Concept and 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 Policy in FY 2080/81 Budget

Transform import-based (customs) revenue structure to direct tax and domestic production-based.
Promote entrepreneurship, attract investment, and protect domestic industries.
Ensure theoretical stability of tax policy for improved industrial and business environments.
Discourage informal and illegal transactions, bring all taxable activities into the tax net, and protect/expand the tax base.
Make revenue systems technology-friendly, automated, transparent, and taxpayer-friendly to enhance voluntary tax compliance.
Control revenue leakage through legal reforms and effective coordination.

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.

2.2 Concept & Principles of Revenue