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June, 2003 |
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Cover Story |
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Questioning Budget Relevance The
budget season has started in the Ministry of Finance with its staff busy
compiling figures from various sources. Though outgoing Finance Minister
Dr. Badri Prasad Shrestha too was grappling with the fundamental
principles that he was to follow in prescribing the fiscal measures to
hasten the recuperation of the economy out of the current ailment, the
dissolution of the cabinet in the meanwhile has made his efforts
irrelevant as there is a very high likelihood that he will be replaced
by a person related to political party. Meanwhile,
following the decades-old ritual, various sections of the business
community have started presenting their own respective sets of
suggestions to the finance ministry. Similar ritual is expected to be
completed (by the time this material goes to the press) also by the
Revenue Consultation Committee by submitting its own set of
recommendations. However,
the finance ministry is also likely to follow the ritual by adopting a
few minor suggestions of the business community and leaving the
significant issues untouched. The
finance ministry has also received one more set of recommendations this
year from a high level task force headed by National Planning Commission
member Yuba Raj Khatiwada. The task force comprised of Harvard educated
upper house MP and businessman Dr. Roop Jyoti, Tribhuvan University
Professor of Economics Dr. Bishwambher Pyakurel and Joint Secretary in
the Ministry of Finance Bidyadhar Mallik, among others. Though
the business associations have been forwarding their budget suggestions
to the finance minister, one business association, Bhaktapur Chamber of
Commerce and Industry (BhCCI), has abstained from doing so also this
year as in the last couple of years. The reason? “We have found that
our recommendations are not heard by the Ministry”, says Krishna
Tamrakar, the President of BhCCI. Budget
Objectives Outgoing
finance minister Dr. Shrestha as well as other officials involved in the
budget preparation say that the objectives of the forthcoming budget
will be matching with the 10th plan. This is going to be somewhat
different from the practice so far. As can be seen, all the budgets in
the past used to be very much detached from the periodic national
development plans of the respective period. As such the budget
objectives for the coming fiscal year are likely to be related with: (i)
broad-based economic-growth; (ii) social sector development; (iii)
targeted programs; and (iv) good governance. But
while the validity of the 10th plan itself is being questioned, the
relevance of these objectives is expected to be very low particularly
for the business community in terms of improving the investment climate,
though they may be relevant for the government for the purpose of
presenting to the donors. Size
of the budget Though
the total expenditure of the current fiscal year is likely to be far
less than the budgeted Rs. 96 billion, the finance minister to be
appointed soon is likely to budget similar figure also for the coming
fiscal year. There are two arguments for this: Since the current fiscal
year was an abnormal year in that it was suffering the Maoist insurgency
for the entire first six months, thus not allowing the development
expenditure to be made, the current year figures cannot be taken
as the base for extrapolating the figures for the coming year. Second,
since there is now ceasefire in the insurgency, the finance minister has
to go with the assumption that peace will prevail, and the country will
be able to spend much more than what it did in the current year.
“Though it is still a situation of wait and see, it is easier now to
increase development expenditure”, says Dr. Shanker Sharma, the Vice
Chairman of National Planning Commission. Thus
the budget size is likely to be nearly Rs. 110 billion for the coming
fiscal year, as Prof. Madan Kumar Dahal, Head of the Department of
Economics of Tribhuvan University has calculated. The calculation is
simple. Dr. Dahal sees the possibility of mobilizing Rs. 60 billion as
revenue and Rs. 50 billion as foreign assistance. But one may object to
this estimate and point out that it is like saying “cut your coat
according to your cloth”, while the basic principle of public finance
says that the government can have its cloth according to the size of the
coat it wants. But
whatever way you calculate, the results will be the same. For example,
the other way of calculating it is like this: The budgeted figure for
the current fiscal year for regular expenditure was Rs. 57 billion and
for development expenditure Rs. 38 billion. In regular expenditure, the
government is reported to have exceeded the budget figure and reached Rs.
