Nepal observed its Fifth National Tax Day on November 16, with the slogan that translates to something like “Let’s Pay Tax and Feel Dignified to Help Achieve Our Aspirations for a Prosperous Nepal”. But activities have gone according to the spirit of that slogan. And the second part of the slogan goes against the basic principles of economics.
By ‘Tax Day’ people in the developed world and most other countries understand it to be the last day when they are required to file their tax returns. But in Nepal it is the day when the tax authorities hold different programmes to raise awareness about your duty to pay taxes. The slogan does seem appropriate to the purpose. But it also raises questions. For example, do the taxpayers in Nepal really feel dignified by paying their taxes?
The highest taxpayers selected from across different sectors and categories as well as from different tax jurisdictions are presented a certificate on National Tax Day and the authorities seem to think that these certificates will instill a sense of honour in the taxpayers. Yes, the recipients of the certificates may feel this to some extent. But what about the hundreds of thousands of other honest taxpayers whose payout to the exchequer may be a few rupees less than that paid by those who got the honour? Why not publish the names of all (or of about a hundred of the highest taxpayers) along with the amount they paid?
The authorities may be protecting the privacy of the taxpayers. But that is based on an outdated principle, not relevant to the present day when transparency is in high demand.
And the honour, in the form of a certificate, serves no real purpose other than to be hung on the wall of the office of the recipient. It does not even help as a pass to enter the Singh Durbar premises. So, a better idea would be to publish the list of all taxpayers with the amount they paid and give a special privilege card to al least some hundred or so the highest taxpayers in each district. Such a card should entitle the taxpayer priority service in all government offices.
Now about the second part of the Tax Day slogan. That part of the slogan gives the impression that the infrastructure needed to make a prosperous Nepal is created by spending the money raised as taxes. Doing this is against the basic principles of economics which says that the cost of the public goods should be recovered from those who enjoy such services. This means, as the services created by such things as roads are enjoyed by future generations, the cost of such services should be borne by future generations. So, the funds for meeting the cost of constructing such infrastructure should come from loans which will be serviced by the future generation.
Since taxes are paid by the present generation, the tax proceeds should be used to finance only those activities that the present generation can enjoy. Better security, better judicial services, better healthcare are such examples. The highest taxpayers thus naturally deserve priority in getting such services. Hence the argument for providing them privilege cards. This will automatically encourage the other people to pay higher taxes and get such privileges.
Another equally important point to note is that as the value added tax does not in any way help improve the taxpayers’ dignity, it needs to be abolished altogether or the system needs to be changed to a better one. Though many developed countries are focusing on similar taxes (such as Goods and Services Tax), those examples are not worth emulating. They are doing this only because their capacity to raise additional state revenue from income tax is almost exhausted. But in our case, the scope for increasing collections from income tax is still immense. For example, the existing tax net does not cover many income generating activities. Government authorities say, many doctors and lawyers and the like are still not under the tax net. And what about agriculture, which is currently the highest contributor to the national income?