Good Governance
For Sustainable Development

By Sanu Maiya Pradhan

SUSTAINABLE development is a compelling morale and humanitarian issue. But is also a security imperative. Poverty, environmental degradation and despair are destroyers of people, of societies, of nations. This unholy trinity can destabilise countries and even the entire regions. The spread of democracy and market economics combined with breakthrough in technology, makes us dream of a day when, for the first time in history, most of humanity will be free of ravages of tyrrany and poverty, the sustainable development requires institutions, policies, people and effective partnership to carry out the common efforts.

Threat

For Nepal the greatest threat to sustainable development is poverty, which has also been a key source of many conflicts. At present the focus is on strengthening the environmental institutions, promoting a balance between the overall economic development and the environment and developing human resources so as to provide basic facilities to the people. Nepal has to endure the negative impacts of the evils of poverty. Some 38 per cent of the national population live below the poverty line. Slow economic development, lack of resource mobilisation and a clear vision on the part of the planners and administrators and most importantly, the lack of social awarness among the people have been the major factors for pushing Nepal to the bottom of the list of the least developed nations in the world. Bad governance and the increasing Maoist insurgency have marred the country in the last seven years.

Bad governance is something which Nepal's development partners had always pointed out to the previous government. They always urged that corruption be curbed and that the administration be transparent and efficient. Our concern at present should be at good governance. This would cover the fields of ethics (less vulnerability of human rights), equity (less disparity within country), inclusion (less marginalisation of people), security (less instability and vlanability), sustainability (less environmental destruction) and development (less poverty).

Corruption diverts resources away from development activities that are vital for poverty eradication. Corruption harms private sector development, erodes the investment climate and undermines the financial system of the developing countries like Nepal. There in no doubt the Nepalese people themselves have become sick of the rampant corruption of government officials and politicians. High ranking officials must be aware of this and be accountable to their duties and responsibilities if corruption is to be controlled. Corruption has become a bane to the country and the people, and it is weakening democracy and demeaning the country's prestige.If the people in the government are honest and responsible, corruption can be controlled. The government should severely punish those who are involved in corruption. The government should keep an eye on its officials. They should be dealt with according to the law. The office of the Auditor General has been pointing out what has gone wrong in fighting corruption and has been giving suggestions in its annual report but no government has given attention to the remedy of the problem.

The civil servants are not accountable and responsible to their duties and only a few of them are afraid of the corruption control bodies such as the Commission for Investigation of the Abuse of Authority (CIAA) and the Judicial Commission for the Investigations of Property. Bad governance, poverty and exclusion have provided fertile ground for the deterioration of the present law and order situation in the country.

However, Nepal has made substantial progress in the fight against corruption. This year has seen important legislation, giving the Commission for Investigation for Abuse of Authority (CIAA) greater power to investigate and act against government employees accused of corruption. Now that the CIAA has accelerated its job of bringing the corrupt to book, that too by raiding and filing cases against the top politicians and bureaucrats. People have felt the need of expanding its offices to other parts of the Kingdom where corruption is rampant.

Security is the biggest challenge for Nepal's development at this moment. As long as the Maoist insurgents continue their wanton destruction of country's infrastructure in the name of People's Movement, create havoc by applying terror tactics of exerting money and ornaments from innocent civil servants or plundering food stuff from villagers, recruit children as combatants or use women and children as human shields, and the government continues to ignore the large segment of the population that suffers from malnutrition, sickness and illiteracy, the country cannot pick up the desired pace of development.

The solution to the Maoist insurgency and introduction of good governance is the only one answer for materialising people's aspiration. People here are frustrated with endless political squabbling, rampant corruption and bureaucratic inertia in the development administration. But if good governance is achieved the enormous reservoir of goodwill of the international communities and adequate natural resources at home can yield better results for the country. Good governance is the functioning of the government in which the people have their say in the decisions making process. Especially on those decisions that decide for themselves they need to be educated about what suits them best.

Awareness

Nepal should invest heavily on education. Unless civic education is pegged with bringing about a dramatic social change in the society for the all round development of the people, not much can be attained in the development front. Education should be taken as a component to generate awareness regarding human rights of individual citizen.

Income Tax Act-2002 To Minimise Loopholes

By Dr. Puspa Kandel

THOUGH the government has tried to minimise the loopholes of tax system, there are different ways of minimising the tax liability by a person or business organisation. The first is tax evasion. It is done thorough non-reporting of income, under reporting of income, making fraudulent changes in account books, maintaining multiple sets of accounts, operating bank account under different names, doing business in dummy names, over reporting of expenses, fragmenting of income, transfer pricing etc. In short, tax evasion is unethical, illegal and uneconomic activity.