60 billion by mid-April. That means, the coming fiscal year too is
likely to need Rs. 60 billion as the budget for regular expenditure on
the assumption that the budget allocation for the security expenses will
be reduced in the coming year. In
development expenditure, though the government has been reported to have
spent only around seven billion rupees by mid-April, the finance
minister has to increase the allocation for development expenditure for
the coming year beyond what was allocated for the current year. The
first reason for this is the expected normalcy in the security
situation, and the second, the need to allocate more for the
reconstruction and rehabilitation. Looking
at the figure of Rs. 234 billion planned to be the total development
expenditure of the tenth five year plan, the annual budget for
development expenditure needs to be Rs. 46 billion. Since in the current
year, which is the first year of the tenth plan, the actual expenditure
is going to be far less than the required annual average, it is likely
that the finance minister will target to increase the development
expenditure beyond Rs. 46 billion in 2003-04 to make for the short-fall
of 2002-03. All the officials involved in the budget making process
agree on this. Financing To
finance the increased expenditure, the finance minister is likely to
rely heavily on foreign aid. For this the finance ministry is pinning
hopes on the promise of the donors to provide budgetary support. However,
going by the revenue collection possibilities, it can be seen that the
size of budget deficit is going to be very high. According to a report
quoting the finance ministry, the government has collected as revenue Rs.
40 billion from all the tax and non-tax sources by mid-May 2003. This
indicates that the targeted collection of Rs. 57 billion will not be
realized this year, thus making it difficult to raise Rs. 60 billion in
the coming year. The
collection from corporate income tax is going to reduce substantially in
the coming year as there is excess collection made as advance income tax
in the current fiscal year. That excess will be adjusted by the
companies against the amount they will have to pay in the coming fiscal
year. Moreover, as the advance income tax is collected on the basis of
what the company had to pay in the previous year, the collection is
going to be lower in year 2003-04 as the tax figure for year 2002-03 is
going to be lower than in the previous year due to the lower business in
2002-03. From
existing sources of revenue, the government’s collection is not likely
to exceed Rs. 50 billion, though it is expected that the finance
ministry will put this figure at around 60 billion as the estimates for
2003-04, as Prof. Dahal has estimated. Assuming that some Rs. 20 billion
will be received as foreign grant, the budget deficit will be some Rs.
30 billion. Given that the foreign grant was expected to be some Rs. 14
billion in 2002-03 and the revised estimate for 2001-02 was less than 8
billion, the expectation of Rs. 20 billion being arranged as foreign
grant in 2003-04 is very ambitious. This
indicates to the likelihood of higher deficit in the year 2003-04. To
reduce this deficit, the finance minister this year is most likely to
increase the rates of existing taxes and non-tax sources of revenue as
recommended by the high level committee headed by Dr. Khatiwada. As
the deficit still left will be very high, the government will have to go
for more foreign loan. To get that, the government has to raise more
internal loan so as to arrange the counterpart fund. Relevance
to business Many
of the expectations of the business community are not likely to be met
in the forthcoming budget. Talking to Nubiz, finance secretary Bhanu
Acharya said that the government was not going to go back to the
discarded method of duty concessions to promote investment. “We’re
now going for procedural simplification, which will have the same effect
of cost saving for the businesses.” That
means the business community’s demand for reduction in the customs
duties, withdrawal of taxes on dividend and exports are not likely to be
fulfilled. In
fact the budgets have gradually becoming less and less relevant in the
recent years. Gone are the days when the traders used to hoard the
essential commodities like kerosene and sugar as well as liquor and
cigarettes in anticipation of tax increment in them. More
importantly, the list of demand that the business community has
forwarded this year to the finance ministry this year contains mostly
those issues that can be addressed any time in the year; there is no
need to wait for the budget. The
other side of this story is that the government does not listen to the
demands of the business community. In fact the government simply cannot
listen to the business community given the limitations that the
government has, for example, from the revenue constraint. It cannot dare
reduce the rates. Also the removal of certain taxes that the business
community is demanding is not likely, as Dr. Khatiwada says about the
dividend tax in an interview in next page 36. Another
reason for the budget losing its relevance is the practice in the
previous budgets to not mention anything about the progress report on
the promises made by the budget before that. If such a list is prepared
it will put the government in a really bad shape. It can be recalled
that many of the demands of the business community presented to the
finance ministry are brought forward from the previous years. As one of
the document presented to the ministry by the business community states,
even those issues in which that the government announced measures to
resolve are not resolved because the government decision is not
implemented by the bureaucracy. One
of the refrains of the business community is that the bureaucracy is
always searching for some legal hitches in the policy decisions so as to
distort its spirit and avoid implementing it. The
business community itself may be to blame for this to some extent. They
come up with some innovative ideas very often and it seems they are
seriously going to pursue the issue to its logical conclusion. But they
lack seriously in ‘aftersales’. The case in point is the so-called
‘White Paper” that the binational chambers had brought out last year
after the announcement of the national budget in July 2002. Some
possibilities Despite
above realities, the coming budget is going to impact the business
sector in a number of ways for which, perhaps, the business community
will be able to do nothing. In
order to increase the revenue, the government is likely to follow the
advice that the Dr, Khatiwada committee has suggested in its report
because it provides some very logical grounds for the revenue-starved
government. Though
the details of the report are not made public, it is understood that the
task force has recommended to readjust the tariff rates on the one hand
and not to raise the rates on the other. To achieve this objective, it
has recommended exploring new areas to increase the revenue. It has
specifically recommended reducing the customs tariff, which is in line
with the program of the government to get the WTO membership for Nepal.
