STRUCTURE OF NEPALESE TAX SYSTEM

Government collects the revenue from different sources. Basic source of the Government Revenue are classified into tax and non tax revenue. Tax revenue has been playing dominant role in our total revenue structure. Nepalese economy is characterized by a low revenue performance in contrast to the growing public expenditure. Revenue growth is not maintaining a pace with the expenditure growth. The composition of the Government Revenue from fiscal year 1990/91 to 2010/11 is presented in table 4.1.

The contribution of non-tax revenue is 13.53 percent and tax revenue is 86.47 percent in total revenue collection in last fiscal year 2010/11 (Economic Survey 2011/12). This scenario indicates that the role of tax revenue is very important in revenue mobilization of Nepal to meet the growing Government expenditure. The total tax revenue in fiscal year 1990/91 was Rs. 8176.3 million, which was increasing every year and reached to Rs172777.6 million in fiscal year 2010/11. But in percentage on the total tax revenue has been fluctuating from 86.86 percent to 73.08 percent. The highest contribution of tax revenue to total revenue was 86.86 percent in fiscal year 2009/10 and lowest contribution was 73.18 percent in fiscal year 1991/92.

The non-tax revenue is fluctuating from 13.14 percent to 26.92 percent. The highest contribution of non-tax revenue was 26.92 percent in fiscal year 1991/92 and the lowest contribution was 13.14 percent in fiscal year 2009/10. The last fiscal year 20010/11 the non tax revenue was 13.53 percent with amount Rs.27041 million in total revenue mobilization. The average contribution of tax and non-tax revenue to total revenue was found to be 79.14 percent and 20.86 percent respectively throughout the study period. Also, the structure of total tax revenue has been shown graphically as below.     

The economy of Nepal has suffering from different problems like resource constraint, rapid growth of population, aggressive dependence on agriculture, lack of revenue surplus for development, increasing reliance of foreign loans, domination of indirect taxes to direct taxes and widening resource gap.

The different types of resource gap have been defined as follows:

 A)  Resource Gap (RG1): This is the difference between expenditure and revenue. It is also known as Fiscal Deficit.

RG1= Total Government Expenditure –Total Government Revenue

Here, Revenue includes total tax and non-tax revenue and Total expenditure includes both regular and development expenditure. The concept of RG helps us to know the government’s capacity to finance the nation’s expenditure.

B)  Resource Gap (RG2): This is the difference between expenditure and revenue plus foreign grant. It is also known as Budget Deficit.

RG2= Total Expenditure – Total Revenue - Foreign Grant

Here, foreign grant includes both bilateral and multilateral grants.

C)  Resource Gap (RG3): This is the difference between expenditure and revenue plus foreign aid (grant or loan) plus internal borrowing. It is also known as Overall Deficit.

RG3= Total Expenditure – Total Revenue - Foreign Aid (Grant or Loan) - Internal

Borrowing

A conceptually right way of measuring deficits is to look at the change in the public sector’s net worth (assets minus liabilities). In practice, however, such a measurement is quite difficult, if not impossible, in most countries. The difficulty lies in the valuation of public sector assets. Partly due to this problem, the conventional deficit measure captures the change in public sector liabilities. In the conventional way of measuring deficits, the inflation-corrected, consolidated public sector deficit is the most comprehensive and correct measure of public deficit. It represents the total excess of expenditure over revenue for all government entities (Bhatia, 1994).

Lack of sufficient resources is the major obstacle to realize the planned development programs in a developing country like Nepal. Nepal has been experiencing massive resource.

Table 4.2 provides the picture of the growing resource gap in Nepalese economy. As shown in the table resource gap has been increasing rapidly. Since in fiscal year 1990/91 the resource gap was Rs. 12820.3 million and fiscal year 2010/11 reached to gap was Rs. 95544.7 million. After consideration of foreign grants the resource gap was Rs. 10655.5 million in initial fiscal year 1990/91 and further widen up to Rs. 49622.2 million in the fiscal year 2010/11. Similarly, after consideration of foreign lone the resource gap was Rs. 4398.8million in initial fiscal year 1990/91 and in fiscal year 2010/11 the resource gap was Rs. 37546.9 million.

