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historical Development of Tax laws in Nepal

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
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
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)