Wednesday, April 21, 2010

IMF proposes new taxes on financial institutions

In the paper called "A Fair and Substantial Contribution by the Financial Sector", the IMF argues the case for two new levies to be applied on financial institutions in as many countries as possible: More here and here. The full document is here.

(1) A "financial stability contribution" to pay for "the fiscal cost of any future government support to the sector". The levy would be paid by all financial institutions, not just banks, initially at a flat rate but eventually refined so that riskier institutions paid more.

(2) A "financial activities tax", which would be levied on the sum of financial institutions' profits and the remuneration they pay.

Industrial Policy of Nepal 2010

Finally, the Nepali government is going to update its outdated industrial policy of 1992 with a new one. I have not got hold of the official document yet. The following is a brief highlight of what is coming:

  • High priority industries: IT, cement, hydropower, vehicle and motor parts, chemical fertilizer, bio-technology and adventure tourism
  • Priority industries: Agriculture, forest-based Ayurvedic and homeopathic medicine, manufacturing, minerals and handicrafts
  • Finance support to construct infrastructures such as roads, electricity lines and water supplies up to factory sites.
  • Promotional incentive package for export-oriented industries, specially SMEs. It promises 25 percent income tax concessions to small, medium and large industries that directly employ 100, 300 and 600 people, respectively.
  • Industries promoted by women to get income tax incentives.
  • Tax holidays for 10, 7 and 5 years to firms that invest respectively in highly underdeveloped, undeveloped, and underdeveloped industrial regions.
  • Promotion of Special Economic Zones (SEZs) and Agro-Export Promotion Zone (AEPZ). Firms located within in these zones to be exempted from customs duty, excise duty and VAT.
  • Income tax deductions for R&D and market promotion.
  • Simple exit policy to promoters, freeing them from long-term labor and other liability.
  • Subcontracting of production to promote specialization in the manufacturing process and to enable firms to meet international orders without investing further in its production units. This is expected to foster backward linkages.
  • Differential tariff rates for raw material imports and import of finished goods. The protection rate (difference in tariff favoring local manufacturing over direct import) will be 25 percent.

It sounds all good. I will have to see the full document to comment on specific topics. But, a general observation reading this article is that there seems to be no sunset clauses for industries. Any policy to help domestic industries should have a clear end sight, i.e. sunset clause. Policy help cannot be for infinite time as this dampens competition and leads to inefficiency. There should be policies to deliberately promote domestic industries without violating international trade treaties but it also should have clear sunset clauses. More comments when I get and read the full document.

Meanwhile, here is a list of loss making public enterprises, which borrowed Rs 1.6 billion in ten months instead of the allocated Rs 800 million for the whole fiscal year, in Nepal.