Kathmandu, May 21: Experts participating in discussions on the next budget at the Finance Committee of House of Representatives have suggested that the government reduce the Value Added Tax (VAT) rate from 13 percent, increase the personal income tax exemption threshold, and introduce structural reforms in tax and debt management to stimulate the economy.
They stated that declining market demand, rising living costs for the middle class, and a weakening business-friendly environment have made reforms in the tax structure and fiscal federalism necessary through the upcoming budget.
Speaking at a meeting at Finance Committee, tax expert Rup Khadka said the government should seriously review reducing the VAT rate to encourage demand growth and create a more positive business environment. During the budget discussions, he suggested lowering the current 13 percent VAT rate to 12, 11, or even 10 percent.
According to him, decisions on reducing taxes should not focus solely on VAT but should involve an analysis of the overall tax structure. Khadka cited the example of imported goods being subject to VAT, excise duties, and customs tariffs, noting that the government can generate necessary revenue through multiple channels.
He stressed that the current economic situation requires flexibility in the tax structure. At a time when consumption and market demand are weakening, he argued that lowering taxes could increase consumers’ purchasing power.
Economist Chandramani Adhikari said that the personal income tax exemption threshold should be significantly increased considering the growing cost of living for middle- and lower-middle-income groups.
He noted that prices of most essential goods and services have risen, making the current tax exemption threshold unrealistic. According to him, inflation has particularly affected the categories where middle- and lower-middle-class households spend most of their income, making an increase in the tax exemption threshold necessary.
Adhikari also highlighted Nepal’s strong economic dependence on India, stating that price changes in India directly impact Nepal. Since around 61 to 64 percent of Nepal’s trade is with India, inflation or price reductions there have a direct effect on the Nepali market.
He cited India’s provision allowing annual income up to 1.2 million Indian rupees to be tax-exempt and argued that Nepal’s current exemption levels—Rs 600,000 for married couples and Rs 500,000 for single individuals—are too low. He suggested increasing the personal income tax exemption limit to at least Rs 1 million to Rs 1.2 million to provide relief to middle-class families.
Former Vice-Chair of the National Planning Commission Prakash Kumar Shrestha said Nepal’s fiscal federalism system suffers from serious imbalances and that the budget should address them. He pointed out that while all three levels of government hold large amounts of unused funds, the federal government continues to borrow money and pay interest.
Shrestha argued that amendments to the Intergovernmental Fiscal Management Act are necessary to address the issue. Without structural reforms, he warned, the contradiction of the government borrowing while billions of rupees remain idle in savings would continue.
Industrialist Hari Bhakta Sharma said domestic industries are becoming less competitive because raw materials face higher taxes while finished goods are imported at lower tax rates. He added that excessive taxation during the initial stages of industrial establishment discourages investors.
Citing the pharmaceutical industry as an example, Sharma said businesses in Nepal are required to pay taxes of around 38 percent immediately after starting operations. He also claimed that the current Industrial Enterprise Act is outdated and not suited to Nepal’s needs, emphasizing that a new legal framework is essential for creating an investment-friendly environment. #Nepal
