Tax Policy and Administrative Challenges

  5 min 31 sec to read
Tax Policy and Administrative Challenges

We should move further towards the direction of taxing consumption rather than income.


The World Bank recently published the 14th series of its Doing Business report, “Doing Business 2017: Equal Opportunity for All“, incorporating quantitative indicators of 190 economies. The report measured the changes in regulations affecting ten areas in the life cycle of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

The report indicated the deteriorating position of Nepal in ease of doing business. Nepal slipped to 107 during 2016 from 100 in 2015. The lowest rank ever recorded before was 94 in 2014. The average position has been 108. Nepal ranks 142 in global economy for ease of paying taxes. The rank was 124 in the previous year. It has been estimated that 339 hours is spent and 34 payments have to be made for taxes in Nepal. The time required for compliance was 334 hours with 34 numbers of payments. India, the South Asian economic powerhouse and Nepal’s closest neighbour (geo-politically and economically), has been ranked 172 in ease of paying taxes. But the time to comply is 241 hours with 25 numbers of payments, comparatively lower.

The total tax rate in Nepal is around 29.5 percent while it is 36.2 percent in Asia Pacific. However the time required for compliance in this region is around 212 hours and the numbers of payment are 23.5. Post filing index looks at two post-filing processes- claiming a value added tax (VAT) refund and correcting a corporate income tax (CIT) return. Both processes may involve a tax audit and administrative appeal procedure. 0 represents the least efficient process and 100 the most efficient. The post filing index of Nepal is 33.48.

Despite such a high total tax rate, tax to GDP ratio is only 15 percent in Nepal (Consumption tax to GDP 7 percent and Income tax to GDP 4 percent).This clearly indicates a narrow tax base. Less than 1 percent of the total population in Nepal pays taxes. There are a large number of hard to tax groups like small businesses, small farms and professionals. Tendency to deliberately remain outside the tax threshold is predominant. The low number of tax assessment in comparison to the number of registered taxpayers indicates inefficiency of administration. The weak tax collection is also associated with low tax payer morale, corruption and weak governance. The low level of trust among tax payers and tax authority has weakened the tax administration of Nepal making it harder to comply with tax laws. 

There are many restrictions placed by VAT Laws which add to the deadweight loss caused by imposition of tax. Restriction in the process of refund of excess VAT paid is one of the major issues. Moreover, the carry forward of excess VAT paid is allowed only up to six months. This creates a huge hassle for excess taxes paid. In many other economies including many states of India, the carry forward is allowed up to one fiscal year. Similar restrictions have been placed in Nepal towards the refund of excess income tax paid, generally ensuing from withholding taxes.

Another administrative barrier lies in the appeals process for administrative reviews and making appeals before a tribunal. The maximum time limit for appealing for administrative reviews is only 30 days. A taxpayer generally does not have a complete knowledge of tax laws and procedures per se. Therefore, they must be given a reasonable time limit to understand the scenario and the facts of the case, take advice if necessary and then proceed for the review. This can not only raise awareness among tax payers but also reduce the piling of unnecessary appeals which lack proper understanding of the case. Ensuring independence and objectivity of the appellate authority should be prioritised. Further, a positive outlook in the examination of tax returns filed seems to be lacking. Taxpayers should be given a chance to correct minor errors and omissions in tax returns not made deliberately to evade tax.

The possible solution to mitigate the current problems of a narrow tax base and administrative hurdles is an effective and easy tax law. Informalities and problems faced to tax hard a tax group can be reduced by imposing presumptive taxes in those area viz. small businesses, small farms and professionals. Similarly, agriculture income should be brought into the purview of tax with certain subsidies, of course. The government should not look into increasing the rates to increase revenue but broaden the tax base by taxing new areas and shifting to easier and corrective tax systems like Pollution Tax, Fuel Tax etc.

We should move further towards the direction of taxing consumption rather than income. Consumption based tax not only encourages savings but also encourages investments. The widely agreed view on consumption tax is that it helps to promote the economy by encouraging saving and capital formation. A right balance should be sought for taxation of domestic and foreign investment. This is necessary not only to boost up revenue and foreign investment but also to curb tendencies of base erosion and profit shifting. Rather than assuming a flypaper theory of tax incidence only on present taxpayers, the tax administration should be forward looking to boost investment both domestic and foreign.

In recent years, Nepal has eased the administrative burden of paying taxes for firms by introducing electronic filing for value added tax and income tax returns. Similarly the implementation of ASYCUDA (Automated System for Customs Data) World systems, allowing for payments of duties and submissions of export declarations to be done electronically has made trading across the border easier. However, the continuously deteriorating position globally in ease of doing business and ease of paying taxes needs immediate attention. 

Taxes are essential but both tax rates and the administration should be perceived as less of a hurdle to doing business. A reduction in the administrative burden of the tax system is possible by simplifying tax laws. But it requires political will and leadership to drive in the reforms.

The writer is a Chartered Accountant at CR & Associates and can be reached at [email protected]

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