Luxury Tax on Permanent Residency, Fiscal Frugality or Tax on Foreign Income: A Discussion Paper

Reduction in aggregate demand in the Nepalese economy due to the high-scale flight of the Nepalese workforce abroad seems unquestionably acknowledged as a fiscal fact of current times. Be it for straightforward foreign employment through a working visa or disguised cheap labor movement in the name of Abroad Education by self-funding, the prime motive may not be other than lucrative foreign earnings.

When governmental statistics present around 60 lakh Nepalese with formal labor permits for foreign employment, around 80 Lakh Nepalese are estimated to be residing in foreign countries so far.

However, the presence of such an economically active population within the formal Nepalese economic and political system is only of a technical nature as they are neither active players in consumption nor investment in our economy due to abroad residence, nor do they have representation of their voice in changing dynamics of national politics. Contribution to their Nepalese economy is observed to be limited only to sending remittances to their households. 

Yet, the love they have for the motherland is undeniably innocent. It is too heart-wrenching to have one’s prime ages of wildest dreams and enthusiasm depreciate in working in foreign land. Had same been poured within national geography, our collective dreams of standing proud as a developed nation would have already been contented.

Of course, it has already been late.

But never too late.

The wheel of time has already revolved to that delayed moment at which addressing the desires of our people working abroad, being integrated in national accounting procedures- has become an immediate urgency.

Because investment in infrastructures for our dream of ideal development requires funds in such amount which does not seem to be adequate to be contributed by people and institutions only working within Nepalese boundary, the Compiler of the ideas suggests that the contribution of Nepalese People living abroad should not be limited to merely sending remittance to their respective household but also a part of their foreign income needs to be offered towards National revenue (in form of income taxes).

Well, the Compiler acknowledges that such a proposal might bring disruption in the review process and widespread reactions.

Nevertheless, no matter how painful it is now; we need to believe: that great initiatives towards national interest should have no comparison with short-term personal self-benefits.

Remittance Inflows:

% of Remittance to GDP (As per Annual Report of NRB 2080/81) in NPR

The ratio of Remittance inflow to GDP is estimated to be approx. 25%. However, this 25% cash income portion of economy remains untaxed.  While a person working in Nepal has to bear minimum 1% of SST even at lowest income, it is more than alarming to not have that one-fourth cash inflow to GDP beyond scope of direct taxation.

New Birta System?

While earning in Nepal requires payment of Social Security/income taxes in each rupee earned, but not on any income earned in a foreign land when brought to Nepal, a new Birta System seems to be in place. In the old land management system, Birta land was that category of land in which no taxes were levied, and often, Birta was granted to elites. In 1952 AD, the major revenue of the Nepal Government used to come from land taxes. However, out of the total land area of cultivable land, 36.3% of the land was categorized as Birta land, from which no taxes were collected. (Reference: Book named ‘Landownership in Nepal’ by Mahesh C. Regmi).

In today's perspective, if around 25% of GDP is Cash remittance and 26% of the total population or 50% of the economically active workforce, does not contribute to income taxes, this portion of national income might be categorized under Birta System of present times which seems tax-free.

Progressive tax or regressive tax?

Let’s consider the proposition of the necessity of taxing income earned by Nepali Citizens in a foreign land by understanding the following questions:

Where are opportunities ample- in Nepal or abroad? Where is it easier to get a job? Do jobs in Nepal pay more than of abroad for similar tasks? Medical and social security on the job? And the possibility of switching jobs? Due to the lack of organizations opening jobs and the informal nature of the economy, the possibility of job switching/career hopping is nearly impossible in Nepal. However, the reverse is true abroad. Finally, foreign exchange gains: definitely, earnings in foreign currency and spending in local currency provide foreign income holders the upper hand in society and the economy.

When deep thoughts about the benefits of having a foreign job look better than working at the same job in Nepal, the system, which seems to be in place to provide tax holidays to income abroad, comes into sight. The applied principle of taxation needs to be progressive: higher taxes on higher income. However, in the case of Nepal, applying income taxes to a person seems to be regressive in reality. It might be observed that people working in Nepal at the lowest pay are still taxed, while peers of those working at higher at abroad are being provided a full discount in tax.

Promoting income earned abroad at the expense of borrowers of the banking system?

Another major flaw in the Nepalese economic system seems to be enriching foreign income holders at the expense of borrowers of the formal banking system. NRB Directives mentions that interest rate of at least 1% more needs to be provided on deposit account of person having valid work permit and sending a fixed amount of remittance in such bank account.  This provision of providing additional at least 1% interest rate on remittance income is itself unnecessary as it serves those who earn more by providing higher interest rates on saving.

This is because: due to the low level of salary and benefits and high cost of living, maintaining savings of funds is itself a difficult task while working in Nepal. Therefore, incentives should be provided to people working within the country for the generation of savings. However, it is just the opposite of the existing provision. Providing additional incentives to surplus funds in remittance saving accounts of foreign income holders whose earnings are themselves in a higher amount not only increases inequality between national residents and foreign income earners but also increases the plight of borrowers of the banking system.

Additionally, at least 1% interest on the deposit of remittance income is neither provided by the government nor by the bank. The additional margin of interest provided to foreign income holders in reality is being borne by borrowers. And, in a difficult economic scenario when businesses and persons are facing difficulty in repaying regular bank obligations, it is again in favor of tax-free remittance cash flow holders at the expense of national residents and businesses.

 In actuality, government policy needs to be directed to increase economic strength of people working within country, but when economic system undermines their pathetic living condition under its own nose and only intends to extract from national residents by designing weird policies, it becomes certain that state itself might be promoting people to leave motherland.