But this recommendation is not likely to be implemented as Nepal’s
rates are already the lowest (in average 16%) in the South Asian region. One
important recommendation that Khatiwada team has made is to impose
excise on new items, to reduce the concessions on VAT, excise and income
tax. This indicates the likelihood that more will items will come under
VAT net and the rates also will be higher (expected to be 15% as
compared to only 10% at present). The implication likely is that there
will be another round of wrangle between the business community and the
government. This is more likely because of the repeated postponement of
VAT implementation in India in the face of opposition from business
community there. The Nepali business community is likely to draw courage
from the achievement of their Indian counterparts. Most
importantly, Khatiwada panel has recommended increasing the rates of
various service fees, fines and other administrative receipts so as to
reflect the increased expenditure to render these services. Another
important effect on the business community likely from the coming budget
will be in interest rate and inflation. To meet the budget deficit, the
government will be borrowing heavily from the market crowding out the
private sector and sending the interest rates higher, and causing an
inflationary spiral. Since the interest rate which is at present around
3% for the depositors is negative real interest rate when seen against
the fact that the inflation rate is at present hovering around 5%, the
increased interest rate will be good for the depositors encouraging them
to save more. But it will push the cost of production and prices upward,
triggering the upward spiral in general level of prices. The
inflationary spiral will be rampant if the government fails to spend as
budgeted. With the budgetary allocation announced, for example for the
infrastructure building and reconstruction, the private sector will
start mobilizing its resources accordingly, thus creating demand in the
economy. If the government fails to implement its budget, there will be
a gap between the anticipated investment and the real investment. Wider
this gap, higher will be the inflationary pressure. Given
that the ongoing ceasefire is not yet made permanent, there is every
likelihood for a wide gap between the budgeted and actual expenditure. That
is the challenge that the business community has to press the government
to tackle rather than wrangling about the tariff rates as of now. "Export tax can't be justified for ever" What
particular taxes can the business community expect to be reduced by the
forthcoming budget on the basis of what your committee is thinking? The
export sector, the hotel industry, manufacturing industry and some other
sectors are seeking concessions from the government in terms of the tax
rebates and exemptions. I think export is one area where we have to look
into because it is not doing well. May be next budget would
address some of the tax related issues in export sector, though I
don’t think there are many areas where government can have room to
provide exemptions because the government is heavily loaded in terms of
spending in some of the areas and the revenue collection is not meeting
the gap. So I think the government is not really in the position to
reduce the tax rate so as to lose revenue to a significant amount. But
even then the finance minister might look into the economic slowdown of
the country and take some bold measures to provide some more
concessions. In that respect our task force is providing some
recommendations to the government in the line that the problems of
export sector have to be addressed somehow. In principle, export tax can
not be justified for ever. It is also that the export tax was included
in our tax system as a part of some strategy to deal with our
neighboring countries. Now I think, this is the time to review. The
business community has been complaining that the customs duty for some
of the raw material and auxiliary raw material is higher than that for
the finished products. How much is this complaint going to be reduced?
