2.2 Concept & Principles of Revenue

Concept of Revenue

Revenue is the aggregate of tax and non-tax income received by the state without creating direct liabilities. It includes all forms of government income except public loans and foreign aid. Revenue is categorized as tax revenue (direct or indirect) and non-tax revenue (fees, charges, fines, dividends, recoveries, sales proceeds, etc.). The practice of collecting revenue in various forms to meet government expenses has evolved with the origin of the state. In the 18th century, the principle of "No taxation without representation" emerged. In Nepal, revenue collection, including forms like Bhaga, Bhoga, and Kar, dates back to the Lichchhavi period. Classical economists advocate for minimal government expenditure and revenue collection, while economists like J.M. Keynes support higher revenue collection for public welfare and economic investment. Liberal economists favor reducing tax rates while expanding the tax base without harming the private sector. Article 60 of Nepal’s Constitution provides for revenue sharing among federal, provincial, and local levels.

Types of Revenue

Based on Nature

Tax Revenue: Direct taxes (e.g., income tax, property tax) and indirect taxes (e.g., VAT, excise duty, customs duty).
Non-Tax Revenue: Fees, charges, fines, dividends, royalties, interest, sales proceeds, etc.

Based on Jurisdiction

As per Nepal’s Constitution and the Intergovernmental Fiscal Management Act, 2074 BS:

Federal Government

Taxes (6): Customs duty, excise duty, value-added tax (VAT), corporate income tax, personal income tax, remuneration tax.
Non-Taxes (6): Passport fees, visa fees, gambling/lottery/casino fees, fines, tourism fees, service charges.
Other taxes and non-taxes as per federal laws.

Provincial Government

Taxes (5): Property registration fees, vehicle tax, entertainment tax, advertisement tax, agricultural income tax.
Non-Taxes (3): Fines, tourism fees, service charges.
Other taxes and non-taxes as per provincial laws.

Local Government

Taxes (8): Property tax, house rent tax, land revenue (Malpot), business tax, property registration fees, vehicle tax, entertainment tax, advertisement tax.
Non-Taxes (3): Fines, tourism fees, service charges.
Other taxes and non-taxes as per local laws.

Importance, Necessity, Objectives, and Functions of Revenue

Operates state mechanisms.
Supports regular, emergency, and developmental services.
Establishes a welfare state with redistributive justice.
Ensures resources for national priority areas.
Reduces poverty and creates employment.
Implements national policies, plans, programs, and budgets.
Reduces dependency on foreign aid and loans.
Fulfills public aspirations and expectations.
Protects citizens’ rights.
Strengthens national security and economic power.
Promotes public interest.
Maintains peace, security, justice, and rule of law.
Regulates private and non-governmental economic transactions.

Difference Between Tax and Non-Tax Revenue

Aspect	Tax Revenue	Non-Tax Revenue
Nature	Mandatory payment as per law.	Voluntary payment for services or penalties for law violations.
Expectation	No direct benefit expected by taxpayer.	Linked to direct benefits or services.
Applicability	Uniformly applicable to all.	Applicable to those availing services or under contracts.
Role	Primary and regular source of government income.	Supplementary source of income.
Purpose	Revenue collection for public expenditure.	Administrative or judicial regulation, non-economic purposes.
Nature of Payment	Compulsory.	Includes voluntary payments (e.g., donations, gifts).
Impact on Prices	Directly affects price system (tax increase raises prices).	Does not directly affect prices.
Examples	Direct taxes (income, property, business, capital gains, house rent); Indirect taxes (VAT, excise, customs).	Fees, charges, fines, forfeitures, dividends, royalties, interest, sales proceeds.

Characteristics and Arrangements of Revenue System in Nepal

Guided by the Constitution, periodic plans, policies, programs, annual budgets, economic acts, and sectoral laws.
Defined revenue jurisdictions among federal units.
Intergovernmental Fiscal Management Act, 2074 BS, clarifies revenue collection and sharing.
Constitutional provision for the National Natural Resources and Fiscal Commission to set revenue-sharing criteria.
Federal government collects the largest revenue share.
Tax revenue constitutes ~90% of total revenue; ~70% from indirect taxes (VAT, customs, excise) and ~30% from direct taxes (~80% income tax, ~10% land revenue, ~5% vehicle tax, ~5% others).
Adopts strategy of reducing tax rates, expanding tax base, and strengthening collection.
Promotes taxpayer-friendly systems through self-assessment, tax concessions, and education programs.
Uses IT-friendly systems like VCTS, ASYCUDA (NECAS), RMIS, SuTRA Revenue Module.
Specialized administrative mechanisms for revenue management.
Progressive tax system.
Improved investment-friendly environment post-political transition and conflict.

