Impact of Advance Income Tax on Nepal's Food Processing Industries: A Call for Policy Revision

The annual budget for the financial year 2081/082 presented by the Nepalese government has raised concerns regarding the imposition of advance income tax, particularly on raw materials such as wheat and rice used in essential food processing industries. Here are the details regarding the impact and tax rates:

1. Advance Income Tax on Wheat and Flour:
i. Tax Rate: 2.505%
ii. The advance income tax on wheat and ready-made flour imports is higher than that on flour production domestically. This situation favors importing prepared goods over raw materials, posing a threat to the domestic flour industry.
iii. The tax burden may lead to the closure of domestic flour mills, resulting in loss of investment and unemployment.
iv. The association requests the government to exempt wheat and flour imports for commercial purposes from advanced income tax to protect the domestic industry.

2. Advance Income Tax on Rice and Dal Processing Industries:
i. Tax Rate: 2.55%
ii. Both rice and dal processing industries face a similar challenge with advance income tax on raw materials.
iii. The tax burden may lead to increased prices of rice and pulses, contributing to inflation.
iv. Illegal imports might increase, affecting state revenue and domestic industries negatively.
v. Billions of dollars in domestic investment could be at risk, leading to job losses.
vi. The closure of indigenous dal and rice industries may result in reliance on imported goods, compromising the quality of essential food items.
vii. The association urges the government to cancel advance income tax in the entire rice and dal industry to prevent long-term damage to the industrial sector.

3. Effects of Advance Income Tax:
i. The policy of advance tax is deemed inappropriate, considering its impact on industry viability and tax liability.
ii. The unadjusted amount of advance income tax and income tax payable cannot be carried forward, affecting financial planning and expenses.
iii. Recovery of advance income tax from the income tax of individuals is not feasible, leading to higher costs and reduced sales.
iv. The additional revenue from advance income tax may lead to higher prices, inflation, and illegal imports.
v. The closure of domestic industries may lead to dependence on imported goods and compromise product quality.

The association emphasizes the adverse effects of advance income tax on essential food processing industries and calls for its cancellation to safeguard domestic production and economic stability.