Reconstruction tax up to 2pc advised

  • Commission suggests 2pc tax on personal and institutional income and 1pc on interest and dividend earnings
Reconstruction tax up to 2pc advised

Jul 5, 2015-

High Level Tax System Review Commission has suggested imposing 2 percent reconstruction tax on personal and institutional incomes and 1 percent on interest and dividend earnings.

Considering the huge resources needed for reconstruction after the massive damage caused by the April 25 earthquake and subsequent aftershocks, the commission suggested charging such taxes for the next two fiscal years (2015-16 and 2016-17.)

The commission, which submitted its final report to Finance Minister Ram Sharan Mahat on Sunday, stated the revenues for the reconstruction can be raised either under the name of “Reconstruction Surcharge” or “Reconstruction Tax”.

“Seeking additional revenue from tax payers during such disasters is an international practice,” said Roop Khadka, chairman of the commission. “The imposition of 2-3 percent tax was recommended based on stakeholder consultations, where business community seemed to be comfortable with the idea.”

Currently, corporate income tax is 25 percent.

As per the Post-Disaster Needs Assessment (PDNA), the country needs Rs 666.3 billion ($6.66b) for reconstruction of damaged infrastructure. The government received foreign aid commitment of Rs 440 billion ($4.4billion) at the International Conference on Nepal’s Reconstruction held in Kathmandu on June 25.  

The commission said the reconstruction tax should be introduced by adjusting tax payment under the current tax system. Although imposition of the tax seems to be additional burden for taxpayers, the commission suggested reducing personal income tax by 5 percentage points in each category of taxpayers.

The report has suggested bringing down income tax to 10, 20 and 30 percent in three categories of taxpayers based on their income. But it has recommended expanding the income bracket to accommodate more taxpayers.

The commission suggested 10 percent tax on additional income up to Rs400,000 from the cut off income. Currently, 15 percent income tax is imposed within the bracket of just Rs100,000, which according to Khadka, has discouraged taxpayers.

The commission has proposed a tax bracket of Rs 1.3 million for 20 percent tax. For those making income over this bracket will have to pay 30 percent tax.

Terming the current tax system of Nepal healthy, the commission said the system should not be changed for raising money for reconstruction.

Various welfare funds such as Foreign Employment Promotion Board, welfare funds of Nepal Army, Nepal Police, Armed Police Force and Rural Telecommunications Fund and other unproductive funds should be utilised for generating resources for reconstruction, according to the report.

With the private sector willing to take part in reconstruction, the commission has suggested complete tax exemption on the expenditure made by anybody in national heritages, stadium, and universities.

“The participation of the private sector in reconstruction can be enhanced if the sector’s expenditure in reconstruction activities carried out in the areas as fixed by the Reconstruction Authority are exempted from the tax,” the report says.

Both the Federation of Nepalese Chambers of Commerce and Industry and Confederation of Nepalese Industries, two apex bodies of the private sector, have demanded that the private sector be allowed to participate in reconstruction.

The commission has said the existing social security tax should be improved by ensuring equal contribution from both the employers and employees. “Initially, two percent of the employees’ salaries should be allocated for social security tax, while the employers also should contribute the equal amount,” states the report.

Currently, the government has been imposing 1 percent tax on the income of employees with an objective of implementing universal social security in the long-term. The commission has suggested scrapping the social security tax imposed on pension, arguing the pension itself is a type of social security scheme.

The report has also suggested allowing people owning property more than a certain level to declare their property for income tax purpose. “We suggested allowing people to make self-declaration so that transparency could be maintained. “Tax should not be imposed on declared properties but such declaration can help in imposing tax in the coming years,” said Khadka.

Implementation from next FY: FinMin

KATHMANDU: Finance Minister Ram Sharan Mahat said on Sunday the government would start implementing reforms recommended by the High Level Tax System Review Commission from the next fiscal year. After receiving the report, Mahat said the budget for the next fiscal year would initiate some reforms. Stating the reforms initiated in early 1990s contributed to increase revenue to Rs400 billion from Rs12 billion in early 1990s, further reforms are needed. “There was a time when the contribution of income tax used to be 8-9 percent which has now improved to 20-25 percent,” said Mahat. The contribution of the value added tax has reached the highest at 37 percent, Mahat said. (PR)

Major recommendations

-    2pc reconstruction tax on personal and institutional income

-    1pc reconstruction tax on interest and dividend earnings

-    2pc social security tax

-    Exemption of social security tax on pension

-    Allowing self-declaration property

-    Reducing income tax by 5pc points

-    Imposing turnover tax on transactions below the level (Rs2 million) where VAT is imposed

-    Introducing provincial tax law to ensure coordination between centre and provinces on tax issues

-    Provision of paying land tax once in five years

-    Forming Tax Dispute Solution Committee beyond the mechanism of the Inland Revenue Department


Published: 06-07-2015 08:04

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