Constitutional Provisions

State can impose taxes on personal property and income (restrictive clause on property rights).
Revenue jurisdictions for federal, provincial, and local levels (Article 57, Schedules 5–9).
Exercise of financial powers (Article 59): Budget, policy, and plan formulation and implementation.
Revenue sharing (Article 60): Tax imposition within jurisdictions, federal law for shared jurisdictions, equitable distribution of federal revenue among units.
Financial procedures (Parts 10, 16, 19): No taxation without law (Articles 115, 203, 228), all revenues deposited in consolidated funds, expenditure approved by representatives.

Legal Provisions

Financial Procedures and Fiscal Accountability Act, 2076 BS, and Rules, 2077 BS.
Intergovernmental Fiscal Management Act, 2074 BS.
Local Government Operation Act, 2074 BS.
Customs Act, 2064 BS, and Rules, 2064 BS.
Income Tax Act, 2058 BS, and Rules, 2059 BS.
Excise Duty Act, 2058 BS, and Rules, 2059 BS.
Value Added Tax Act, 2052 BS, and Rules, 2053 BS.
Revenue Leakage (Investigation and Control) Act, 2052 BS (First Amendment, 2076 BS), and Rules, 2070 BS.
Revenue Tribunal Act, 2031 BS.

Institutional Arrangements

Office of the Prime Minister and Council of Ministers: Revenue Investigation Department.
Ministry of Finance: Customs Department, Internal Revenue Department, Taxpayer Service Offices.
Revenue Advisory Committee.
Revenue Tribunal.
Other tax-collecting offices.
Financial Comptroller General Office, Provincial Financial Comptroller Offices, Auditor General, CIAA, etc.

Principles of Revenue

Equality: Uniform tax rates for similar income/transactions/nature.
Certainty: Defined rates, methods, amounts, processes, locations, timing, and criteria.
Legality: No taxation without representation.
Economy: Minimize collection and compliance costs.
Progressivity/Social Justice: Higher rates for higher income/property, lower for less.
Convenience: Easy revenue payment systems.
Ability to Pay: Rates based on taxpayers’ capacity.
Productivity: Avoid reducing taxpayer productivity.
Simplicity: Simple policies, laws, methods, and processes.
Coordination: Avoid double taxation through coordinated systems.
Flexibility: Policies and laws adaptable to changing times.
Transparency: Open and transparent revenue collection and utilization.
Accountability: Responsible and accountable stakeholders.
Diversity: Different approaches for different transactions.
Exemption: Tax relief for small or priority transactions to encourage growth.
No adverse impact on human health, environment, social justice, or macroeconomic stability.

Revenue Policies and Programs in the Budget Speech for Fiscal Year 2083/84

The Budget Speech for Fiscal Year 2083/84 has introduced several important reforms in tax administration, customs, VAT, investment promotion, and revenue system modernization. The major revenue-related policies and programs are summarized below:

1. Tax Rate and Income Tax Reforms

The budget has introduced significant reforms in income tax to enhance equity and disposable income. The personal income tax exemption limit has been doubled to NPR 1 million. Similarly, the maximum rate of personal income tax has been reduced by 10 percentage points.

In addition, capital gains tax on the sale of securities of listed companies has been made final, simplifying tax compliance. Likewise, capital gains tax has been exempted up to government valuation in cases of land acquisition for development projects.

2. Customs and Excise Policy Reforms

The customs system has been restructured to promote industrial growth and simplify tariff administration. Customs duty on 273 types of industrial raw materials has been reduced to at least one level lower than finished goods.

The existing 11-tier customs tariff structure has been reduced to 7 tiers for simplification. Furthermore, excise duty on 360 items has been abolished.

A new unified “Green Tax” has been introduced by integrating various scattered taxes such as infrastructure development tax and road maintenance fees collected at customs points.

3. Value Added Tax (VAT) Reforms

To promote digital transactions, a 10% VAT discount has been introduced at the time of invoicing for purchases made through digital payment systems.

The VAT refund system will be automated to ensure efficiency and transparency. Moreover, a high-level committee will be formed to study the feasibility of multiple VAT rates in the country.

4. Investment Promotion and Sectoral Incentives

Various sector-specific incentives have been introduced to attract investment.

In the IT sector, 50% tax exemption has been granted on income from export of IT services, and employee “sweat equity” has been made tax-free.

Agricultural processing industries will receive full income tax exemption for the first 10 years of operation.

Similarly, cinema halls established outside metropolitan and sub-metropolitan cities will enjoy full income tax exemption for 10 years.

For electric vehicles (EVs), customs duties will now be based on value rather than peak power, and a clean infrastructure investment fee will be levied on batteries and charging stations.

