Thursday, July 5, 2018

Import-based revenue account for 45% of tax revenue in Nepal

Finance ministers in their budget speech focus exclusively on two issues: new or augmented expenditure programs and revenue mobilization plan to cover additional expenditure without drastically increasing budget deficit (although this and previous finance ministers unveiled budgets with larger-than-expected deficits). Implementable reform measures to enhance public service delivery and effective budget execution are usually missing or mentioned cursorily. The core focus of expenditure plan and associated reform measures are to attain high and inclusive economic growth by transitioning the remittance and monsoon based economy to a one that is based on more robust sources of growth (industrialization, commercial agriculture, tourism, innovation, etc). For this, the government requires both revenue and knowledge transfer (comes usually with foreign grants, loans and investment).

However, meeting revenue target supersedes all other objectives of MOF (which sometimes is labelled Ministry of Revenue instead of Finance). The strategy for meeting ever-higher revenue target is dependent on import related taxes and duties, and revenue administration’s efficacy. The core strategy of raising more revenue from duties on imports to finance an ever-increasing expenditure plan that aims to change the structure of the economy is at some level self-defeating (unless the expenditure plan, i.e. budget execution, is realized faster than expected to create a base for generating higher non-trade/import related revenue). Else, we are always at the mercy of remittance income!

Anyway, this dynamics is not going to change anytime soon and the economy will continue to bank on customs duties and taxes on trade as a core source of tax revenue to finance expenditure. The share of trade related revenue (total customs revenue including taxes on exports, VAT on imports, import duties in the form of excise duty) in tax revenue is about 46%. In FY2018, this was equivalent to about 9.6% of GDP.  Note that total tax revenue is about 21.9% of GDP). Non-tax revenue is about 2.3% of GDP. Total receipts (tax and non-tax revenue plus foreign grants) is about 25.4% of GDP. 

Import related revenue increased from 6.5% of GDP in FY2012 to 9.6% of GDP in FY2018. It is projected to be about 11.6% of GDP in FY2019.  This indicates how much the economy is reliant on import-based revenue to finance its rising expenditure. As long as imports are increasing, largely financed by remittance income, tax revenue will continue to rise. It will rise even more if excise duties on some imported goods are increased. There isn’t much room to raise trade/custom tariffs due to various multilateral and bilateral treaties.  

Total expenditure was about 34.8% of GDP (23.3%, 7.9% and 3.6% as recurrent, capital and financial provision expenditures, respectively). From FY2019 onward, federal government has to share 30% of VAT and 30% of domestic excise duty collections with subnational governments (it further squeezes available revenue sources and without a reduction in expenditure, it increases federal budget deficit).