Share of Direct Taxes in Revenue Increasing, But Still Low

India recently announced that direct taxes, including income tax and property tax, now account for 57 percent of its total government revenue, up from 54.63 percent the previous year.

In comparison, direct taxes make up only about 30 percent of Nepal’s total revenue—nearly half of India’s share. According to the Ministry of Finance, the contribution of direct taxes in Nepal’s revenue has seen a slow but steady increase over the past decade, rising from 28.4 percent in fiscal year 2014/15 to 30 percent in 2023/24.

Nepal’s revenue system remains dominated by indirect taxes, such as customs duties, value-added tax (VAT), and excise duties, reflecting its heavy reliance on imports. Finance Ministry spokesperson Mahesh Bhattarai highlighted the need to reduce this dependency, stating, “It would be better if direct taxes could be increased to 40 percent and indirect taxes reduced to 60 percent. Although direct taxes are rising, a strategic approach is needed for significant progress.”

Direct taxes are based on income and wealth, levied on individuals and companies. In contrast, indirect taxes are applied to the import and sale of goods and services, making them a dominant revenue source in Nepal’s import-driven economy.

Ram Prasad Acharya, director general of the Inland Revenue Department, explained that the share of direct taxes cannot increase substantially without improvements in factors like personal incomes, employment, industrial productivity, and wealth creation. “The more activities tied to income generation increase, the greater the share of direct taxes will be,” Acharya said.

Income tax collection in Nepal has improved since the enactment of the Income Tax Act, 2058 BS, which expanded the tax base to include income and property-related taxes. Over the past decade, the share of direct taxes has risen from about 20 percent of the total revenue to over 30 percent in some years, with income tax alone climbing from 4.7 percent of total revenue in 1975 to 26.7 percent in 2022/23. However, further growth hinges on rising employment, wages, and industrial output.

To bolster direct tax collection, initiatives such as mandatory Personal Permanent Account Numbers (PAN) have been introduced. As of now, the Inland Revenue Department reports that nearly 4.2 million individuals have obtained PANs, and the total number of taxpayers, including businesses, has reached 6.4 million.

Nepal’s heavy reliance on imports has tilted its revenue structure predominantly toward indirect taxes. Customs duties and VAT collections rise in tandem with imports, leaving direct taxes less prominent.

“The underdevelopment of manufacturing industries has led to an import-dominated economy, reinforcing the dependence on indirect taxes,” Acharya remarked.

Prof. Dr. Ram Prasad Gyawali, head of the Central Department of Economics at Tribhuvan University and a member of the High-Level Suggestion Committee on Tax Reform, noted shifts in Nepal’s revenue structure. Customs revenue, which accounted for 34.6 percent of total revenue in 1979, dropped to 20 percent in 2022/23, while VAT increased from 26.9 percent in 1997 to 32.7 percent in 2022/23. Income tax, which represented just 4.7 percent in 1975, has now reached 26.7 percent.

Gyawali predicted that income tax could overtake VAT as Nepal’s largest revenue source within the next five to six years if current trends continue. However, he stressed the importance of formalizing the informal economy to increase income tax collection. “If corporate activities expand, industrial profits grow, and businesses thrive, income tax revenue will rise, enhancing the share of direct taxes,” he explained. Gyawali also emphasized the need to strengthen Nepal’s economic system, develop productive industries, and create more employment opportunities to sustainably boost direct tax contributions.