The first federal government budget of the country has received mixed reactions from the Nepali private sector. Businessmen say that the budget has not been able to meet their expectations in creating an investment-friendly atmosphere in Nepal which they hoped for after the end of the prolonged political transition. Shekhar Golchha, managing director of Golchha Organization is one of the leading personalities in the Nepali business fraternity. Golchha, who is also the senior vice president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), has been actively suggesting the government and the policy makers to formulate and implement appropriate policies required to promote industrialisation and achieve sound economic growth. In an interview with Sanjeev Sharma of New Business Age, he assesses some of the major provisions in the new national budget, the importance of the private sector’s budgetary suggestions, the tax system reform and other issues. Excerpts:
What are the things you liked and disliked about the ‘socialism-oriented’ federal government budget?
The Constitution of Nepal is a result of a long political revolution which speaks about the socialistic pattern of Nepali politics. In this context, the socialism-oriented budget should not be any surprise. Personally, being a citizen and a member of the country’s private sector, I cannot say I don’t like this budget as it is in line with the spirit of the statute. But as the process to incorporate socialistic characteristics in state policies is happening too soon, it feels difficult for us sometimes. For example, the support and the importance given to the cooperatives in the budget is something which we were not used to listening to and has made us wary about.
At the same time, I’ve found the budget very realistic. The objectives that have been laid out in it, particularly the targets in revenue collection and expenditures and the structuring of the budget itself, are realistic. The government has managed to overcome the pressure created by the expectations of the people after the promulgation of the new constitution and the country adopting the federal system of governance. Similarly, the increase in the maximum slab of export incentive from 4 to 5 percent is another positive aspect in this budget.
We had thought the government would address our key concerns in order to foster investments in the productive sectors. We didn’t see significant encouragements for the private sector in the budget as expected. Similarly, the hike in excise duty on a lot of consumer items is another area of concern.
The government has taken the approach of adopting “import restrictions” with the federal budget. Do you think the Panchayat era policy of import substitution is pragmatic in today’s context?
Our international trade deficit has been ballooning very fast. The ratio of import and export has reached 95:5 which is quite worrying. In this situation, some kind of restriction on imports is required to tame the widening trade gap. However, imports have become a vital part of Nepal’s trade which generates most of the revenue for the government. Instead of restricting the imports, a positive approach is to find ways to increase the exports. There is a need to intensify the exports by increasing domestic production which will ultimately help us to lower the level of dependency on foreign products.
There was a huge balance of payment (BOP) issue during the Panchayat era. So, restrictive measures like licensing of imports used to be in place. Now we don’t have a dramatic BOP problem. The data of the first nine months of the current fiscal year shows that our foreign currency reserve is at satisfactory levels. Unless and until the reserve starts depleting fast, we need not worry about our foreign trade.
What type of impact will the excise duty hike and removal of VAT rebate on various types of imported and domestically produced goods have on the consumer market and inflation?
Over the years, it has been alleged many times that the benefits from the arrangement of VAT rebate on certain products has not reached the consumer-end. I think such an allegation is very unfair and isn’t true at all. The arrangement of VAT rebate was introduced keeping in mind that such a provision would enable manufacturers and traders to supply certain essential items in the market at affordable price points as they get some amount of money in refunds. The justification for this is that the removal of this arrangement has resulted in the immediate market price increment of some daily essentials including edible oil, ghee, dairy products, certain types of food grains, noodles, biscuits and consumer electronics like mobile phones. I think this is likely to cause the inflation rate to rise to the double digits of 10 percent from the current organic inflation of 5-6 percent.
What could have been a more pragmatic approach?
There is very high pressure on the government to collect revenue. With the country adopting the federal system of governance, public expenditure has drastically increased. At present, increasing taxes is the only solution for the government. We have been stressing that the first step to tackle this problem will be to expand our industrial and business base. Secondly, we’ve been asking the government to create a viable atmosphere for investment in order to increase productivity. Doing this will automatically increase the revenue instead of imposing new taxes. For instance, Nepal has been facing the problem of unauthorised trade of several daily essential items including, sugar, flour, ghee and edible oil, such trade is likely to further increase in the coming days. It has proven very difficult to control such illegal trading activities primarily due to Nepal’s open international border with India. It is indeed a complete revenue loss for the government.
