The federal budget unveiled on May 29 by Finance Minister Yubaraj Khatiwada has expanded revenue base and emphasized job creation, with the ultimate goal of improving the lives of ordinary citizens. In other words, the budget attempts to make positive changes in the lives of low-income people by taxing high- and middle-income individuals. While individuals with annual income of over Rs 2 million have to pay a high tax rate, those earning below Rs 400,000 have to pay only 1 percent income tax. In fact, the budget tries to change other forms of taxation, not just income tax. Such amendments are aimed at bringing everyone into the tax bracket. This entails not just more transparency in financial transactions but also systematizing them through banking channels.
In a society with a huge informal economy, the budget tries to convey another message as well: stop over-consumption. The hike in excise duties on motorbikes with engine capacity higher than 150cc and other vehicles over 1000cc capacity hints at this message. This has reinforced the old mentality that vehicles are luxury items.
The auto sector, which contributes annual taxes worth some Rs 1 billion, had been slowly collapsing after the tightening of auto loans in 2017. The budget has dealt another blow to the sector. Anjan Shrestha, former chairman of Nepal Automobiles Dealers’ Association, says, “We may not be able to rise again. This budget has wrecked our sector.”
Tightening the screws
The auto sector is but one example; the budget has caused many other entrepreneurs to lose sleep. The private sector in general will bear the brunt of the changes in taxation. The first hint of it came right after Khatiwada was appointed finance minister, when he issued an instruction to tighten customs procedures. Implicit in his instruction was the intent to stop indiscriminate imports, which have increased significantly in recent times.
Khatiwada also made life difficult for small businesses that were already in dire straits since the Goods and Services Tax (GST) came into effect in India in July 2017. The finance minister’s thinking is also reflected in his encouragement of the use of letters of credit. In other words, he wanted to curb import transactions carried out through other payment methods besides a letter of credit.
Finance Minister Yubaraj Khatiwada acknowledges that implementing the budget is a challenge. In a review session on May 30, a day after the budget, he said, “Businesses have to pay their due to the state. Those who don’t fulfil their responsibilities will be made to do so from now on.” He added that tax evasion has been categorized as financial crime and those committing it won’t be spared.
Despite many improvements in the taxation system, the revenue collection won’t be enough to finance current expenditure. This will exert heavy pressure on the government’s current account from the very first day of the upcoming fiscal. The current account is already strained as the national budget has to be allocated to three tiers of government. Data from the central bank indicate that in the first nine month of the current fiscal, the country is running a current-account deficit of Rs 171 billion. The economy will face further complications if rising imports cannot be curbed.
The production equation
Economist Madan Kumar Dahal thinks that the budget tries to incorporate all sectors. Nonetheless, “the 8 percent growth target will be difficult to achieve without a 40 percent capital expenditure. Because the revenue collection won’t be enough for even regular expenditures, high domestic and foreign loans will be necessary,” he says. The budget has set a target of 23.9 percent capital expenditure for the next fiscal, 0.1 percent lower than the current fiscal’s capital expenditure.
In the review session, Khatiwada said that the budget rolls out red carpet for investors in export-oriented industries. But although the finance minister stresses export promotion to reduce the country’s ballooning trade deficit, the task is easier said. Instead of focusing on export promotion, it might be better to raise domestic production in order to reduce imports.
In a meeting of the Nepal Communist Party Parliamentary Committee held on May 30, Prime Minister KP Sharma Oli extolled the budget, claiming that it was the best-ever. “This budget will help the country acquire a ship and will bring railway lines to Kathmandu.” He asked everybody to lend their support to the budget, which he argued paves the way for prosperity and, ultimately, socialism.
Others, however, are less sanguine.
Former vice-chairman of the National Planning Commission Govinda Raj Pokharel thinks that the budget has spoilt the country’s investment climate. “The taxation system is unreasonably harsh on the private sector. This won’t help boost private investment,” he says.
To increase investment, the government, the private sector and the international trade organizations all have important roles to play. Attracting foreign investment calls for a favorable investment climate. Former finance minister Ram Sharan Mahat thinks the budget has completely failed on that front. He also thinks that an 8 percent growth rate is talk only.
Flying horse, crawling snail
Former Prime Minister Baburam Bhattarai derided the budget by comparing it to a famous children’s game (one in which they expect a fish but get a frog instead). Immediately after the conclusion of the budget speech, he tweeted, “In all respects, this budget is a continuation of previous ones. What was needed was structural change to make a leap toward prosperity. That was seen neither in revenue collection and domestic and foreign investments, nor in regional allocation and devolution of authority to provincial or local levels.”
As Bhattarai claims, the federal budget incorporates even the tasks that the constitution has devolved to the local level government, such as the construction of zoos, tourist trails and handicraft exhibition centers. Such provisions, coupled with frugal capital expenditures, indicate that the budget is populist.
Nepali Congress came down heavily on the budget. “On the campaign trail, the parties heading this government claimed that the NC’s economic policies were flawed. But this budget is a strange hodgepodge of NC’s policies and communist orthodoxies,” NC central working committee concluded a day after the budget’s announcement. “It promises to be a flying horse, but one that delivers results at a snail’s pace.”
BY SHREEDHAR KHANAL | Kathmandu