Hence, we can conclude that in our country Nepal, resource gap has been increasing rapidly as a whole period. But there is a fluctuating in the increasing trend of resource gap. Thus, this increasing trend of resource gap indicates that it is necessary to mobilize additional domestic resource and the best measure to fill the resource gap is to increase public revenue through effective tax system. 

In the context of our country Nepal, tax revenue is major source to mobilize internal resource because it has been dominating the total government revenue by contributing around 80 percent of the total revenue. Basic source of the tax revenue are direct and indirect tax revenue.

The composition of tax revenue from fiscal year 1990/91 to fiscal year 2010/11 was presented in the table 4.3. As shown in the table, during the study period there has simultaneous increase in total tax revenue, direct tax and indirect tax revenue in absolute term. In fiscal year 1990/91 the amount of tax revenue, direct tax revenue and indirect tax revenue were Rs. 8176.3, Rs. 1370.00 and Rs. 6806.60 million respectively. The direct tax contribute 16.75 percent of total tax revenue and indirect tax contribute 83.25 percent of total tax revenue in fiscal year 1990/91 and share of direct tax and indirect tax were 28.16 percent and 71.84 percent respectively in fiscal year 2010/11. During the study period the contribution of direct tax fluctuated from 16.16 to 29.32 percent and contribution of indirect tax fluctuated from 70.06 to 83.85 percent. Average contribution of direct tax and indirect tax revenue to total tax revenue are 24 percent and 76 percent respectively over the study period.

In the context of Nepal, indirect tax played a dominant role during the study period, which is considered regressive in nature, and hence we are depending upon regressive tax system. Also, the structure of total tax revenue has been shown graphically as below.

Structure of Direct Tax Revenue in Nepal

Direct tax is progressive because the amount paid various significantly according to the income and wealth of the taxpayer. In Nepalese tax structure; direct tax is composed of different sub revenue heads namely Land Tax, House and Land Registration fees, Income tax, Vehicle Tax, Tax on Interest etc.

The composition of direct tax revenue from fiscal year 1990/91 to 2010/11 has been shown in the table 4.4. As shown in the table first of all direct tax is classified into income tax, land tax, house and registration fees and Miscellaneous Items Tax. In Nepalese tax structure the contribution of income tax, land tax, house and land registration fees and Miscellaneous Items Tax were 54.51, 6.0, 33.37 and 6.13 percent respectively with amounting Rs.746.0, 82.1, 456.6 and 83.8 million respectively in the initial fiscal year 1990/91 and these contribution reached to 71.40, 0.00, 7.34 and 21.26 percent respectively with amounting Rs. 34738.00, 0.0, 3572.5, and 10344.7million respectively in the fiscal year 2010/11.

According to the table, in the fiscal year 1990/91 the contribution of land tax was 6.0 percent in total direct tax revenue. After restriction of the democracy the share of land tax was continuously decline and in fiscal year 2002/03 the land tax revenue was zero. After this fiscal year the central Government of Nepal cannot impose the land tax. Local government like as VDC, Municipalities etc, imposed the land tax. So that, after the fiscal year 2002/03 the contribution of land tax was zero in total tax revenue mobilization. Similarly, in fiscal year 1990/91 the contribution of income tax was 54.51 percent in total direct tax revenue, this was continuously increasing trend in each and every year and reached to 71.40 percent in total direct tax revenue mobilization. This shows that the declining land tax was totally covered by the increasing income tax in total direct tax revenue mobilization. The structure of total direct tax revenue has been shown graphically as below.  

Structure of Indirect Tax Revenue in Nepal

In the contest of our country Nepal, indirect tax revenue has been playing a dominant role to total tax revenue and its contribution to total tax revenue fluctuated from 71 percent to 83 percent. Indirect tax provides two third of more of tax revenue in most of UDCs with tax on foreign trade (custom duties) and domestic tax on goods and services (sales tax/VAT and excise duties) are more important.