You’ve recently said that the new budget has not incorporated some important suggestions presented by FNCCI. What were the suggestions and why are they important for the Nepali private sector?
Our suggestions were focused on policy initiation to boost the productive sectors. The new budget has incorporated some of our recommendations such as establishing economic zones and zoning of land for industrial purposes. However, such plans need to be implemented very fast to ensure the effectiveness of the announcements. We have also presented a list of several types of industries in Nepal that are not getting a level of protection from the government. Our list is related to government support for 12 types of industries including cement and RMG that can be elemental in import substitution. The industries were mentioned in the budget, nevertheless, with the removal of previous important arrangements such as VAT rebate. The new arrangement of an income tax concession which came as an alternative to VAT rebate is also not the same thing. Our other major suggestions such as reformation in the judicial system related to financial and business sectors and revenue tribunal weren’t incorporated in the new budget. We have sought more independence for judicial bodies in those areas.
How should the upcoming monetary policy address the issues of the country’s private sector?
We have four suggestions for the monetary policy of the upcoming fiscal year. The first is about the need to have an expansionary monetary policy. For this, the banks should be allowed to borrow foreign capital which can help to expand our economy. Some banks have already started to work towards this end. Second is related to the central bank intervention to maintain the bank interest rate at sustainable levels. We have felt that the interest rates have been artificially jacked up in Nepal. At present, the borrowing rate has climbed to unsustainable levels. It has created a situation of volatility in the financial market and the fluctuation is giving negative signals to the investors. Our third and key recommendation is about relooking at the central bank’s refinancing facility as a means of stimulus to the country’s industrial sector. For instance, refinancing is only limited to certain types of industries at present. The facility should also be made available to the export-oriented businesses. Similarly, small and medium enterprises should also have access to the refinancing facility at a lower interest rate.
The context in the banking sector has changed as bankers rescinded their ‘gentlemen’s agreement’ in interest rate hikes. What is your comment?
The ‘gentlemen agreement’ is itself against the norm of the free market economy. The Nepali banking sector is highly regulated and protected. The regulator in the past had overtaken the management of troubled banks and financial institutions to bring them back on track. The return on equity (ROE) of Nepali banks is probably one of the highest in the world. My point here is when such an industry is strictly regulated, ROE and the spread rate need to be maintained at sustainable levels. We have been arguing that the spread rate should be kept at 3 percent reducing from the current allowed level of 5 percent. When bank interest rates go haywire, some kind of regulator intervention is necessary as such a situation can have broader economic consequences.
Significant amounts of money have been allocated in the federal budget for developing energy, transport and tourism infrastructures. Past experiences have shown that the lack of effective execution delays the progress of projects for years. What is needed to be done to ensure the projects are completed on time?
Budget implementation has been the major bottleneck in our developmental effort. The bureaucracy and the private sector contractors lack the capacity to effectively execute the projects. We have stressed on attracting FDI in infrastructure development as much as we can and engaging the domestic private sector to develop such projects under the public-private-partnership (PPP) modality. Infrastructure can be a lucrative avenue for investors if they are assured about return on investment. For instance, if the government allows construction of private highways and expressways (toll roads) like in many countries across the world, such projects will attract investors. It is high time we seeked the cooperation of neighbouring countries in our infrastructure development. Prime Minister KP Sharma Oli’s state visit to China has been in the right direction in this regard.
The finance minister has recently suggested the private sector to study on whether Value Added Tax (VAT) or Goods and Services Tax (GST) is more suitable in our context instead of insisting on the demand of multi-rate VAT. How should this discourse move ahead?
There is a significant difference between VAT and GST. We’ve been exercising the single-rate VAT system since its implementation in 1998. Arguably, it can be said that we have currently two rates of VAT as there is also a zero VAT system. And, if the (now removed) VAT refunds are considered, three rates of VAT used to exist in Nepal. Meanwhile, GST is an integrated system of taxation. The Indian government removed the excise duty after GST was implemented in 2017. The range of GST rate goes from four percent to 22 percent. It indicates the rates can be much higher compared to other systems of taxation. I think, our experience with VAT has been quite successful so far, whereas India is still struggling with its experimentation of GST as this system of taxation is far too complicated. There are some good things to learn from India such as online billing and payment as the use of digital systems is still in its infancy in Nepal. I’ve felt that the idea of the finance minister starting a discourse is to prove that we are on the right course in the tax system.
