The document discusses the historical development of tax laws in Nepal. It traces the origins of income tax in Nepal back to the 1950s with the introduction of democracy. The first elected government in 1959 introduced business profit and salaries tax acts. Over subsequent decades, the government enacted new income tax acts and extended tax coverage to other sources of income. However, agriculture income was mostly exempt from taxes. Currently, Nepal has a low tax to GDP ratio at 14.8% compared to other countries. The tax structure relies heavily on indirect taxes rather than direct taxes. Issues with the tax system include a narrow tax base, tax exemptions, inefficient tax administration and a lack of property records. Reforms are needed to simplify laws, broaden the
The document discusses the historical development of tax laws in Nepal. It traces the origins of income tax in Nepal back to the 1950s with the introduction of democracy. The first elected government in 1959 introduced business profit and salaries tax acts. Over subsequent decades, the government enacted new income tax acts and extended tax coverage to other sources of income. However, agriculture income was mostly exempt from taxes. Currently, Nepal has a low tax to GDP ratio at 14.8% compared to other countries. The tax structure relies heavily on indirect taxes rather than direct taxes. Issues with the tax system include a narrow tax base, tax exemptions, inefficient tax administration and a lack of property records. Reforms are needed to simplify laws, broaden the
The document discusses the historical development of tax laws in Nepal. It traces the origins of income tax in Nepal back to the 1950s with the introduction of democracy. The first elected government in 1959 introduced business profit and salaries tax acts. Over subsequent decades, the government enacted new income tax acts and extended tax coverage to other sources of income. However, agriculture income was mostly exempt from taxes. Currently, Nepal has a low tax to GDP ratio at 14.8% compared to other countries. The tax structure relies heavily on indirect taxes rather than direct taxes. Issues with the tax system include a narrow tax base, tax exemptions, inefficient tax administration and a lack of property records. Reforms are needed to simplify laws, broaden the
Although, the taxes were collected in various form in ancient era, the history of tax is not very old in Nepal. The idea of introducing income tax in Nepal originated in the early 1950s when a multi- party democratic political system was introduced. In 1951. The finance minister in his budget speech declared the intention of the government to levy as income tax. Attempts were made to introduce income tax in subsequent years in 1954, an income tax with Rs. 10000 basis allowance and progress tax ranging from 5 to 25% was proposed. Due to political instability it could not be introduced until 2057(2000). The first elected government in 1959 finally introduced Business profit and salaries tax Acts, 1960 in Nepal. At that time, income tax was levied only on business profit and salaries. After about three years experience of income tax, the government replaced the prevailing tax Act by income tax Act 1962. The coverage was extended in Act. In 1974, income tax Act, 19749(2031) was enacted. The Act remunerated income source into five groups, a) agriculture, b) industry trade, profession or occupation, c) remuneration, d) house and compound rent, e) other sources. However, agriculture income was kept outside the income tax net except few years through the finance Acts. To enhance revenue mobilization through effective revenue collection procedure for the economic development of the nation and to amend and integrate the laws relating to income tax, the parliament of Nepal enacted income tax Act, 2002 (2058). This act has replaced Income tax Act, 1974 (2031), which was amended for eight times and existed for a period of 28 years. The Government of Nepal framed income tax rules 2059 in 2059 to help clarifying the Act. Nepal is adopting various strict policies to collect income tax.
Posted 14th August 2012 by Dhananjay Bhatta
The history of taxation in Nepal dates back to antiquity. Nevertheless, the modern tax system gained its momentum with the establishment of democracy, and implementation of the first consolidated budget took place in 1951. Until the late 1950s, the two major sources of revenues were land tax and tariff on foreign trade. After 1959, however, sales, and property taxes, as well as several other minor taxes, were introduced. An import-export tax and various business taxes, such as a sales tax, were the principal sources of revenue. The land tax, which accounted for a considerable portion of revenue prior to 1960, no longer provided an important source of revenue. Income tax on individual incomes accounted for less than 7 percent of revenues. Most of the other taxes were progressive in nature. The total revenue/GDP ratio (R/Y) or tax effort ratio in Nepal is currently estimated to be 14.8 percent of GDP, which is perhaps the lowest in the world. The tax effort ratio went up marginally from 11 percent to 14.8 percent of GDP over a period of years between 2001/02 and 2008/09. During the period 2001/02 to 2008/09, the tax revenue to GDP ratio increased steadily from 8.6 percent to 12.0 percent, while the share of non-tax revenue in GDP has risen marginally from 2.4 percent to 2.8 percent of GDP. (calculations based on data from Economic Survey 2008/09) Nepals tax structure is composed of three categories of revenues. These are (a) Direct taxes (b) Indirect taxes and (c) Non-taxes. The tax structure is heavily dominated by indirect taxes that still contribute more than sixty percent of the total revenue and the remaining is covered by direct and non-taxes. The major components of direct taxes comprised of income tax and house and land registration fees. The premium indirect taxes constitute custom duties, value added tax and excise duties. The total revenue elasticity is found to be 0.64 (Rana, 2009) which is less than one for the period 1963/64-2001/02 indicating poor responsiveness with respect to GDP. The low tax elasticity for total revenue signifies that the government has concentrated more in introducing discretionary measures rather than broadening the tax base which is not conducive to supplement growing development activities. This also suggests that the Nepalese tax system is regressive in nature, which does not lead the overall economy towards short run stability as well as in the long run development. This can be mainly attributed to the reasons, given the existing tax structure, automatic growth in total revenue is insignificant and heavy reliance on indirect taxes like customs, sales and excises which have low elasticity will lead to revenue reduction. An efficient tax system is the promotion of strong and self sustaining tax structure that is obtained in the elastic tax system. Elasticity in tax system is that it is a crucial determinant to siphon-off automatically an increasing portion of national income to the public exchequer without additional effort. The governments in the past and present mobilized revenues through a series of tax reforms during the Tenth plan and 3 Year Interim Development Plan. These reform comprised of: (a) Streamlining and rationalization of tax rates in conformity with provisions envisaged by WTO, SAFTA and BIMSTEC; (b) expanding the base through minimizing a number of tax shelters and introducing new tax imposts; (c) reforming tax laws and regulations; (d) and improving efficiency of tax administrations. The tax system in Nepal is circumscribed by serious structural constraints with tremendous administrative and procedural complexities envisaged in the existing Income Tax Act that it lacks simplicity and transparency. Tax payers are often unaware about the specific size of tax they are to comply with, because tax is determined arbitrarily between tax payers and the tax officials resulting in enormous corruption. The major issues and problems of taxation in Nepal include: (a) marginally high tax rate (b) limited tax base (base eroded due to prevalence of a number of tax shelters e.g. no tax on income from agriculture, because this is a subsistence sector, relatively blanket exemptions concessions and deductions provided to industrial sector.) (c) leakages in tax collection (d) rigid and complex Income Tax Act 2000 (e) inefficient, indifferent and corrupt tax administration and (f) no consolidated record of property of land and building with the Internal Revenue Department (g) adhocism and arbitration in tax settlement (h) low elasticity of taxation (i) limited potentialities of direct taxes (j) negative responsiveness of land tax with higher administrative costs. As a result, it is imperative to vehemently concentrate on these issues as soon as possible to rectify the modality of tax structure and mobilize additional resources on a greater quantum by establishing an effective, dynamic and highly power driven Autonomous Revenue Board under the chairmanship of Finance Minister. Dr. Rana was formerly Senior Economist of Agricultural Projects Services Centre (APROSC)