The private sector in Nepal has raised concerns over the prevalent issue of cross-border smuggling, urging the government to introduce a competitive and progressive tax system to address this challenge. This call to action comes amidst an economic summit titled ‘Fundamental Need of Economy: Joint Commitment from Political Leaders’ organized by Kantipur Media Group in Kathmandu on Sunday.
Kamlesh Agrawal, the president of the Nepal Chamber of Commerce, highlighted the significant price differences between Nepal and its immediate neighbor, India, ranging from 30 to 40 percent. He attributed this disparity as a driving force behind the thriving smuggling activities across the open border between the two nations. Agrawal emphasized the need for competitive tax rates to control smuggling effectively.
According to Agrawal, India has implemented a 5-6 percent goods and service tax on essential goods, while luxury items attract higher taxes. In contrast, Nepal has imposed a 13 percent value-added tax (VAT) on essential goods. The private sector argues that Nepal’s tax system is “upside-down,” where lower-income individuals pay a greater percentage of their income in taxes compared to those with higher incomes.
Agrawal questioned the logic behind imposing the same VAT rates on all types of goods in a socialist economy system, where the factors of production are under government control. He called for a restructuring of Nepal’s tax system, advocating for a reduction in tax rates on essential goods.
The private sector representatives cited three primary reasons for the current economic slowdown in Nepal. Firstly, the government’s policy of discouraging the private sector through import bans; secondly, the global economic slowdown’s impact; and thirdly, the unstable policies and political climate, which discourage investment.
Nepal’s GDP is projected to grow by 3.3 percent this fiscal year, driven by improvements in the tourism and hydropower sectors, according to the National Statistics Office. However, the construction, manufacturing, retail, and wholesale trade sectors are experiencing negative or near-negative growth, prompting calls for policy reforms in the upcoming budget to revitalize the private sector and address the economic slowdown.
Rajesh Agrawal, the president of the Confederation of Nepalese Industries (CNI), highlighted the challenges faced by small and medium entrepreneurs, with many leaving the country to work abroad due to tight policies. He emphasized the need for stable policies to encourage investment and shift towards domestic production.
Chandra Prasad Dhakal, the president of the Federation of Nepalese Chambers of Commerce and Industry, expressed concerns over investors’ lack of confidence due to frequent policy changes with changes in government. He called for the budget to address this issue and provide policy consistency.
Kalpana Khanal, a senior researcher at the Policy Research Institute, attributed the economic slowdown to expansionary monetary and fiscal policies during the Covid-19 pandemic, leading to higher credit expansion and a sharp rise in the credit-to-GDP ratio. However, the credit did not benefit the productive sector and instead fueled the real estate sector, resulting in an increase in non-performing assets for banks and financial institutions.
Madhu Marasini, the Secretary at the Ministry of Finance, acknowledged Nepal’s vulnerability as a small, open economy, highlighting the need for self-sufficiency and growth in the agricultural sector. He assured the private sector that the government is committed to facilitating businesses and welcomed political consensus for favorable policies.
As Nepal grapples with economic challenges, the private sector’s call for competitive tax reforms and a progressive tax system resonates as a crucial step toward curbing smuggling, boosting economic growth, and fostering an investment-friendly environment.
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