Unethical

Tax avoidance, in contrary, is saving taxes without breaking the laws. It is not illegal. It is only unethical. From the point of view of a lawyer, tax evasion and tax avoidance are different, tax evasion is the violence of law and tax avoidance is the reduction of tax liability by using loopholes of the tax law. But from the viewpoint of an economist, they are same. Awareness against one induces one to follow other. Tax evasion is the art of dodging the tax without breaking the law. In developed country, where there are large organisations, educated taxpayers, strict tax discipline etc., there occurs tax avoidance. In opposite case, evasion takes place. Another way of reducing the tax liability is tax delinquency. The meaning of tax delinquency is delaying in paying the taxes.

Tax evasion, tax avoidance and tax delinquency are not the legitimate methods of reducing the tax liability. That is why, a business organisation should not follow these paths to reduce tax liability.
Unlike, these terms tax planning is a legal activity done to minimise the tax liability. It is the scientific planning of a company's operations related to economic, legal and ethical activity. It is also the use of various incentives, concessions, allowances, rebates etc. provided by the government. Tax planning is related to the future activities of business organisation. The main objectives of tax planning are to reduce tax liability, minimisation litigation, make productive investment, and promote healthy growth of economy and economic stability in a country. Tax planning covers the changing structure of a business, planning about various projects and day to day activities of a business organisation.
The government has the objective of reducing the non-complaince of the tax system. Income Tax Act, 2002 has clearly mentioned it. But in tax law, there are certain avenues which are neither illegal nor immoral. They are as per the intention of the tax law.

As given in the Act, the tax rates for manufacturing sector, financial sector and others are 20, 30 and 25 per cent respectively. The differences are created to promote the manufacturing sector of the economy by creating employment opportunities. These differences also induce to tax planning in the economy. One investor selects manufacturing sector of the economy because the tax rate applicable to this sector is low. The government intends to use this method to reduce tax liability. That is why, it is neither illegal nor unethical. The government wants to increase investment in the country by this manner.

A firm can plan the tax while selecting the forms of organisations because different types of tax facilities are provided to different forms of business organisations. Proprietorship firms get exemption facility but a company and a partnership firm do not. Progressive tax rate is applicable to proprietorship firm and fixed tax rate is applicable to a company. A company should pay double taxation to the government i.e. one from the profit of a company and another from the dividend received by an individual whereas a proprietorship should not pay double taxation. Individuals get medical facilities but company does not. Individual should follow cash basis of accounting but a company should follow accrual system. That means, the companies have to face a difficult type of tax system than the individual or proprietorship. There are so many discriminations against the companies and in favour of individual and proprietorship. All these discriminations against company in favour of an individual create scope for tax planning to and individual and proprietorship firm.
Location of a business is also important from the point of view of tax planning because the provisions given in the new Tax Act and Industrial Enterprise Act-1992 have provided different facilities based on the location. For example, in the remote area, individual can get up to Rs. 30,000 remote area allowance. Business established in the remote, undeveloped and under developed areas should pay only 70 per cent, 75 per cent and 80 per cent of the statutory rate of taxation.

Accordingly, foreign investment in a country with which there is double taxation avoidance agreement should pay tax in source country only. If the foreign investment is made in a country where there is no double taxation avoidance treaty, there would be double taxation. The scope of tax planning is created due to provision of applying different amounts of taxes to firms of different sizes also. Business having up to Rs. 10 lakhs transaction or Rs. one lakh income in Metropolitan city should pay only Rs. 2 thousand as tax. Business of the same nature in Sub-metropolitan City should pay Rs. 1500. Business of the same nature in a city should pay Rs. 1000 only. This means an investor can save his money in selecting the remote areas to establish the business.

The rewards for share capital, debenture or loan and retained earnings are dividend, interest and capital gain. In Nepal, the tax rates applicable to gain of each of these sources of capital are different. Interest is taxed at six per cent but dividend is taxed at 10 per cent. In case of capital gain, the tax rate is 10 per cent for gain on the sale of securities whereas the profit from the sale of non-security assets is taxed at normal rate of profit i.e., 20, 30 and 25 per cent for industrial firms, financial firms and others respectively. Accordingly, interest to a business organisation is a deductible expense but dividend and capital gain are not. Naturally, this means favourable treatment to debenture and interest. This favourable treatment to debenture or loan, obviously, creates the scope of tax planning employing more loan than share capital or retained earnings. Since the Act has also favoured debt making interest deductible expense, the firm can plan tax by engaging more loan than other forms of capital.
The selection of the method of production also have the impact on the amount of tax to be paid. If the industry is labour-oriented and has the employees of more than 600 persons, it should pay only 90 per cent of the tax that should have been paid by the industry if there are less than 600 employees.

Understanding

Though the Income Tax Act-2002 has tried to discourage tax planning, there are so many ways to get planning in real practice. These avenues provided by the tax are neither the evasion nor avoidance of tax. They are hundred per cent legal and ethical. By using, either the selection of the line of business or product or forms of organisation or location of business or the source of capital, a firm can reduce its tax liability. The thing needed is only the detail understanding of the tax law and using its intention in real practice.