Despite paying income tax of up to 39 percent of their income, citizens have not been able to enjoy any facilities in the areas of health, education, transportation, drinking water, social security, or administrative services.
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Even though Nepalis pay the highest income tax in South Asia, the services they receive from the state are the lowest. Even though they pay up to 39 percent of their income as income tax, the public services they receive are weak. Citizens have not been able to experience any benefits in any area such as health, education, transportation, drinking water, social security, and administrative services. Thus, the imbalance between high taxes and low benefits has now become a complex issue in Nepal's tax system. Taxes should be considered only as a natural obligation of citizens, but since the message is being sent that citizens are being squeezed in the name of taxes, the government should make citizen-friendly changes in tax policy.
Taxes are mandatory for the functioning of the state. Since they are mandatory obligations, citizens can neither say that they do not pay taxes, nor can they claim that they have paid so much tax, so they need so many benefits. However, just as citizens have a tax liability, it is the government's responsibility to provide benefits commensurate with the tax. The validity of taxes is established only when citizens feel that they are receiving benefits from the state in return.
In other countries, citizens receive excellent facilities from the state in areas such as health, education, social security, unemployment allowance, old age allowance, and public transportation. In Nepal, although old age allowance and limited health facilities are available, taxpayers are forced to pay high fees for essential services such as health, education, and transportation despite paying taxes to the state. Dissatisfaction with the tax system has increased as they have to pay high fees for essential services even though they are paying a large portion of their income as taxes to the government.
By imposing taxes up to 39 percent, it has sent a bad message to the international community that it is a high-tax country. There has been a call to reduce the high tax rate and increase the scope to maintain Nepal's good image in the outside world. The government should address this.
The government needs a balanced system that provides relief to low-income citizens, reduces the burden on the middle class, and imposes fair taxes on high-income and wealth. Another serious problem in Nepal's tax structure is the narrow scope of taxes. There is about 40 percent more informal sector in Nepal. The number of industrialists is low. Therefore, the population falling under the tax net is limited. Every government has said that it will reduce tax rates and expand the scope, but it has chosen to impose higher taxes on salaried workers and formal businesses, which are easy to find. Therefore, the tendency to evade taxes and hide income has increased in many, which has encouraged the informal economy. The fact that almost half of the businesses in Nepal are still in the informal sector is a sign of this.
The policy of only increasing tax rates in the name of increasing revenue collection is not a long-term solution. The fact that the share of income tax in GDP has remained stable or decreased in recent years shows that revenue will not increase at a high rate alone. On the contrary, excessive taxes can discourage investment, consumption, and production. Currently, the Nepalese economy is sluggish. The private sector has not been able to expand. Employment creation is weak. At such a time, the government needs to be aware that the tax policy that reduces the purchasing power of the middle-class consumers is likely to be counterproductive.
It is claimed that in Nepal, those with high incomes are taxed at higher rates and those with low incomes are taxed at lower rates (progressive tax), and that this type of system will reduce the unequal distribution of income in society. But it is a fact that the practice of imposing higher rates on high-income individuals has narrowed the tax base in various countries, and the tendency of taxpayers to evade taxes due to high rates has developed, weakening tax implementation. Therefore, there is a demand that the government should reduce the tax rate to 39 percent.
Similarly, even though the government says it will provide tax exemptions for income up to 5 lakhs, it has been imposing 1 percent social security tax. That is injustice to the citizens. This should also be repealed. And, the tax scope should be expanded by increasing the minimum tax exemption limit.
Saying that the country will not rise until the middle class is safe, Finance Minister Swarnim Wagle has been saying that the government will also adopt a policy of reducing the tax burden on such a class. He says that the tax system should also be reformed in the course of restructuring the economy and reduce the tax burden on the middle class. This statement of Finance Minister Wagle should be reflected in the upcoming budget.
Therefore, the government needs a balanced system that provides relief to low-income citizens, reduces the burden on the middle class, and imposes fair taxes on high incomes and assets. Similarly, if effective tax management can be done in capital gains, property, and unproductive sectors, the income tax burden can be reduced to some extent. It is equally important to make tax administration digital, transparent, and predictable. The government has indicated that it will reduce the tax burden on the middle class through the upcoming budget. That may be welcome. But changing rates alone is not enough. The tax system should be linked to production, employment, and expansion of the formal economy.