It’s been a year since the implementation of GST in India. What are the impacts of the tax system on Nepali businesses and the cross-border trade between the two countries?
We have held high hopes that the introduction of GST in India will help to end the problem of under-invoicing in Nepal. I myself met with the top officials responsible for implementing GST during a visit to India to inform that the government in Nepal will give them access to our tax portal. It could have proved very useful in digitally verifying the authenticity of every import bill. Somehow, such a mechanism could not come into existence and we also couldn’t push for it. Had we utilised the GST properly, several issues being faced by the Nepali private sector including the problem of reference price at the customs would have been resolved in Nepal-India trade. Such an approach could also have brought significant changes in assessing the import papers as the existing practice of using the reference book is very unscientific.
What is needed to be done to address the problem of under invoicing?
The government has several tools at its disposal to control under invoicing. There is a legal arrangement for the authorities to buy the under invoiced products from the importers by paying them five percent more than the price and other costs declared by the importer. Similarly, the authorities can also conduct an audit of the papers if they suspect such activities have occurred. Likewise, they have access to the tax portal to verify the authenticity of the papers. Utilising all these tools can be more effective than using the reference book. Product prices are always dynamic in the international markets. The price of raw materials and finished goods change with the changing fuel prices. In the last few years, the price of crude oil has been fluctuating from USD 40 to USD 80 per barrel. We need to acknowledge the dynamism of the international market. Our current practice of using reference value is like determining the price of a product as being stationery which is not possible. Meanwhile, prices are also associated with the quality and brand value.
The domestic auto market is among the hardest hit by the tax provisions in the new budget. What could have been a proper policy move for the automobile sector?
The government has achieved a brilliant result in connecting the country through road over the years. All 77 districts have road linkages and more tracks are being opened in different parts of the country. The standard of the roads is also improving with time. The roads are meant for driving vehicles not the ox carts. Automobiles are what drives the modern day economy and ensure both producers and consumers access to the markets. For instance, until a few decades ago, Jumla district used to be considered a very remote area. We are now able reach to such places with fewer hassles than before. We can expect more progress in road connectivity in the coming years. So, the government should see the automobile business in a changing context. Yes, growing traffic congestion in the capital valley is concerning. But, it is due to the Kathmandu-centric mindset. A state of confusion prevails at the policy making level because of this.
Also, let’s not forget that the automobile sector contributes 29-30 percent of the total revenue of the government. By restricting such a big contributor, the government will have to be prepared to lose revenue. I don’t think it is pragmatic to levy excessively high taxes on higher priced vehicles. For example, a buyer of a car worth Rs 2 crores has already been paying taxes amounting to Rs 1.5 crores to the government. This money goes to the much needed infrastructure development of the country.
Talking about two-wheelers, motorbikes have become the preferred means of passenger and goods transportation for the urban middle class and also for the people living in the hilly areas. The tax hike in the Federal Budget will hinder the mobility of hill dwellers as without motorbikes over 200 cc engine capacity, they will have to face difficulties in safe and comfortable transportation. After the budget announcement, there has been a Rs 2 million increase in the per unit price of Mahindra Bolero which is regarded as a lifeline for hilly and mountainous regions. This is quite difficult to justify. On top of this, automobile taxes in Nepal are already considered to be one of the highest in the world, while our per capita vehicle ownership is among the lowest in the world. With the latest hike, owning vehicles will be beyond the reach of the Nepali middle class.
In December 2017, Hulas Auto Craft started the assembly of Bajaj Discover motorcycles in Nepal at its Ramgram plant. When will the plant commence full-fledged production of Discover and the assembly of other Bajaj two-wheelers?
We have moved ahead in the learning curve. We have already started production of Bajaj Discover motorbikes and will be going all out for full-fledged manufacturing activities. We have begun investing in the localisation of the products as well. Our target is to produce at least 20 percent of the components in Nepal within two years, which should be better in all senses than what we buy from India. Similarly, the assembly of other Bajaj two-wheelers will start in due time.
Have you received government support to produce two-wheelers in Nepal?
Till date, we haven’t received any subsidies from the government. There is only a slight concession in the excise duty. The customs duty for importing parts or other components have remained the same. In any country, the automobile industry starts from the assembly of vehicles. Supporting this type of initiation can be very beneficial to spur the country’s manufacturing sector and generate mass employment as one industry can help establish many support industries.