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Background
The Tax Expenditure (TE) refers to the foregone of tax revenue resulting from specific provisions within tax laws, encompassing exemptions, exclusions, preferential rates, tax credits and tax deferrals. Broadly, the TEs are calculated in four broad categories namely, Exemption, Credits, Concessions and Rebates.
Tax Expenditure (TE) in Nepal
Nepal has recognized the need for the study of TE in order to accomplish the goal of making the tax system transparent as well as to improve financial accountability while providing the Ministry of Finance (MoF) evidence-based policy input in the budgeting process.
The MoF has included the Strategy to “Publish Tax Expenditure Details” (Strategy Code 20103) in the Domestic Revenue Mobilization Strategy (DRMS) in 2024 with the action code 2020301 “Develop an integrated online portal to manage Master List of tax exempted and rebated goods along with quantity, foregone customs, VAT, Excise, and other taxes”, 2010302 “Integrate all tax expenditure data from the Department of Customs and the Inland Revenue Department” and 2010303 ”Publish Tax Expenditure Report annually”.
Nepal has initiated the TE Study from FY 2021/22. This endeavor is prompted by the realization of the substantial revenue foregone due to tax concessions, exemptions, rebates and credits. The primary objective of the TE Study is to comprehensively assess the impact of these reductions in tax liabilities, which directly affects fiscal policy decisions made by the Government.
In Nepal, there are two regulatory bodies under the Ministry of Finance for taxation, namely Inland Revenue Department (IRD) and Department of Customs (DoC). IRD looks after income tax, VAT and excise duty, while DoC looks after customs duty, VAT on import/export and excise duty on import/export.
The calculation of TE in Nepal almost aligns with the guidelines issued by International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD). The "Revenue Foregone" approach, widely employed on a global scale, serves as the methodology for estimating TE in Nepal. It involves calculating the actual tax liability and then comparing it with the benchmark. The resulting difference represents the tax revenue foregone or TE.
The study of the tax exemption has become essential in order to determine the support for the policy that the state should adopt in connection to the tax exemption in order to build a transparent system so that the citizens, taxpayers and interested investors are also informed in this regard.
The legal references for the study of TE in Nepal are Income Tax Act 2002, Value Added Tax Act 1996, Excise Duty Act 2002, Customs Duty Act 2007 and annual Finance Acts.
IRD had initiated the study of TE on income tax and VAT for FY 2021-22, and GIZ Revenue Administration Support Project has initiated the study of TE on income tax, VAT and excise duty for FY 2022-23 and 2023-24. Reanda Nepal has been involved as consultant for the estimation of TE on both of these assignments.
Reference/Citation
Ministry of Finance, Government of Nepal
Inland Revenue Department, Ministry of Finance, Government of Nepal,
