrary/inconsistent penalty for non-compliance Defective appeals system Tax “negotiation” at customs checkpoint

Cross-border smuggling due to porous border Administrative Issues more serious than structural ones Tax administration –improvement but results /changes limited

SOURCES OF NON-TAX REVENEUS Penalty, Fines and Forfeiture –Declined during armed Maoist conflict –Court Fees have not been reformed in 15 years Duty and Fees –Passport Fee is the largest item –Tourism Fee has dipped Interest –NIDC, NEA, Water Supply Corporation, Civil Aviation Authority have failed to pay –Nepal Telecom has even paid future liability Royalty and Sales of Government Property –Casinos and electricity pay the most royalty

FISCAL POLICY CHANGES NEEDED Increase the Tax Base/Net –Bring commodity futures market into tax net Encourage and Develop private sector –Duty exemption to recycling and renewable energy industries Tax concession and rebate Revenue Administration Reform –Smooth flow of information to plug leakages –Customs police to control cross-border smuggling

Impact of Policy reform Focus at National Level – other levels too small Number of Personnel and Offices increased Reforms with Existing Taxes merged and new ones introduced such as VAT in 1996 Overall Impact – limited Tax GDP ratio still low

Lessons Why outcome of reforms not so marked? Why revenue base/spread so low both spatially and by individuals? Why so many difficulties in developing a unified efficient tax administration? Implications for fiscal stability and Inclusive Growth ?

Policy reform - Revenue Widen the tax base of major taxes - Get the economy working again Streamline tax rates and slabs in major taxes – review policies, receive feedback, Minimize exemption list – with lower rates this may be feasible Better coordination between tax and other policies in line with commitments made Revenue leakage control

Policy reform Taxpayer friendly environment, education and easy access to tax information, reducing costs of tax compliance Separate revenue group in civil service Strengthen Revenue Advisory Board Encourage self assessment, Monitoring, evaluation and follow up

Revenue Administration Reform Restructuring Inland Revenue Department- how to make it more efficient to handle all the different types of activities High level permanent Central Revenue Board Revenue Police, Custom Police, and emergency flying squad Electronic tax filing system

SUGGESTIONS TO INCREASE NON-TAX REVENUE Recover service delivery cost via service fees Rethink royalty on natural resources Rationalize and increase passport, tourism, and education fees “Quarantine Fees” for agricultural products Efficient public enterprises

Public expenditure management Maintaining Balance between income and expenditure Enhancing capital and development budget vis- a - vis recurrent expenditures How to provide effective support to other government policies – poverty reduction, gender balance, environment, peace etc

Public Debt Management Debt has been increasing – foreign debt ( 28.5 % of GDP ) more rapidly than domestic debt ( 13.2 % ) More effective policy reforms towards Increasing domestic savings, growth and private sector investments

Fiscal Agenda Not isolated from the rest of the economy- conflict, instability, insecurity must end for peace and development Law and order fundamental for business confidence to be restored Infrastructure gap including power shortage needs to be addressed on a priority basis

Institutional Weakness and Improvements Complex laws and Procedures –influence transparency and accountability Short term revenue focus HR Quality Tax adjustments and Tax credits Grievance handling, Appeal system, Time Taken