Fast Track government service to aspiring foreign residents

The current national administrative and economic system not only favors persons with foreign income/aspiring emigrants but also provides short-cut hacks in every governmental service as if national residents are 2nd class citizens. Take the example of a driving license. A Nepalese driving license is much more needed within Nepal for a national resident than for someone going abroad. However, the government provides a license service immediately to those aspiring to go abroad, but puts national residents in a queue of multiple years just to get the document. But for a passport? You get a passport within at least 3 days!

Remittance reduced poverty but increased inequality.

Yes! We should not hesitate to praise foreign income inflows, which seem pivotal for reduced household poverty in Nepal in the last 30 years. The increased standard of health, hygiene, education, housing, and nutrition of the present times is indeed a sweet fruit of hard-working Nepalese in foreign lands. Clean and aesthetic houses of cities, emerging towns, market and district headquarters, urbanization, though unmanaged, have the contribution of foreign income. However, it should be noted that foreign income inflows may have only made respective households well-off but not our nation.

Another major concern regarding tax holidays of foreign income that needs analysis is with respect of increased income and wealth inequality among people. While foreign income has indeed contributed to increased living standard of respective household, it also needs to be studied from another aspect of how much wealth and income inequality foreign wealth has brought in society.

At present, the people from that upper economic class, having high net worth and the best income in Nepal, are observed to be residing in advanced economies and earning in the range of approximately. 30 times more than the per capita of Nepal. However, the highest earners of the society are out of the income tax bracket of Nepal. And we should have no doubt: the contribution of high earners should be a high contribution towards government revenue.  This issue needs serious addressing as providing privileges to the highest earner to remain neglected by the tax system is not a good practice in the socio-economic system.

For doing so, a separate legislation is required to be promulgated that makes every foreign income-earning Nepalese citizens to file details of income annually by designing a proactive national income accounting system.

Proposed Luxury Tax on Permanent Residency?

Further, holding permanent residency in advanced economies has become a new social tradition. While the governmental system considers owning a basic need of survival: a two-wheeler vehicle in Nepal as a luxury item and taxes multiple of 1.5 times of cost of the same for a national resident, when shall our vision observe that holding permanent residency in an advanced economy is the highest luxury? Shouldn't it be taxed on a certain basis?

To navigate the gravity of the matter, consider answering this question. What is easier and more convenient? Living in Nepal or residing in an advanced economy? Where does one earn more- in Nepal or abroad? Where is the quality of life better- in Nepal or abroad? If the answer to these questions is abroad, there is an urgent need of time to design a new taxation structure that generates contributions in the form of a luxury tax among Nepalese Citizens holding permanent residency in foreign countries.

More tax on the import of productive goods?

The Nepalese economic system has again promoted and pushed Nepalese youth towards foreign lands instead of encouraging them to work in Nepal. Consider remitting money for studying abroad. Only 3% of the tuition fee to be remitted needs to be paid. However, when one plans to plant and machinery to establish a factory, the rate of taxes on the import of plant and machinery might be more than 3%. There are at least twofold benefits of the establishment of the factory:  in one way, it increases the productive capacity of the nation, and in another way, it also increases national income. However, the prime motive of studying abroad study in the surface might be educational, but ultimately, residing there permanently, alienates one from the fulfillment of obligation towards one’s society and country. Therefore, it needs to be taken into consideration that taxes on the remittance of funds for foreign study must be greater than taxes on the import of plant/machinery. Only then does entrepreneurship get encouraged.

Nation Building: Responsibility of Domestic Residents only?

Let's understand the issue in this way: while people and businesses working in Nepal contribute towards government revenue by paying income taxes, even at the lowest level of earning and profitability margin, it is untaxed foreign income that does not share any portion of government revenue. So the question arises, is the job of funding for the state’s operation an obligation of people working in Nepal only? Should not be that Nepalese people working in advanced economies contribute a fair share to the development of infrastructure in Nepal?

As per data from the Annual report of NRB 2080/81, out of the total revenue of NPR 10.82 Kharab, a portion of income taxes was staggering NPR 2.83 Kharab, which is 26.15% of the total revenue collected. This is the figure contributed solely by people/businesses working in Nepal only as income taxes. Meanwhile, for 81/82, the government had initially aimed to channel NPR 3.52 Kharad as capital expenditure out of the total budget of NPR 18.60 Kharab. The total contribution to initially targeted capital expenditure by income taxes collected alone comes to around 80%.

So the major query goes like this: can our dream of good infrastructure and public amenities get fulfilled only by approximately? 19% of the total budget is utilized in capital expenditure. Out of that amount, 80% of the same when contributed through income taxes by people and businesses working in Nepal, isn't it a thought-provoking issue?  Are public infrastructures of good transportation, high-quality schools, and health services required by people living in Nepal only?  When the time comes shortly to have returnees with aging factors, these facilities' needs shall increase significantly. 

So the question arises, till when national residents needs to bear burden of operation of expensive administrative system while 80 lakhs people earning in foreign currency are enjoying tax holiday?

 The answer to this question lies in probable policy recommendation that: foreign working individuals should also be provided a privilege to serve the nation by allowing them to put a portion of their income for a part of government expenditure in public infrastructure.

Nevertheless, if taxation on remittance inflow (foreign income) is not a solution, the expenditure pattern of government needs re-structuring. While budget for 2082/83 is being presented, there are many urgent things upon which an accountable government should consider to take necessary beneficial actions.

Article By -Sanolaganikarta