The budget of nearly 20 trillion rupees for the next financial year was presented by the finance minister of the federal government in the joint meeting of both the parliaments last week. The budget is in the process of being passed by the parliament.

As a whole, the country is currently experiencing low and unstable economic growth rate, low savings and capital mobilization capacity, inability to spend the allocated capital budget, unproductive general expenses and increasing financial management expenses, problematic financial sector, wide gap between imports and exports, low foreign investment, migration of youth abroad, to what extent the presented budget can be effective in addressing the issues. . 

Overall, Nepal is going through a cycle of weak economic growth with low income and employment, low domestic savings and investment. Although the external sector is considered strong, it has become strong not because of domestic investment, production, employment and export, but because of remittances brought by foreign employment . There's not much room for complacency in this either . There are also positive effects and challenges that the recently presented budget can bring to the current problems of the Nepalese economy and its burden.

Since the financial year 2075/76, the gravity of the Nepali economy seems to have shifted from the agricultural sector to the non-agricultural sector. In subsequent years, the growth rate of GDP has been around the growth rate of the non-agricultural sector . Analyzing the growth rate of the non-agricultural sector, the growth rate of three types of economic activities is very unstable and reaches negative in some economic years. These three sectors are manufacturing, manufacturing, and transportation/warehousing. They contribute about a quarter of the total non-agricultural domestic product . In FY 2080/081 the growth rate of the previous two sectors was negative . Due to fluctuations in these, the growth rate of the entire non-agricultural sector has become unstable. Adequate attention needs to be paid to these sectors, including agriculture, to boost domestic economic growth. If we look at the lending situation of banks, it is necessary to shift the investment of the banking sector to productive, construction and transportation/storage sectors in the current situation, which has reached almost 40 percent in retail trade and consumption. 

Strengths and Weaknesses

Overall, the budget is generally reformist. This does not bring much change in the economy. But it also has some positive aspects . First, it seems that the government is emphasizing on capital expenditure rather than financial arrangements. From the last financial year, the capital expenditure started to decrease compared to the financial system . But the government has realized this and is trying to gradually bring it to the reformatory path. In order to increase the capital spending capacity, there is no need to wait for the new financial year to start the programs under this, and there is a provision that they can start their preparation immediately . This has increased the possibility that the paper process can be started immediately and the budget can be released at the beginning of the new financial year. 

Another positive aspect is that the policy, rule and law formulation program regarding the establishment of land bank implemented as a trial three years ago is very positive . It is said that it will be implemented in 100 local levels in the first phase. It can be expected that about 30 percent of barren agricultural land in Mukuk can be brought into use. It also indicates that the program was announced without preparation a few years ago . On the other hand, the goal of becoming self-sufficient in rice within two years has been set, for this a policy has been taken to encourage the production of chaite rice. This is a very positive effort in a situation where food imports are increasing at a very fast pace. 

Safe crop promotion programs should be relevant to reduce the damage caused to food crops by wild animals in the context of population thinning in the hilly areas . But it is unclear whether this covers only the use of pesticides, the development of crop storage capacity, or also the reduction of human-wildlife conflict . As the population thins out in the hilly areas and with the expansion of the forest, the human settlement has to be harassed by the increase of wild animals. There is still a need for a solid program to protect crops from wildlife control.

Apart from this, there are many weaknesses in the budget . First, like the previous one, this is an ambitious budget. Looking at the level of the government's financial capacity and working style, neither the projected revenue can be raised, nor can the government spend the budget of nearly 20 trillion . On the other hand, the discipline of public spending has not shown signs that it can be enforced. It has tried to prevent the transfer of budget funds from projects of national pride, but there is a high trend of transferring funds from one title to another. Without controlling it, overall financial discipline will not be improved . If we look at the Auditor General's report of the last two financial years, it seems that 5 and 12 percent of the total budget has been transferred from various titles. The establishment of the Budgetary Management Fund as arranged by the then Finance Minister Suvarna Shamsher in 2008 and 2016 is very relevant in terms of financial discipline and transparency.

In order to reduce the environmental pollution of the valley, a policy has been taken to move the industries outside, but it is not clear what the strategy will be and how to give incentives to move the industries . In this way, it has come as a policy effort, but since there is no clear strategy on how to move it forward, it will bring concrete achievements in the next fiscal year. One can hardly be optimistic .

