On 1 June 2019, Finance Minister, Dr. Yuba Raj Khatiwada unveiled an overly ambitious budget for the fiscal year 2019/20 (from mid-July 2019 to mid-July 2020). Out of the total budget of NPR 1.53 trillion, NPR 981.13 billion is expected to be raised via tax revenue, which accounts for 64.04% of the total budget. Of this, about one-third is targeted to be collected from value added tax (VAT) and the consumption tax on goods and services. This year’s budget had a significant increase in VAT contribution to the total budget, which is about 25.5 % more than the previous year.
The following are the key changes with regards to VAT mobilization in the FY 2019-20 budget.
- VAT on transportation and imported goods and services have been introduced.
- Taxable amount of NPR 10 lakh should be paid via draft, cheque or any electronic medium.
- Anyone failing to issue a tax invoice will be fined NPR 10,000 and NPR 1,000 for the customer failing to take the invoice.
- To have a VAT refund, the minimum transaction for the diplomatic delegates is NPR 10,000. This is-an increase of an additional NPR 5,000.
- Consumers purchasing goods and services from contractors or consulting firms will have to deposit half of the VAT amount by themselves.
- In any scenario whereby an invoice is sent without delivering the good is fined 50% of the tax amount or 6 months of jail or both.
Although the VAT system has been in existence since 1997, the introduction of VAT on transportation services this year has been a controversial measure. This decision will have a ripple effect on the overall economy, however, the end consumers will have to bear the burden as this measure will exert an upward pressure on prices for daily essentials, thus, increasing the risk of inflation. Nevertheless, the Government of Nepal has targeted to contain inflation within 6.5% during the next fiscal year, which is highly unlikely given the current changes.
A huge price hike in daily consumption goods has already been reported in an article published in The Kathmandu Post on 10 June stating, “The food prices have increased by about Rs. 40 per kg. Price of green gram has increased from NPR 130 to NPR 170. The most in-demand good, rice, which is mostly imported from India, has seen a price hike by NPR 50 rupees per 20 kg. Before the budget was announced, the price was NPR 1,400 per 20 kg, but it is NPR 1,450 per 20 kg after the budget release”.
The government has also mandated suppliers to deposit half of the amount charged as VAT into the account of the revenue department. This was done to ensure that the contractors do not evade VAT fees after the payment of their services. Importantly, the prominent question that this act generates is whether the law is even practical! The motive of the government is praiseworthy given that the state wants both the consumers and buyers to have an equal responsibility for their bill but the consequence behind this provision needs critical assessment- whether the provision is reliable or practical and have we adopted relevant measures to make this provision less troublesome and easier to operate.
The government believes that its new revenue policy, particularly maintaining tariff on imported raw materials one level below the import of final goods, will help to stimulate domestic production and eventually substitute imports. The downside risk to this revenue policy is that sectoral cartels might take advantage of the tariff preference to keep profits high instead of increasing production that is competitive in terms of price and quality.