Economy Down, Tax Collection Up
Good Time to Reduce Tax Rates
Reading between the two data sheets released officially by the government one cannot stop wondering how the tax collection can go up so high exceeding the target while the country’s economy overall is performing so poorly. While the GDP growth rate in fiscal year 2006-07 is estimated to be a mere 2.5 percent, the growth in tax collection was nearly 24 percent. Upon deeper analysis, the contradictory statistics also indicate that it is now most appropriate to reduce the taxes across the board and to further simplify the tax collection process.
 It is crystal clear that the increase in tax collection is due to the combined effect of a number of factors. There is better compliance owing to some simplification (including rate cuts) effected over the last few years in the tax collection system. This has widened the tax net. Taking these steps further will certainly increase the tax collection.
One noticeable improvement in the tax administration is the establishment of new office for the collection of taxes from the big tax payers. Anyone who has visited this office cannot refrain from gasping in wonder that a Nepali government office can be so spick and spank, not only in terms of the upkeep and décor but also in terms of prompt service. Similar improvements are now expected also in other tax offices.
The Finance Act has introduced a number of provisions this year that may help the taxpayers reduce their tax liability. It also has offered some schemes under which the taxpayers can clear their previous tax liability by paying certain specified sums. This scheme is likely to widen the tax net and bring some high income earners under the net. Those who intend to use this facility should not be discouraged by officialdom and the legal provisions should be implemented honestly.
Still some other possible reasons for the higher tax collection last fiscal year need to be examined further. As can be noted, the corporate tax collected during the last fiscal year in four quarterly instalment is based on the actual tax assessed and paid for the year before that. After the final tax returns for the last fiscal year are filed (which is to be done in a couple of months now), it may turn out that the actual tax liability of the company for that year is lower than what it had paid in the installments. In that case, the excess payment is to be adjusted in the tax liability of the company for the current year. And this is very much likely scenario, since the economy was down overall in the last fiscal year and many companies are likely to report lower profits for that year. Therefore, it is quite possible that the corporate tax collection this year will be lower than in the last fiscal year.
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