By Shanker Man Singh
As Milton Friedman said, “No one spends other people’s money as carefully as they spend their own”.
The government has presented a deficit budget of about 5.5 trillion rupees for the new financial year. Since revenue and foreign grants are not enough to ensure the resources of the budget. A significant amount has to be resorted to external and internal loans.
As a result, the fiscal year 2081/82 has followed the deficit budget like the previous 4 years. For the total budget of 18 trillion 60 billion for the coming fiscal year, out of the estimated revenue sources, 12 trillion 60 billion 30 billion rupees from revenue.
Finance Minister Barshman Pun, while presenting the budget statement for the upcoming fiscal year, has mentioned that the government will raise 2 trillion 17 billion 67 million rupees from foreign loans to meet the said resources. The net 3 trillion 30 billion that will not be reached when mobilizing revenue and mobilizing foreign aid will be covered by internal debt. The possibility of an interest rate increase cannot be ruled out because of the liquidity problem.
Increasing tax rates and government spending by the same amount effectively transfers money from individuals to the government. This reduces the incentive for people to work and for investors from around the world to invest in their country.
It doesn’t destroy incentives, but higher tax rates make everyone less likely to want to work harder or more often. If the tax rate goes up, someone who would normally work overtime will in some cases no longer do it.
For wealthy people, this may encourage them to hire accountants to help them avoid taxes, keep money overseas or hold assets longer than usual. Even higher tax rates do not always guarantee higher tax revenues, mainly because of the points already made about changes in incentives.
If a store raises its prices, it would be foolish to assume that its profits will also increase. Some customers may no longer shop there.
Their profits may decrease or even incur losses. Lower prices can attract more customers and also result in greater profits. It all depends on many factors. Similarly, tax rates affect the behavior of individuals and companies so the resulting revenue may not be easy to predict.
Singapore’s low tax rate undoubtedly attracts a lot of foreign investment while some investors prefer to keep their money in a country with a really low tax rate.
The government extensively revised taxes on various items. It has announced to change the tax on potatoes, onions, fruits, cigarettes, alcohol and electric vehicles.
This policy of the government will affect the common man’s kitchen to the luxury class. Since onions and apples are imported in large quantities, if VAT is not imposed on imported products, it will be difficult for domestic products to compete, but consumers will get cheaper products. In the presented budget, it seems that the government has increased the customs and excise duty on electric vehicles while continuing the tax determined based on kilowatt. A five percent excise duty has been imposed on vehicles up to 50 KW and the customs duty has been increased by 5 percentage points.
Earlier there was no excise duty on it. In the past, the customs duty was 10 percent. Currently, it will attract 15 percent customs duty and 5 percent excise duty.
In addition, there are differences in other kilowatts and the duty on electric vehicles above 300 kilowatts has been increased from 60 to 80 percent.
The excise duty on it has been reduced from 60 percent to 50 percent. In Nepal, the import duty on finished goods has been reduced by at least one level compared to the duty on raw materials imported by industry. Similarly, in the budget, the road maintenance fee for vehicles running on petroleum products has been increased. The road maintenance fee charged at the rate of 8 percent has been increased to 10 percent.
Similarly, the road maintenance fee for diesel-powered cars up to 2,000 cc has been increased from 8 percent to 10 percent.
The 10 percent road maintenance fee for petrol cars and diesel cars with engine capacity of more than 2500 cc has been kept unchanged. Excise duty rates on alcohol, beer, tobacco and cigarettes have been increased.
Excise duty on cigarettes has also been increased by 3 to 4 percent. Increasing taxes can potentially increase the government’s budget surplus under certain circumstances. Here is a general explanation of how it might work:
Increased Revenue: When taxes are raised, the government collects more revenue from individuals and businesses. This additional revenue can help increase the overall income of the government.
Reduced expenses: In some cases, tax increases can also lead to reductions in government spending. This can happen if the government decides to use additional revenue to pay down debt or reduce budget deficits. By reducing spending or allocating more revenue to repay debt, governments can improve their fiscal position and potentially increase budget surpluses.
Fiscal Policy: Tax increases can be part of a broader fiscal policy strategy aimed at increasing budget surpluses. If the government is running a deficit, tax increases can help fill the deficit and go into surplus. Economic impact: It is important to consider the broader economic impact of tax increases. Higher taxes can affect consumer spending, business investment, and overall economic activity. If a tax increase leads to a significant slowdown in economic growth, it could potentially offset the gains from higher tax revenues, resulting in a smaller-than-expected increase in the budget surplus.
Behavioral responses: In addition, individuals and businesses may change their behavior in response to higher taxes. For example, individuals may work less, save more, or engage in tax avoidance strategies to reduce their tax burden. These behavioral responses may affect the overall effectiveness of tax increases in generating additional revenue.
Overall, while tax increases may contribute to an increase in the government’s budget surplus, the actual effect will depend on a variety of factors, including how the additional revenue is used, the broader economic context, and how individuals and businesses respond to tax changes.
Nepal’s budget 2081/82 has reduced import duty and excise duty on raw materials of industries such as medicines, induction stoves, thread, helmets, incense sticks, sanitary pads, cashew and almond processing, spring leaf making to give priority and support to indigenous industries.
To develop a clean tax system and expand the tax base by reducing the list of goods and services that are exempted by price addition, the system of discounting some items by adding price has been abolished. Similarly, the existing threshold for registration in the value-addition system for mixed transactions of goods and services has been increased.
To protect the indigenous industry, the government has taken a policy of increasing the import duty and excise duty on some ready-made goods. It is mentioned in the budget to reform the system that requires the recommendation of various agencies to get concessions on the import of raw materials for the industry and make the industrialists themselves responsible. Responsibility will be realized through self-proclamation.
To attract foreign capital, the government has reduced the income tax levied on interest payments on loans taken from foreign banks and financial institutions.
It is mentioned in the budget that a model of a double tax exemption agreement will be developed to increase investment inflows from potential investment countries. Based on that model, negotiations should be started with potential countries. It is said that the IT industry will be exempted from dividend tax if they capitalize their profits.
The government has also introduced a system of tax concessions due to changes in control when capital is increased to expand business capacity.
As a result, it is believed that startups and venture capital, private equity funds will benefit from this. According to the commitments and agreements made at the international and regional levels, the government has put forward a plan to formulate a new customs law to facilitate trade and promote investment.
The new budget increased the scope of tax on imported luxury goods to mobilize resources for the current financial year’s allocated budget. And, a policy has been taken to promote domestic production.
No doubt that to collect more revenue by reforming the tax administration, the state should make policies such as increasing the scope of taxes and reducing the rates. In the recent report submitted by the High-Level Suggestion Committee on Tax System Reform, it is mentioned that revenue collection can be increased by increasing the scope of taxes and reducing tax exemptions. The government had mentioned in the budget of the current financial year that it would form a high-level committee to make suggestions for reforming the tax system. It is said that the report concludes that the economic growth has not been achieved as expected due to the decrease in the revenue collection capacity of the government. The report also said that a separate agency is needed to look at the risk burden of taxes and changes are needed in the existing structure of the Revenue Tribunal.
The views expressed in this article are the author’s own and do not necessarily reflect People’s Review’s editorial stance.
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