Finance Minister Yubaraj Khatiwada presented Nepal’s first federal budget of NPR 1.31 trillion in the parliament for the fiscal year 2018/19 on 29th May, 2018. The government has set an ambitious goal of achieving 8% economic growth and 29.8% revenue growth target for the fiscal year 2018/19 beginning mid-July.
The federal budget has allocated NPR 113.43 billion to seven provinces and NPR 195.05 billion to 753 local bodies as equalisation and conditional grants. Under the revenue-sharing scheme, the provinces and local bodies have received NPR 60.42 billion and NPR 53.82 billion, respectively, from the divisible fund.
Budget Allocation and Financing
Highlights on Revised Taxation System
Changes in Direct and Indirect Tax
Progressive Taxation System: The government has introduced new tax slab through for the fiscal year 2018/19. The income tax rate has been reduced for lower and middle-income earners whereas higher earners will have to bear additional tax burden. There shall be three rates for income tax: 10%, 20% and 30% on taxable incomes. Previously, there were two rates: 15% and 25% in practice.
Tax Concessions for Investment Promotion
The budget gives tax breaks and benefits to some firms and companies. The manufacturing and tourism sector industries that reinvest their profit from the reserve will get tax discounts on dividends.
The industries that provide direct employment to more than 100 people will also get discount on income tax.
Micro enterprises will get an income tax waiver for five years while the women-run enterprises will not have to pay income tax for seven years.
Tea, garment and dairy industries are also going to get 50% waiver on income tax.
Tax Increased on Alcohol Beverages, Tobacco, Automobiles and Luxury Goods
Metropolitan and sub-metropolitan areas will have to add Value Added Tax (VAT) on trading of alcoholic beverages, tobacco products, electronic items and construction materials.
Excise duty will be levied on the import and locally manufactured perfumes, toys, refrigerators and chocolates that use cocoa.
The government will also be collecting additional NRS 0.25 as health risk tax per stick of cigarette.
The government has increased the excise duty for four-wheelers with engines bigger than 1,000 cc and two-wheeler with engine displacement larger than 150 cc.
The government has scrapped the provision of VAT refund provided to individual sellers. With the new provision, mobile importers are not allowed to avail VAN refund and the purchaser will now have to pay higher costs while purchasing mobile sets.
Tax in Other Sectors
The education and health service fee has been scrapped.
Patients will not have to pay VAT upon receiving medical services at private hospitals which was non-tax source of the government.
Community hospitals will be waived 20 percent of the income tax.
Tax waive limit on the premium paid for life insurance has been increased to NPR 25,000.
The income tax for telecommunication service providers and internet service providers has been increased to 30%.
Private companies having paid-up capital of NPR 500 million will get 10 percent income tax deduction if they decide to go public. Such companies will be given income tax discount of 10% for 3 years
No tax will be levied up to 100 gram raw gold brought in by the people returning from foreign country.
The government has revised the slab on Capital Gains Tax (CGT) on land and housing transactions and lowered the CGT limit on land and housing transactions from NPR 3 million to NPR 1 million.
Job Creation: The government has allocated NPR 3.10 billion to initiate “Prime Minister Employment Programme” with an aim to generate employment opportunities. Moreover, the government has decided to provide 5 per cent concessional loan of NPR 700,000 backed by educational certificates to help young entrepreneurs to launch their ventures. Special emphasis will be laid on developing programs for entrepreneurship development and skill-oriented training
Foreign Direct Investment (FDI): The budget has given 5% cash incentive on exports and is focused on industrial development of selected products like cement, sugar and iron rod, among others. The budget announcement also accords that companies of the real estate sector with capital above NPR 1 billion should be converted into public and listed in NEPSE. This is in contradiction to the Finance Minister’s pledge to clear the hurdles in doing business and encourage foreign investment in Nepal, since not all the foreign investors would be least willing to convert a private limited company to a public limited company.
The government in the budget has revised tax rates in many sectors and the revenue hence collected is expected to finance 63% of the budget. The budget also highlights on bringing the non-filers of tax for the past three years into the tax bracket. However, the main challenge of controlling the leakages in tax revenue remains. Enforcing the integrated tax-payers management system and implementing the electronic billing system to register tax payers into the central billing monitoring system are some of the important budget announcement with regard to tax reforms that might enhance tax revenue. Moreover, strict action needs to be taken against tax evaders and the firms failing to issue invoice on their transactions is the government aims in generating the expected revenue hence reducing the fiscal stress. Other important steps includes promoting trade through opening letters of credit and implementing risk management at the customs clearance to smoothen the collection of taxes.