The structure of Indirect tax revenue from the fiscal year 1990/91 to 2010/11 has been shown in the table 4.5. As shown in the table indirect tax was classified in different sub revenue heads namely custom duties, sales tax/VAT, excise duties and other taxes. VAT has been introducing from 1997 instead of sales tax. Excise duties include taxation on industrial product. And other tax includes entertainment tax, hotel tax, air flight tax, road and bridge maintenances tax and some other taxes. In Nepal’s indirect tax structure, the contribution of custom duties, excise duties, sales tax/VAT and other taxes were: 44.7, 17.6, 29.8 and 7.9 percent respectively amounting with Rs. 3044.3, 1200.2, 161.6 and 356 million respectively in the initial fiscal year 1990/91 and these contribution reached to 28.8, 21.4, 49.8 and 0.16 percent with amounting Rs. 35711.6, 26542.9, 61663.6 and 204.5 million respectively in the final fiscal year 2010/11.

According to the table, in fiscal year 1990/91 the contribution of custom duties was 44.7 percent in total indirect tax revenue. This was the highest percentage then other taxes. This data shows that the initial year of the study period Nepalese indirect tax revenue was basically depended on custom revenue. But the revenue of custom duties was continuously decline and in fiscal year 2010/11 the share of custom duties was just 28.8 percent in total indirect tax revenue. This declining trend shows that base and rate of custom duties was not increases in proper manner. Also Nepal has entered the WTO. Under WTO provision the custom tariff should be reduce. Similarly, the contribution of excise duties was approximately at constant ratio. In another way, the share of sales tax was 29.8 percent in fiscal year 1990/91.This was continuously increasing year by year and reached to 49.8 percent in fiscal year 2010/11 in total indirect tax revenue mobilization. The increasing trend of sales tax/VAT shows that the tax base and tax rate both quite satisfactory in Nepalese tax system. After imposition of VAT in 1997 the tax base was wide and VAT covers all the other taxes areas. So that after imposition of VAT the share of other tax was zero in total indirect tax revenue. The structure of the indirect tax revenue in Nepal has been shown graphically as below.

Tax-GDP and Revenue-GDP Ratio

Tax-GDP ratio or average tax is defined to be the simple ratio between the total tax collection to the total output (or GDP). In other words, it is the total tax liabilities to the total tax base. It is considered as the most straight forward measure for the international comparison of taxable capacity. It indicates the feasibilities of change in the taxable capacity of countries to respond to fiscal problems by raising the level of taxation.

In absence of other more reliable indicator of the utilization of the taxable capacity, the ratio of Tax to GDP (Tax/GDP) has been used in assessing the fiscal performance in almost all the countries. It is often believed that the Tax-GDP ratio generally increase with the increase in per capita income. But it is not true in many cases as well. In Nepal, the Tax-GDP ratio is increasing comparatively at very low rate as compare to the rise in Gross Domestic Product (GDP). On this basis, this could be interpreted that there exist substantial scope for further taxation in Nepal as the countries Tax-GDP ratio is below taxable capacity ( Kayastha, 1986).

Tax revenue as percentage of GDP is known as Tax-GDP ratio. High Tax-GDP ratio is desirable. Tax revenue as the percentage of GDP of the low income countries is the lowest than the middle and high level income economics countries. Nepalese tax revenue as the percentage of GDP is the lowest on all the low income economics country.

Tax-GDP ratio and Revenue-GDP ratio in Nepal from fiscal year 1990/91 to 2010/11 is presented in below table 4.6. The tax revenue and GDP has been increasing year by year for the study period. Tax-GDP ratio in fiscal year 1990/91 was 7.04 percent and Revenue-GDP ratio was 9.24 percent for the same year. Tax-GDP ratio has fluctuated from 6.81 to 14.45 percent during period. Similarly, Revenue-GDP ratio fluctuated from 9.20 percent to 16.60 percent.