IMF asks Nepal to end VAT exemptions
KATHMANDU, NOV 20 -
The International Monetary Fund (IMF) has urged Nepal to stop providing value added tax (VAT) exemptions, saying that they erode the tax base and are not always effective in lowering tax burden of intended beneficiaries.
The global monetary advisory body has categorically told the government that Nepal should end VAT exemptions on electricity and cooperatives and agriculture companies having turnover above the presumptive tax threshold.
“This could yield revenue gains by 0.7 percent of GDP,” the IMF said in its latest report on Nepal. It has also urged reforms in income tax incentives by increasing revenue productivity. The lender said the measures could be conditioning tax holidays and rebates on investment, expiring tax rebates earlier and increased use of investment tax allowance. “These measures could yield revenue gains up to 1.5 percent of GDP,” says the IMF.
According to the report, tax holidays and tax rebates in Nepal tend to favour short-run projects and are likely to lead to tax avoidance. Given the government providing VAT exemptions in areas of social benefits, the IMF suggested that such exemptions should not be applied for the purpose of social benefits, because they are not guaranteed to be reflected in the final product price. “When the benefits take place, they go proportionally more to those who spend more.”
The main objective of tax policy in Nepal has been to promote investment, industrialisation and export. Economic advisor to the Prime Minister, Rameshwor Khanal, also said unnecessary and unconditional tax incentives are not good for the country as they cause revenue losses. “Incentives should be given to the targeted people and region such as Karnali,” said the former finance secretary.
The IMF said Nepal’s tax incentives could be used widely and they are not conditional on outcomes. It also outlined some weaknesses in incentives offered to a few areas. First, tax holiday time horizons seem slightly longer, and second, tax rebates which appear indefinite in Nepal compared to other countries, which is worrisome, it said. Third, Nepal is poor in targeted investment allowance, and fourth, exemption on VAT and customs here seems more generous than in neighbouring countries, The IMF said, adding that excessive exemption and tax incentives lead to a low total tax rate.
The IMF termed Nepal’s the import-based revenue collection system ‘unsustainable’. “If import growth moderates in line with a more sustainable balance of payments position, and tariff rates decline with trade agreements, this revenue structure will be unlikely to generate sustainable revenue growth,” it said.
Import related indirect tax revenues make up close to 50 percent of Nepal’s tax revenue.
The government failed to realise the targeted revenue last fiscal year due to slow import growth, with the collection standing at Rs 200 billion against the target of Rs 216 billion.
Nepal has also made commitment to continue to reduce its tariff regime to the World Trade Organization, and other regional trade agreements, including South Asian Free Trade Agreement (SAFTA), are also oriented to reduce the tariff.
According to IMF, Nepal’s tax revenue against GDP is low among most of the low income countries (LICs) despite its good progress in revenue administration. As of 2010, Nepal’s tax revenue against GDP stands at 13.2 percent, against LICs’ average of 15.2 percent.
Source: Kantipur