5. Expansion of Tax Base and New Charges

The budget has expanded the tax base by introducing new measures. VAT will be applicable on electricity consumption above 50 units per month at a concessional rate for end users.

A domestic production promotion fee has been imposed on selected imported goods to protect local industries.

In remote areas, a minimum “equity fee” will be charged for private education and health services.

Additionally, excise duty on cigarettes, alcohol, and beer has been increased to discourage consumption and increase revenue.

6. Reform and Modernization of Revenue Administration

Structural reforms have been introduced to modernize revenue administration. The Revenue Investigation Department will be abolished, and its functions will be transferred to relevant agencies.

Mandatory e-billing will be enforced for all businesses with annual turnover exceeding NPR 100 million through a central billing monitoring system.

An AI-based e-assessment system will be developed, maintaining a three-year tax audit cycle.

The administration will be transformed into a paperless, faceless, and contactless system for efficiency and transparency.

Furthermore, a dispute resolution scheme has been introduced allowing taxpayers to withdraw pending court cases by paying 1% additional tax, with penalties and interest waived.

Overall, the budget for Fiscal Year 2083/84 emphasizes tax simplification, digitalization, investment promotion, and broadening of the tax base. These reforms aim to enhance revenue mobilization, improve compliance, and support economic growth through a more efficient and modern tax administration system.

Challenges in Revenue Management in Nepal

Developing a tax-paying culture and increasing tax participation.
Controlling informal economy and including all transactions in the tax net.
Creating an investment-friendly environment.
Reducing tax rates, expanding tax base, and enhancing revenue collection.
Establishing mandatory invoice issuance and acceptance.
Effectively controlling revenue leakage.
Ensuring full compliance with tax laws.
Basing customs valuation on transaction value.
Reducing collection and compliance costs.
Including e-services in the tax net.
Strengthening governance and effectiveness in revenue administration.
Ensuring vibrant coordination and uniformity among federal units in revenue management.

Problems in Revenue Management

Inability to bring informal economy into tax net.
Failure to control revenue leakage effectively.
Revenue system not simple, taxpayer-friendly, or technology-friendly.
Inability to reduce customs duty reliance and increase income tax share.
Ineffective revenue collection (e.g., house rent tax, agricultural income tax).
Lack of transparency and taxpayer-friendliness in revenue administration.
High collection and compliance costs.
Failure to control non-issuance, fake, or under-invoicing.
Lack of effective coordination among federal units in revenue management.
Low tax culture and participation.
Ineffective and irregular revenue monitoring systems.

Suggestions for Improvement

Reduce tax rates, expand tax base, and strengthen collection.
Integrate informal economy into tax net through banking systems.
Enhance penalty-reward and regulatory systems.
Strengthen revenue investigation and anti-money laundering processes.
Make revenue administration more technology-friendly, transparent, simple, effective, and taxpayer-friendly.
Ensure effective coordination among federal, provincial, and local levels in revenue management.
Avoid arbitrary tax exemptions (use zero-rate taxes if necessary).
Promote tax-paying culture through taxpayer education programs.
Make revenue monitoring and evaluation systems robust and effective.
Include e-services and digital transactions in the tax net.
Strengthen controls on revenue leakage and tax evasion.
Develop integrated electronic revenue record management systems.

Causes of Revenue Leakage in Nepal

Weak regulation and ineffective penalty-reward systems.
Lack of integrity, morality, and discipline among civil servants and citizens.
Weak monitoring, evaluation, and control systems.
Ineffective anti-money laundering investigation and control.
Government tolerance of corruption and revenue leakage.
Lack of proactivity and effectiveness in regulatory institutions.
Low rights-based and governance-friendly citizen awareness.
High tax rates and limited tax base expansion.
Inability to control under-invoicing and fake invoicing.
Social acceptance of tax evasion and corruption.
Open borders and weak border security.
Lack of coordination and collaboration among administrative bodies.
Weak governance in the public sector.
Collusion and unethical relations between businesses and officials.

Measures to Control Revenue Leakage in Nepal

Strengthen regulation and penalty-reward systems.
Enhance monitoring, evaluation, and control systems.
Promote integrity, morality, and discipline among civil servants and citizens.
Strengthen anti-money laundering investigation and control systems.
Increase political and administrative commitment to control revenue leakage.
Enhance proactivity and effectiveness of regulatory institutions.
Develop rights-based and governance-friendly citizen awareness.
Reduce tax rates and expand tax base.
Strictly control under-invoicing and fake invoicing.
Conduct citizen education programs against tax evasion and corruption.
Strengthen border security to control smuggling.
Enhance coordination and collaboration among administrative bodies.
Promote good governance in the public sector.

Gyan Park