Friday, December 5, 2008

Price floor on rent in Nepal

The left-wing Finance Minister Bhattarai is scrambling to meet revenue target set by him in this year’s budget. Many said that around Rs 42 billion in tax revenue is very ambitious. Recently, the government decided to give bonus of up to 200% on the basis of per worker revenue collection in customs offices. Now, to bring house rental business under the tax net, the government is imposing a minimum price for rent in major cities.

This means that house owners will have to pay a fixed (minimum)amount of tax even if rent charged by them is below the one earmarked by the government. If the prevailing equilibrium rent (price) is below the one set by the government, then house owners will be forced to pay rent tax that is not consistent with the price charged by them. So, market rent price will rise till the point where the price floor corresponds to the 10% flat rent tax imposed by the government. On the other hand, if the rent price fixed by the government is below the market price, then either rent price will come down or it will not have any effect other than increase in tax revenue from house rent sector.

Here is the article.

Kapildev Ghimire, director general at Inland Revenue Department (IRD) told the Post they would conduct a survey later this month on rents in various business and residential areas of Kathmandu and major cities outside Kathmandu to fix reference prices.

He made it clear the government would collect tax according to the rent it sets even if it is found that the rent is lower than the fixed amount.

"Fixing minimum prices has become necessary to discourage those who show very little rental prices in paper to evade tax ," he said. The government will start collecting taxes by effectively enforcing the law from mid-January after completing the survey."

The government has set a revenue collection target of Rs. 1.03 billion through rental tax in the current fiscal year while the amount was Rs. 706 million in the last fiscal year.

[I have microeconomics-related demand and supply graph in mind but can’t spend time in drawing that in MS Word because it’s finals week and I am overloaded with exams and papers. Next time, if this issue emerges again, then I’ll definitely include a figure to explain the effect of this price floor.]


This news piece caught my eye. The vegetable ghee industry is perishing in Nepal. Why? due to high import taxes on raw materials, high transportation costs, labor troubles, and lack of power. The high cost of production has made Nepali ghee uncompetitive in the Indian market.

The ghee industry has been facing the squeeze for the last 10 months. There are 16 vegetable ghee factories in Nepal. High taxes in the import of raw materials from Kolkata of India, high customs duty on export, labour troubles, lack of power and poor transportation facilities have pushed these factories to the verge of extinction, said Laxman Nebatia of Swastik Ghee and Oil Industry. The closure of ghee factories has caused a loss of Rs 2,400 million. The government should revive the ghee industry, said Pradip Murarka of Nepal Ghee and Oil Industries’ Association. High import duty and export taxes have spoilt the competitiveness of Nepali ghee.