Although the concept of modern tax system started in 1919, France is considered to have implemented modern tax system for the first time in 1954. As a result, although the tax system has been effectively implemented in many countries of the world, differences can be seen in the tax system according to the country. Thus, with the change of time, after 1986, a campaign was started to raise more revenue from low tax rates by widening the scope of taxes in the world.
“Because the tax revenue in Nepal is not being utilized for economic progress but is being misused for other purposes or the economy is not getting the returns as per the tax collected in Nepal.”
In this way, when the tax scope is widened, the tax rate is low, but the tax system implemented by the American President Ronald Reagan in 1986 with the aim of generating more revenue was successful, and the International Monetary Fund and the World Bank also followed it. As this system is related to personal and corporate income tax, during the reform of the tax system, the highest rate of personal income tax in America was reduced from 50 percent to 28 percent and the rate of corporate income tax was reduced from 46 percent to 34 percent.
The goal of this tax reduction was to make the tax law and administrative process transparent and simple by widening the scope of tax by cutting many exemptions and benefits that were given in the past from the reduced revenue. As a result, the tax payers of the United States were very enthusiastic about this new recognition of the tax, and the overall economic growth was also achieved due to the increase in investment and employment.
In general, the purpose of taxes is to levy the tax at the rate that can be paid and to make the tax payers happy as well as to use the tax revenue efficiently. Therefore, the state has the right to impose taxes by making laws, but it is not considered lawful to spend or misuse tax revenue by neglecting the interests of taxpayers. On this basis, complaints are being heard everywhere that tax collection has been started against the objective of achieving maximum economic growth rate from the minimum tax revenue in Nepal and levying taxes to keep the tax payers happy.
Because the tax revenue in Nepal is not being utilized for economic progress but is being misused for other purposes or the economy is not getting the returns as per the tax collected in Nepal. Also, the economic growth rate in Nepal has not been increased from the tax revenue, nor has the tax payer been satisfied.
In fact, the amount collected from various sources in the treasury of the state is called revenue and revenue collection is the first requirement for the operation of any state. On top of that, in a developing country like Nepal, there is an imperative need for revenue mobilization to carry out regular government functions, accelerate development, promote social responsibility and reduce dependence on foreign aid.
However, due to reasons such as lack of political stability, poor peace and security, energy crisis, poor condition of infrastructure and uneasy labor relations, the country is not able to move forward according to the way the state should be run economically.
According to the prevailing tax laws of Nepal, the sources of revenue include both tax revenue and non-tax revenue. Under which non-tax revenue is collected from fees, charges, penalties, fines, dividends, interest, royalties, donations, gifts, etc. for services provided by the state, while tax revenue is collected under income tax, social security tax and property tax. Similarly, value added tax, excise duty and customs etc. which are added to the price of goods and services are considered as indirect taxes.
Thus, direct tax is progressive in nature and increases in proportion to income and wealth, while indirect tax on consumption is neutral in nature. Therefore, in a country with a good and efficient tax system, the proportion of direct taxes increases, while in the traditional tax system, indirect taxes are prevalent.
Tax system reform was one of the various dimensions of economic liberalization that started in the 1990s. Considering this, to create an investment-friendly environment in the economy by increasing the voluntary participation of taxpayers in the tax system, V.S. In the year 2050, the then Income Tax Act, 2031 was amended and a new provision was made for self-assessment of tax.
At the same time, a self-imposed tax system was started on the production and export of goods other than alcohol and tobacco, which are considered sensitive from the point of view of revenue and public health, in excise duty, which is completely dependent on the physical control system.
In this way, these two provisions in Income Tax and Excise Duty which were made almost at the same time were of bold and far-reaching importance in terms of reforming the tax system. However, in the context of Nepal, the sales tax applied for three decades could not increase the expected revenue and the sales tax could not attract the taxpayers in the changing environment, so the value added tax law was created in 2052 in Nepal.
According to which, after abolishing one-level sales tax and implementing multiple value-added tax as the backbone of the revenue system, to develop it as a modern, neutral and scientific tax system, from the beginning, all taxpayers’ value-added tax and tax statements are recorded and operated through an automatic computer system. The impact of the tax system seems to be increasing.
