Sunday, November 18, 2018

Nepal Airlines seeks bailout, federal government to address tax overlaps and latest private sector diagnostics

From The Kathmandu Post: Less than four months after making the largest jet purchase in the history of Nepali aviation, Nepal Airlines Corporation, which was on a mission to reclaim its long-lost glory, said it is running out of cash and teetering on the edge of bankruptcy.

A statement made public on Thursday by the national flag carrier through a “white paper” shows that the corporation’s monthly cash deficit has reached Rs317.79 million since inducting the first of two long-range Airbus A330s into its fleet. Before that, Nepal Airlines had a monthly revenue surplus of Rs12.54 million. Since summer, Nepal Airlines’ debt-to-equity ratio, which measures the financial health of a company, has swelled to 39.82 percent from 14.40 percent. A higher ratio indicates the company is receiving most of its financing from borrowing, threatening bankruptcy if business continues to decline.

According to the white paper data, revenue earnings from the two wide-body jets from August 1 to September 15 stood at Rs264.8 million, while the expenses nearly tripled to Rs756.6 million, in addition to a staggering deficit of Rs491.8 million. At the moment, the two A330 jets are being utilised for less than seven hours daily, less than half of the required flight time to generate a decent profit. The revelation about the dire state of Nepal Airlines’ finances comes on top of the corporation’s massive loans to various institutions—its long- and short-term loans stand at Rs41.73 billion and it owes more than Rs3.66 billion in interest annually.

The national flag carrier, instead of scoping pilots for the new aircraft, followed its traditional practice—to get the planes first and find the pilots to fly them later. It still has at least three planes sitting on the tarmac at the Tribhuvan International Airport while it frantically looks for capable pilots. It was indeed a gargantuan project to equip the airlines with the youngest fleet in the country—inducting two Airbus A320 aircraft in 2015 and two additional wide-body A330 in 2018. The induction of four jets had been described as a game-changer for the corporation—and the country, allowing the airlines to compete with other international players on long-haul routes to Europe, Japan and the Middle East. However, some airlines officials say the corporation did not plan its operations efficiently.

From The Kathmandu Post: The Finance Ministry presented the proposal to the Cabinet for implementing the report that calls for scrapping several taxes levied by the local and provincial governments while broadening the tax base of the sub-national administrations.

The report recommends that the arbitrary taxes should be scrapped and a composite federal revenue law introduced to provide legal clarity. Finance Ministry officials confirmed that the government will instruct the provincial and local governments to follow the recommendations. The Thapaliya-led committee was formed after an uproar over hefty increments in taxes imposed arbitrarily by the provincial and local governments.

The committee concluded that only the federal government has the authority to levy tourism fees, which has to be shared between the provincial and local governments. It also recommends an end to the practice of non-state actors such as various committees and projects collecting tourism-related taxes contrary to the spirit of the constitution. The high-level committee also suggests that local governments cannot impose business taxes—on industries, trade, profession or occupation within a particular local federal unit—on transactions. Such taxes can be imposed only during the registration and renewal of business ventures. The report deems the Patake Sawari Kar (vehicle tax) and the District Export Tax as unconstitutional as they go against Article 236 of the constitution.

While the erstwhile District Development Committees imposed ‘District Export Tax’ on the sale of such goods to another district, the new constitution banned it. However, Clause 11 of the Local Government Operation Act allows the local government to collect sales and export fees on such items. After the Financial Act introduced by the federal government amended the provision of the Local Government Operation Act-2017, local governments complained that the changes breached their right to collect wealth tax. The report suggested implementation of the Act’s provision. The report also stresses the need for a law on taxing the extraction of stones, gravel and sand as there is no legal clarity over their use.

Private sector diagnostics 

The IFC recently released country private sector diagnostics, which identifies sectors that have potential to support Nepal's growth. In addition to hydropower, the other identified five sectors that have potential to have major impacts on Nepal's growth trajectory are tourism, agribuisness, education, health, and IT. 

The private sector is constrained by institutions/governance and infrastructure. With key sectors such as tourism and agribusiness being highly reliant on connectivity, strengthening infrastructure is the other critical challenge for private sector development. A gap in technical skills and managerial capabilities is constraining growth-oriented firms from scaling up and rising up the value chain. Access to finance and inefficient land markets are also key constraints. Excessive barriers to foreign investment and foreign-exchange transactions also constrain the private sector. Policies on land acquisition and the use of land as collateral, in particular, deter foreign investors and lenders, restricting private sector access to long-term finance.

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