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FinMin defends announcements in the budget

FinMin defends announcements in the budget
A day after presenting his first budget, Finance Minister Dr. Prakash Sharan Mahat defended the budget announcement on the constituency infrastructure development program, changes in tax arrangements on the import of electric vehicles (EVs), and the capital gains tax (CGT) imposed on the mergers & acquisitions (M&As) and further public offerings (FPOs) of banks and financial institutions. In a post-budget press meet on Tuesday, Mahat said that increasing tax on EVs up to 100 KWs ‘does not mean the government is discouraging the usage of EVs’. The budget for FY 2023/24 has imposed a 5 percent customs duty and 10 percent excise duty on EVs of 50-100 KWs, while reducing the customs duty and excise duty on electric vehicles of 100-200 KW. EV dealers accused the government has paid attention to the demands of influential importers of internal combustion engine automobiles and that the decision will drive the prices of EVs up to 100 KW by Rs 700,000 to Rs 900,000 per unit. Mahat also said that large funds have been allocated to expedite the development of big projects to fulfill the needs of the country. "We are building projects like the Sunkoshi Marin Diversion Multipurpose Project and Bheri Babai Diversion Multipurpose Project with our own investment. A huge amount of money has already been spent on the projects," he said Mahat during the press meet held at the Finance Ministry. "The size of the budget increased to expedite the projects across the country." In the next fiscal year's budget, the government has prioritized the development of large and national pride projects including Sikta Irrigation, Bheri Babai, Sunkoshi Marin, and Naubasta Industrial Park in Banke, among others.

The finance minister also claimed that the government has 'not levied taxes on the income from M&As and FPOs of banks and financial institutions. He asked the stock investors 'not to think that they have been taxed separately' as the arrangements have come per the provisions of the Financial Act which was also recommended in the Auditor General's report. The imposition of the capital gains tax on the income from M&As and FPOs has received widespread criticism from stock investors who see the new tax arrangement as unhelpful to end the downturn in the capital market.

Mahat also tried to defend the announcement to revive the constituency infrastructure development fund. In the budget speech, he announced that members of parliament will receive Rs 50m in the current fiscal year for development works in their respective constituencies. Many see the controversial program, which was scrapped by the then finance minister Bishnu Paudel two years ago, as fostering corruption in the country. The finance minister insisted that the program incorporated in the next fiscal year's budget 'is not the Constituency Development Fund but the Parliamentary Constituency Development Program' and that MPs will not have a big role to implement the program. "It is the concerned ministry that will implement the program," he said. In the budget for FY 2023/24, the government has increased taxes on the number of goods and services and introduced new taxes such as the 'luxury tax'. Similarly, the exemptions of Value Added Tax (VAT) and excise duty provided to various goods and services have been scrapped. Finance Minister Dr. Mahat on Monday announced the scrapping of VAT exemptions on 170 types of goods and services and excise duty on 370 types of goods and services. A two percent ‘luxury tax’ was imposed on services provided by five-star or above hotels and resorts; imported liquor; diamonds; pearls and precious stones embedded with gold and jewelry worth more than Rs 1 million. Those going for foreign trips need to pay a five percent tourism tax on the trip package. Packages for foreign visits by Nepalis will also be expensive as the financial bill has made a provision that Nepalis going abroad for a visit will have to pay as much as five percent of the total payment they make as ‘tourist tax.’ The companies facilitating foreign employment need to pay one percent of the total fee they charge to the migrant workers as foreign employment service charges. Excise duty has been hiked on beer and liquors as well. Income tax is required to be paid by high earners-above Rs five million a year will have to pay more income taxes. Analysts say the hike in taxes can affect economic growth at a time when the country's economy is surrounded by multiple challenges. “Taxation is one of the tools to support growth,” said an economist. “But increasing the taxes is contrary to growth expectations.” The government has targeted a modest growth of six percent in the next fiscal year 2023/24. For the current fiscal year, the growth target was eight percent but the economy slowed drastically due to external and internal economic headwinds stemming from the depletion of forex reserves, the Russia-Ukraine war, surging inflation, and the liquidity crisis. The government has sought to discourage imports of certain goods on which Nepal is more or less self-reliant, by discontinuing any tax incentive for their imports. The budget announced that imported cement, iron and steel, iron and plastic pipes, zinc sheets, and electric cables won’t get any customs duty exemption. “Even though the government’s policy to support domestic industries by removing any tax exemptions on imported goods is good, domestic industries are also not getting any other support through tax policy,” another economist said. On the other hand, the government’s spending is also sure to decline with the government downsizing the size of the budget itself. There is a question about whether the reduced allocation will also be spent like in the past years. The government’s capital spending as of May 29 stands at just 36 percent, according to the Financial Comptroller General Office (FCGO). The government has also scrapped the tax and non-tax support provided to the sectors affected by the Covid-19 pandemic. “All these factors will dampen the aggregate demands in the market,” said a Former finance secretary. “The curtailed demands in the market will hit economic activities and ultimately economic growth,” he added. One of the demands that the private sector had been making for a long time is the reduction in interest rates on loans. But the government has decided to increase tax on interest income to six percentage points up from 5 percent earlier. “It is unlikely to encourage depositors from depositing money in the banks and decreasing interest rate on deposit could be major concerns,” the former finance secretary said. But Finance Minister Mahat chose to remain quiet on the matter of interest rate paving the way for the Nepal Rastra Bank to deal on the matter. “Nepal Rastra Bank will introduce a monetary policy to help attain the objective of this budget,” said Mahat.

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