In addition, the Income Tax Act was implemented in 2058, and the Income Tax System was broadened with modern and universal arrangements in accordance with international practice, and in the same year, the Internal Revenue Department was established by integrating the Value Added Tax Department and the Income Tax Department. During this period, the tax system of Nepal is gradually becoming modern due to improvements in the assessment system, simplification of customs procedures, automation and mechanization of customs, improvement of physical structure, improvement of administrative system, simplification of passenger check and pass process and human resource development.
However, the basic basis of state management is revenue and the basis of revenue is the tax collected from the people. Therefore, tax collection work should be able to make the people happy. Also, among the various sources of taxes, customs, excise duty, value added tax and income tax contribute more to revenue collection. In the past, the main sources of revenue were only taxes related to property such as land, but in today’s modern world, industry, trade, business, revenue collection and operation have become the main sources of revenue.
With the expansion of the tax sector due to the limits of the state’s expenditure and the development of social needs, today, those who work in every sector pay their income tax, and the tax collected from industry, trade, business, customs, excise duty, value added tax and income tax has become a means of revenue collection.
However, after the Value Added Tax Act, 2052 and Value Added Tax Regulations, 2053 duly came into force on November 1, 2054, the value added tax system started in Nepal. The sales tax, hotel tax, contract tax and entertainment tax that were implemented before that have been replaced by value added tax on the sale of goods and services in an integrated manner.
In this way, it is called value added tax and value added tax is a sophisticated form of sales tax because it is taxed on the increase in value that occurs at various stages of production, import and distribution of goods and services.
Before Value Added Tax was introduced in Nepal, sales tax was levied on goods produced within the country when the producer sold their products, while goods imported from outside the country were generally levied at the customs point. In this way, during the conversion from the sales tax system to the value added tax system, in the last few years, the sales tax has also been levied in layers like the value added tax.
However, there are complications in the economic sector of Nepal such as the blueprint for the future economic structure of the state is yet to be created, the share of revenue is less compared to the gross domestic product, and the contribution of the productive sector to the revenue is less. In this way, in terms of state restructuring, there is still confusion about the nature of the tax system, the share of revenue based on imports is high, the investment and employment situation is weak, the customs revenue is reduced, the open border with both neighboring countries, the lack of expected success in controlling revenue leakage, the ratio of direct tax to revenue is less than expected.
Low value declaration and low invoices, many taxpayers who are registered for tax do not file periodic statements, the details of the taxpayer and their actual transaction value are not in conflict, many taxable transactions and individuals remain outside the scope of tax, the work of bringing electronic transactions into the scope of revenue is not effective, a big impact on the economy Problems such as the use of hundi in the remittance of contributions, the large amount of revenue arrears and the lack of voluntary participation of taxpayers are becoming challenges in revenue mobilization in Nepal.
Similarly, when the country is divided from a unitary system of government to a federal state, the issue of revenue sharing between each other is also becoming complicated. Because the biggest and most reliable source of income of any state is the revenue collected from the state. In such a situation, after the division of the country into seven provinces as an autonomous state as prescribed by the present constitution, the problem of revenue is more visible.
In the same way, when all the three governments, central, provincial and local, are making equal claims on the source of income, the government of Nepal i.e. customs, excise duty, value added tax, corporate income tax, personal income tax, wage tax, passport fee, visa fee, tourism fee, service fee under the central government.
Duties, fines and other taxes are kept, while real estate registration fees, vehicle tax, entertainment tax, advertisement tax, tourism, agricultural income tax, service fee, fines, etc. are included as the authority of the state government. Also, under the authority of the local government, property tax, home maintenance tax, real estate registration fee, vehicle tax, service fee, tourism fee, advertising tax, business tax, land tax (property tax), fines, entertainment tax are determined under the current legal system. However, despite the above-mentioned constitutional and legal arrangements for tax collection, the common people are forced to pay double and higher taxes.
Therefore, it seems that the current government should develop a modern tax system and develop a timely tax system to make the tax collection system effective by thinking deeply about how the common people can be satisfied when determining the tax rate in accordance with the constitutional provisions.
Author is a Tax Officer in Government Sector