Nepali Economy & Policy
Nepali Economy & Policy
Nepal Business Age Magazine
Looking Back to 1999/2000
The country’s economy during the fiscal year ending on July 16, 2000 registered a 6% growth, the central bank has announced confirming the forecast made by the Finance Ministry in the Economic Survey presented to the parliament in May. Though Nepal Rastra Bank (NRB) gave no details of the GDP figure, the latest press release from the bank issued in September gives a synopsis of monetary, fiscal, trade and price situation and states that despite a continued monetary expansion, rate of inflation has significantly gone down. Industrial production increased 9% during the year due to increase in the production of beverages, construction material and exportables.
Inflation measured by National Urban Consumer Price Index (CPI) was 11.3% last year, but it went down to 3.3% this year, NRB has stated. This is attributed to very marginal increase (0.4%) in the prices of food and beverages while the prices of edible oil, ghee, vegetables and pulses have gone down. This reduced inflation rate has provided NRB a logic to argue that the interest rate on bank deposits, though reduced substantially than in the last year, is still positive (higher than the rate of inflation).
In international trade, the country recorded 44.7% increase in exports as compared to only 22.2% increase in imports. While imports from India have gone up 27.4%, imports from other countries went up only 19.2%. In case of exports too, the increase was mainly in exports to India (80.5%) as compared to 25.3% to the third countries. The data indicate growing concentration of the country’s foreign trade with one country (India). Above 40% of Nepal’s total foreign trade is with India as the NRB report for 1999/2000 shows. And it is also reflected in the fact that while the share of convertible currencies in the total foreign exchange reserve of the country’s banking sector was over 90% on mid-July 1999, it went down to less than 86% on mid-July 2000.
In case of overseas trade, the concentration on exports of a single item (readymade garments) is growing steadily. Except for a marginal increase in export volume of silver jewellery (2.4%) and woolen carpets (0.4%), all the other major items exported overseas (pulses, tanned skin and nigerseeds) have continued to register heavy decline. A hefty 47.75% of Nepal’s total exports overseas during 1999/2000 was of readymade garments. While this indicates the precarious position of Nepal’s exports trade, the good news about it is that non-quota export of readymade garment has been increasing, as claimed by the entrepreneurs.
Another important development in the last year was the continuously increasing export of Pashmina. But the Pashmina exporters have now started to complain of decline in their business. During 1999/2000, the total volume of Pashmina exports stood at Rs. 6.22 billion. This has given business to the handlooms and powerlooms that had gone out of textile business due to their failure to meet the competition from imported textile.
(Rs. in million)
Increased exports and tendency among banks to delay bringing in the export proceeds has resulted into their net foreign assets to increase faster (21.6%) as compared 17.5 increase in their net domestic assets. Time deposits with banks grew 20.6% this year as compared to 25.1% last year. The growth rate was lower (7.2%) this year in demand deposits too as compared to 12.7% last year. This is because of reduced interest rates in bank deposits and larger mobilization of deposits by non-banking financial institutions, according to NRB.
National Urban Consumer Price Index
Base : 1995/96=100
What does the decline in prices of vegetables and fruits signify? Compare that with the massive increase in the prices of fuel, light and water as well as in transport and communication. It is very much likely that fruit and vegetable farmers will be less encouraged to increase production next year and the prices will shoot up. The benefits of increased prices then will go abroad from where fruits and vegetables will be imported to fill the gap. The increase in the price index of non-food & services category in clearly the result of hike in the prices of services that the government still has a monopoly over (fuel, light, water, communication).
Westernizing Income Tax Act
The bill drafted to replace the existing Income Tax Act, 2031, was not presented to the parliament in its recently concluded budget session. The reason may be the last minute rush to prorogue the session. But the business community is feeling that it was a blessing in disguise. The time before the coming winter session of Parliament can now be used to further refine the bill. And the authorities are also said to be giving positive consideration to the suggestions that various organizations have forwarded.
But the task looks to be a very tricky one. Naturally it is not going to be consensus document, says Sudarshan Raj Pandey, a Chartered Accountant and General Secretary of Nepal Chartered Accountants Association (NCAA). The Department of Taxation has at least three sets of suggestions at its table, and two of them are almost identical as they come from two business associations – the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and Nepal Chamber of Commerce (NCC). The third is from NCAA and it is slightly different, according to Pandey who says that the focus of the NCAA recommendation is more on the practical aspect of implementing the provisions. Since the new law is trying to introduce new concepts in Nepali tax system, questions are raised on the practicality of the proposed concepts.
Jagadish Prasad Agrawal, Chairperson of the Revenue Committee of FNCCI says that in its effort to bridge the revenue gap in the national budget, HMG of Nepal is gradually westernizing the country’s taxation system. Now that one such western concept (VAT) has been enforced all over the country after almost two years of tussle between the government and the private sector, the attention of the government is in now introducing similar western concept in direct tax by rewriting the existing Income Tax Act. "But the administrative structure here is still medieval and not geared to adapt to the western concept," Agrawal comments. The existing draft of the new income tax law is a literal and clumsy translation from English language in which foreign consultants (one from IMF and another from GTZ, according to reliable sources) wrote the draft originally. As a consequence, the Nepali version has become difficult to understand for the Nepali people themselves. On top of that, the proposed law has become ambiguous and subject to different interpretations, it is pointed out. Pandey says, ‘the English version is more clear than the Nepali version, while it should have actually been the opposite’.