Tax regime

The private sector is excited about the budget . This budget has kept the tax rates on other economic activities and consumption unchanged, apart from increasing the excise duty on cigarettes (both premium and cheap cigarettes), besides providing for taxation on tobacco, khaini, gutkha and other panmasalas, aromatic betel nut, mouth fresheners and hookah flavours, which are harmful to health . So how much additional revenue can be raised through tax reform depends on the extent to which informal economic activities can be brought into the formal sector . In the event that there is no major achievement in this, the mobilization of revenue may remain around the old balance .

There has been no fundamental change in the trend of international trade in the last decade. But the share of exports in the total trade was very low (about 6 percent) in the financial year 2073/74, but it gradually increased in the following years and is currently around 9 percent. The presented budget does not seem to make any policy efforts to improve it. Other than removing the provision of bank guarantee to be kept by the exporting and importing industries for taking EXIM code for import-export, there are no concrete efforts to promote exports.  In the budget statement, the government has mentioned the amendment of laws for the protection of intellectual property related to the achievements of all productive sectors including agriculture, but that is not enough. The lack of facilitation is more troubling than the legal complexity. Nepal does not have intellectual property laws such as National Intellectual Property Policy 2073, Patent Design and Trademark Act 2022, Copyright Act 2059, Collective Mark Registration Guidelines 2067, but the progress made by Nepal in the protection of intellectual property is very slow. With the amendment of the law, the protection of patents, designs and trademarks registered in the Department of Industry became easier within the Nepali market, but in the global market, exports are not facilitated without registration in the World Intellectual Property Organization. In this, only the amendment of the Nepali law does not have a special meaning. The Department of Industry needs the government's support to provide access to the World Intellectual Property Organization and to establish intellectual property rights for farmers and industrial producers who want to protect their intellectual property in the international market. Based on the Nepal data of 2023 of the World Intellectual Property Organization, 111 patents, 50 industrial designs, and 13550 trademark applications have been registered so far, including both those living in the country and those living abroad. In addition to establishing their rights, facilitating export promotion should be the priority of the government.

In terms of income tax, it seems that the government should pay special attention to the income received from the capital market and its tax. When tax is applied separately according to the 'script' in share trading, it has become a situation where tax is paid on the profit but the loss cannot be adjusted . If share trading is the source of the family's entire income, it is appropriate to tax the whole according to the slab according to the Income Tax Act. The complex and unfair rule that the government collects tax revenue from profitable share investments, but cannot calculate net income by including loss-making transactions, has discouraged small and retail investors in the capital market. Although the Income Tax Act has been taken into account, it has not been simplified and justified. In addition, provision should be made to include the effect of inflation in determining net income .

Another aspect that the government should pay attention to in the capital market is that bonus shares will be taxed, but investors are arguing that since the bonus shares are distributed from the company's income and have already been taxed, double taxation will result if the bonus shares are also taxed. In this it is justified to follow international good practice .

There is a situation where income tax is being deducted in advance at different rates for different periods in shareholding . This type of tax is different for periods of less than one year and more, for institutionalized share investments and for unlisted companies . As the tax rates are determined with sufficient attention to this, the demand of share investors is that it should be considered as the final tax. In practice, the situation is being collected as the final tax, but the law has provided a way for the tax officer to review it because the Income Tax Act is not clear. Tax administration will also be simplified if it is considered as the last even if the rate is changed .

Roadmap for reform

After the establishment of the democratic government with the change of 2007, the government in Nepal has been preparing the annual budget regularly. However, there are still many policy and procedural weaknesses in the budgetary system of the Government of Nepal. Without reviewing the achievements of the previous financial year's budget with its principles and priorities, the budget is started by reviewing only the form of the economy. Also, the budget formation is affected by the psychology that the next year's budget should be bigger than last year's. Coming out of this kind of mentality, the budget should not be made more ambitious than necessary . 

There is a situation where financial transparency is weakening along with federalism in Nepal. Income and expenditure related to various fees, fines and aid, which are blindly imposed due to lack of resources at the state and local levels, should be made more transparent. On the other hand, without cutting the financial equalization grant, some part of it can be transferred to complementary and conditional grants if necessary, it also ensures financial availability along with capacity building of state and local governments.