Tax Policy Contrary to Principles Set to Increase Economic Expenses

Finance Minister Dr. Swarnim Wagle has implemented widespread changes to tax policies and rates through the budget. The income tax exemption limit has been raised to NPR 1 million, while the maximum tax rate has been lowered to 29 percent. Additionally, a 5% VAT has been imposed on electricity and a 3% equalization charge has been introduced for the education and health sectors. The government has also revised the taxation method on electric vehicle imports. But ultimately, who benefits from this tax policy, and does it increase or reduce economic costs? Senior Chartered Accountant Shesh Mani Dahal provides an analytical discussion on the new tax policies and their impact on citizens:

The Finance Minister mentioned starting with ‘extensive changes in tax rates.’ Upon reviewing the economic bill, significant reforms were indeed found, including some previously unheard-of taxes. The exemption threshold for income tax payers has been raised to NPR 1 million, and the top income tax rate reduced from 39% to 29%. How will these changes affect people’s income or tax burden?

This change in the income tax slab does not affect all taxpayers equally. Previously, tax exemption was up to NPR 600,000; now it is increased to NPR 1 million. This benefits the upper middle and high-income groups substantially, with the highest advantage accruing to the upper class.

There are three tiers of taxation – lower, middle, and upper. All have been adjusted this time. The lower tier limit increased to NPR 1 million, and middle brackets have been modified. The maximum tax rate declined from 39% to 29%, and taxable slabs were also expanded. Previously, a 36% tax rate applied on incomes above NPR 2 million, but now only incomes above NPR 4 million pay 29%. This reform provides significant tax relief for the upper middle and higher-income groups.

In terms of benefits, savings by the affluent can promote capital generation and development investments. However, it offers no relief for the low- or middle-income populations. Earlier, exemption was given up to NPR 600,000, yet taxes still applied thereafter—thus, the lower-income groups receive no substantial benefit.

Even the lowest earners (for example those earning NPR 20,000 monthly or NPR 300,000 annually) must pay an annual 1% social security tax, which is essentially a form of income tax but contradicts fundamental tax principles. While a 20-30% tax does not greatly impact the wealthy, even a 1% tax significantly burdens the poor. This concept is unique to Nepal and not observed globally.

Countries including India, Pakistan, Sri Lanka, Bangladesh, the United States, and the United Kingdom exempt lower-income groups from such direct taxes. In Nepal, however, this tax burdens the poor, conflicting with internationally accepted tax principles.

So, does the income tax slab provide no relief to lower-income groups, instead serving only the high earners?

That is precisely the case, no need for hesitation in stating so.

Could you explain the various provisions and exemptions under the Income Tax Act?

The new legislation introduces an ‘amnesty provision’ for taxpayers involved in previous tax disputes or arrears, allowing them to settle assessed taxes with a 1% penalty to withdraw legal cases. This offers relief to taxpayers caught in difficulties, though it may incentivize tax evasion, causing unfairness for compliant taxpayers.

Is the decision to apply two different VAT rates justified?

The government is adopting a policy departure by introducing multiple VAT rates. While currently the VAT rate is fixed at 13%, some items now attract a 5% VAT, such as electricity and ride-sharing services. This broadens the tax base and promotes equity but also adds complexity and administrative challenges.

Does imposing a 5% VAT on electricity consumers fairly impact prices?

There are concerns here. Since the regulation has not been publicly released, clarity is difficult. For now, VAT is reportedly waived only on the first 50 units of electricity for household use, but how VAT applies to industries buying electricity remains unsettled.

This VAT will directly increase consumer prices, affecting citizens and conflicting with tax principles.

If industries that also act as electricity sellers do not get VAT refunds, will production costs rise?

This issue will only be clear once the detailed regulations are published. Without VAT credit refunds, production costs are expected to increase.

Tax reforms are expected to reduce costs for the economy and taxpayers. Can reforms that raise costs be considered genuine improvements?

Given the current situation, these concerns are valid. The government should undertake further corrective measures.

Capital gains tax has been increased in share markets and real estate, with final settlement dependent on income declarations. Why is there unequal treatment?

The government has revised this arrangement, but since the impact is uneven, enthusiasm in the share market remains muted.

Despite abolishing tariffs on 360 items, new taxes have been introduced. How do these new levies affect the economy?

New types of taxes such as ‘green tax,’ ‘internal production promotion fee,’ and ‘clean infrastructure fee’ have spread across various goods. These add layers of taxation that may negatively affect industrial costs, increasing overall production expenses.

It appears tax administrators have possibly erred by imposing more taxes, complicating the system.

What is your opinion on the additional equalization charge on education and health sectors?

The impact on service accessibility needs evaluation. As privatization increases in these sectors, the cost burden will shift to ordinary citizens. If the government had transparently committed to investing these revenues into social security, public concerns would have been lessened.

The absence of clear commitment and expenditure plans from the government suggests a misstep in this area.

Does the government’s tax policy appear pro-wealthy and anti-poor?

It is often stated direct taxes should mainly bear the burden; however, in Nepal, indirect taxes constitute the larger share. This disproportionately burdens the poor and risks long-term negative socio-economic consequences.

This also undermines the savings environment and further disadvantages the lower classes.

The government has presented a large budget. Will tax revenue targets be met?

With income tax rates reduced, revenue will likely be adversely affected. Since customs and tariffs remain the major collection sources, efficient management is essential to meet targets; otherwise, challenges will arise.

Is the amendment to Section 57 of the Income Tax Act investment-friendly?

While the amendment addresses some shortcomings, sufficient reforms to attract foreign investment remain lacking. Problems such as double taxation are still unresolved.

How do you assess the overall tax policy?

To me, the policy appears status quo oriented. Few innovative measures have been introduced, and some taxes have been imposed without parliamentary approval, which is unjust to citizens. Tax policy and administration must be made transparent and incorporate expert advice.

In the absence of change and proper consultation, the policy cannot be considered progressive, relying only on traditional frameworks.