In the maze of ambiguities, it can however be seen that some far reaching changes are being introduced in the country’s taxation system. One such new concept is that of capital gain tax, to be applicable in several instances of capital gain. The summary of the draft income tax bill circulated by the Department of Taxation (DoT) says that the basic philosophy of the proposed act lies with taxing those activities that contribute towards creation of wealth. Tax is to be levied not only on income from employment (remuneration) but also on the profit or gains from business and investment, though the Act does not specifically use the term "Capital gains tax".
However, the draft also mentions that the proposed law is not to tax all the capital gains. It proposes to tax only ‘those gains which are received from the disposal of business assets or liabilities and those from the disposal of non-business assets of an investment of a person which are regarded as chargeable". Translation of the same in plain language means, among other things, tax is levied when assets change hands, i.e. also in case of inheritance and partition of family property. Since there is no monetary transaction involved in such transfers, the person involved may not be able to pay such tax liability, it is argued. Agrawal gives example of how some Indian Maharajas and Rajas lost their property due to such tax in India.
When asked to interpret these provisions of the proposed Act, Pandey also says that the new act is to tax income from whichever source it may come. This will bring into the tax net many of those activities that were hitherto tax exempt. For example, income of Nepal Rastra Bank (NRB) are to be taxed despite the provision in the existing NRB Act that its income is not taxable. It is also likely that income of the Employees Provident Fund and Citizen Investment Trust will be taxable with the new Act. Implications of such changes have not been debated sufficiently comment tax experts.
Unlike in the existing law, which exempts various forms of income from tax, the proposed law is to tax income from every source (domestic or foreign, remuneration or gift, dividend or interest). However, it also says that income for tax purpose is to be treated as net of expenses, which means expense incurred in the process of earning the incomes or getting the gains are deducted. This is one of the major improvements over the existing tax law, notes Pandey. The existing law states that only certain types of expenses are recognized for deduction from the gross income while assessing the taxable income, thus other possible expenses are not allowed to be deducted. The problem is particularly evident in case of assets that the business firms may sell off. If they sell the asset for profit, the gain has to be shown as income from other sources, and are added up to arrive at taxable income. But, if the sale results into a loss, such loss cannot be regarded as expense for income tax purpose under the existing Act. The proposed act has provision to allow to offset such capital loss against capital gain.
Still the private sector is afraid of the proposed Act because it does not define the expense provision. This gives discretionary power in the hands of the tax authorities – they may refuse to recognize certain expenses. Though one of the objectives of the law, as stated in the draft circulated by DoT, is to reduce the discretionary interpretation of the law by tax administration, the private sector views that the proposed law has not reduced the discretionary powers. In Pandey’s opinion the proposed act should actually have reduced such powers. The new Act is exactly double in size when compared to the existing law, and such detailed law should have detailed all the conditions so that nothing is left to arbitrary interpretation. But in reality, it seems such powers of the authorities will actually increase under the proposed law. Coincidentally, the draft act has 144 sections as against 66 sections in the existing act. According to Pandey’s opinion, while being clearer than the existing one in defining many procedures and thus reducing the chances of discretionary powers in those areas, the proposed law has left too many other things under the discretion of the tax authority. He particularly gives the example of provision relating to fine which says that the amount of the fine can range between Rs. 10,000 to Rs. 60,000. Moreover, phrases such as "in such manner as the Department thinks appropriate" or "according to the Department’s best judgement" are used very often.
Another proposed provision that is criticized by the business community is regarding the right to be granted to DoT to "correct and characterize arrangement targeted at minimizing the taxable income or payable tax". The provision seems to be included to address the problem of tax avoidance by business firms through various means such as indirect payments and transfer pricing. But FNCCI has argued that while it is logical to declare ‘tax evasion’ as an illegal act, it is not logical to regard ‘tax avoidance’ also as a crime. Quoting some fundamental principles of law, Pandey also says, anyone should be free to do what the law does not specifically prohibit.
One demand that FNCCI has made is to include in the Act the right of the tax payer (see box). In its comments on the proposed Act, FNCCI has stated that it is revenue – oriented and disregards the repercussions it would have on the country’s socio-economic structure. If the objective of raising tax from every bit of income is pursued, it may increase revenue collection, but it may eventually sap up the tax-paying ability of the taxpayer, FNCCI has warned. About the proposals to tax dividend and interest earning, FNCCI has said, it will further erode the limited attraction that Nepal has been offering to foreign investors.
Next point that the private sector associations are emphasizing while suggesting not to impose tax on dividend income is that unlike in developed industrialized countries where there is a tax credit system so that double taxation is avoided, the proposed Act for Nepal does not have any such provision. Neither is the existing Nepali administration system capable of implementing such tax credit method, it is pointed out giving example of the problems being faced in implementing similar tax credit system provided for under VAT. However, despite the opposition from the business community, the government has already imposed tax on dividend by making provisions for the same in the Finance Bill, 2000 that has already become the law.
By Business Age Reporter