The government for the very first time commemorated Nov 16 (Mangsir 1) as the National Tax Day. The day marks the implementation date of the Value Added Tax (VAT) regime in Nepal, launched on Nov. 17, 1997. Implementation of VAT (which replaced sales tax, hotel tax, contract tax and entertainment tax) is considered a quantum leap towards systemic tax reform in Nepal. Besides celebrating the national tax day, the government is also observing 2069 BS (2011-12) as the Tax System Reform Year. The ongoing reform initiatives have been backed by two crucial policy instruments, namely, Inland Revenue Department’s five-year Strategic Plan (2012-2017) and the Strategic Plan’s three-year Reform Plan (2012-2015), which provide the policy backup as well as actions and programs for reform.
Through the celebration of the tax day, the government is trying to communicate and convince people about the importance of tax, as well as informing them about tax reform initiatives. Against this backdrop, the Tax Day was observed with two slogans: ‘Let us talk about tax in every household’ and ‘Let us pay tax and participate in nation building.’
The first slogan highlights the importance of making tax a topic of talks in every household. This is important because in Nepali society, there is widespread misconception on the definition of a taxpayer. The society considers only ‘business person’ a taxpayer, which is not the complete truth. Rather, every consumer is a taxpayer. Directly or indirectly, every single rupee that consumers spend while purchasing or consuming goods or services, contains a portion of tax too. For indirect taxes, the business person is merely a ‘tax collector’. Consumers are the real taxpayers. This message has to be clearly convened to every consumer, for which the public needs to be made aware on voluntary tax compliance and contribution. Such enhanced taxpayer education and awareness will also boost public ownership of the tax regime.
The other slogan ‘Let us pay tax and participate in nation building’ is not only a patriotic message, but also indicates the importance of tax revenue in nation building. Reliable and strong tax revenue is prerequisite for development. Over 60 years of our reliance on foreign aid could not deliver satisfactory result on economic front. Foreign aid may work as a cetamol to get the fever down for a short time, but to cure the country’s economic illness, we need a strong national revenue source. High growth rates in both our neighbors (India and China) were possible not because they received large sums in foreign aid, but because of their other sources of investments, including a solid contribution from national revenue.
As Nepal has no large storage of mineral or oil, and since the country has failed to capitalize on its hydropower potential, the only viable source of revenue left is taxation. Thus it is important to educate all citizens that paying tax is their duty, and by doing so they will be contributing towards nation building.
Carrying out reforms is easier said than done. But Bill Clinton was right when he said ‘change is hard but not changing is harder’. The tax administration may thus have to go through baptism by fire to establish itself as a dynamic institution.
It will not be true to say nothing has been done hitherto to reform taxation in Nepal. Implementation of VAT, the new Income Tax Act, the mechanization and extensive IT application in tax administration, and a functional division of work, are some good examples of tax reform initiatives in Nepal. However, national tax yield is not yet satisfactory. Our tax-GDP ratio (which is just over 13 percent) is one of the lowest in the world. Even the Least Industrialized Countries (LICs) average tax-GDP ratio of over 15 percent; forget about the towering 35 percent tax-GDP ratio of OECD countries. Thus creating tax awareness, broadening the tax base, and enhancing compliance that helps achieve a higher tax-GDP ratio is crucial.
The five-year Strategic Plan and the three-year Reform Plan of the Inland Revenue Department are complementary instruments for a systematic and coherent tax reform. The overall objective of the Strategic Plan is improving efficiency and effectiveness of the tax system. The objective will be attained through the application of four development objectives, namely, policy reform and enhanced enforcement techniques; improving taxpayer services and education; optimal use of modern technology; and revitalization of organization system and mobilization of competent human resources. The expected key results have been given in the box alongside.
Likewise, the Reform Plan that complements the Strategic Plan presents seven strategic objectives to realize the reform plan. They cover, among others, policy and legislation changes to improve taxpayer services, enhancing voluntary compliance, augmenting human resource management and wider application of information communication technology. The implementation of reform activities has been ensured through KPIs (Key Performance Indicators), which will also make all concerned stakeholders accountable for its timely and proper execution.
Merely celebrating tax day will not make reform a success, nor does it guarantee the tax administration’s enhanced efficiency. It is critical to implement proposed reform policies and programs. Let people voluntarily comply and take ownership of the taxes they pay, and make authorities more accountable towards taxpayers. Paying tax is state duty too, which is to build our own nation.
The author is Deputy Director General, Inland Revenue Department