Or does your committee find this a tricky issue to resolve? In
principle we suggest that the tax for finished goods should at least be
one slab higher than what we levy to the raw materials for the same
product. I think the next budget might address the existing anomalies in
this front. I don’t think this is a very tricky issue because in
principle we agree that the raw material should be taxed at a lower rate
than the finished products. This is how we protect our domestic
industries. Another
demand of the business community is to withdraw the dividend tax, the
income tax on export income and the capital gains tax. How likely is it
that these taxes will be withdrawn? Well,
once the dividend tax is introduced, I don’t think it is so easy to
withdraw because it has created certain tax base. And at a time
when we have stressed on the revenue collection, I don’t see much room
for the dividend tax to be withdrawn. These are comments and
reservations from the business community that the issue of dividend tax
is an issue of double taxation, but when it comes to investment
and people repatriating their income I don’t think it is any double
taxation issue. By withdrawing this tax we might be losing some other
revenue which otherwise might be paid by the foreigners. This is not
hindering their incentive to invest in this country. In that context, I
say the dividend tax might remain in the tax system for sometime. In the
income tax issue, I think there are certain concerns regarding the
exemption limit and also regarding the lowest tax bracket. I don’t
know at this stage how far we can go on this because as I said at the
beginning that the revenue stress does not allow the government to
reduce the tax rate across the board. But may be, in the long run
we have to rethink on some of the tax slabs. Anyway the existing tax
rate seems to be okay and they are not higher than what the neighboring
countries are imposing. Regarding the issue on capital gains tax, I
think that tax was introduced at a time when the capital market was
booming and people were investing in shares and they were making a lot
of money. The situation has now changed. But people are not being so
much taxed by this new capital gains tax. So, I don’t think this
should be any serious issue for the tax payers. Whosoever have some
capital gains should be ready to pay taxes. I don’t think these
dividend tax and capital gains taxes are creating much of the problem
any way. So, they might remain in the tax system for few years to come. Is
the land tax going to be raised ? Land
tax is a political issue. In fact the land tax remains unchanged for
almost 30 years now. And this tax covers almost all the households. The
government, on political ground, seems not to touch this sector.
Otherwise, the land holders are much more capable to pay tax because the
asset prices are increasing and the agricultural farms too are getting
better prices. So I think this is an agenda on which we have to make a
bold rethinking. But we should also make sure that the money we
raise from the farmers is substantial. Otherwise, it is not going to be
productive. At the same time we should assure the farmers that the money
so collected goes back to the framers themselves in terms of easily
available inputs like irrigation, fertilizers, and so on. What
other changes do you foresee in the coming days? At
last our tax system has reached a challenging stage that now we can’t
raise more revenue by increasing the rates of customs duty. These rates
have to go down continuously. While the customs rates are going
down we can't increase the corporate tax rate either and we also cannot
increase rates in other areas, even in excise. Then what is left is only
the value added tax. So, in the medium term, the only potential area
where the taxation can be increased is the value added tax. Though
this tax is regressive in nature, it is an efficient and scientific tax
system. So, in the long run we should be prepared to have an upward
revision in the value added tax but with adequate tax exemptions, and
adequate measures to ensure compliance. If we don’t address the
problems of compliance first and if do the mistake of raising the rate
only, that would lead to displacing business community from the tax net
itself as there would not be a fair competition because some people will
be paying high value added tax while others will not be paying it at
all. Is
there any rethinking being done to address the problems caused by the
latest national budget of India? It
is not only in line with what India is doing. The rethinking is also in
terms of WTO. India is slashing down the custom duty on account of TWO.
Nepal is doing the same. “Ruthless
control of unnecessary expenses needed” How
significantly has the government’s fiscal management changed since the
cease-fire in the insurgency? The
ceasefire along with other reform initiatives taken by the government
has resulted in improvement of the country’s overall economic
performance. Also, Nepal’s credibility improved notably. Improvements
can also be seen in the budgetary expenditure and revenue collection
figures on the monthly average basis, while comparing the pre and post
ceasefire situation. Similarly, substantial increase in exports of some
major items, sizeable growth in imports as against a sharp decline last
year, significant surplus in the balance of payments and historical
record in the foreign exchange reserves are also the positive
indicators. Can
you give an idea, on the basis of the current situation, as to how
significantly the size of the forthcoming national budget is being
increased as compared to what was planned for the current year? At
this stage, discussion is still underway with the sectoral ministries.
It may not be possible, therefore, to give you any indication of the
size of the forthcoming budget. However, I need to emphasise that I do
not prefer ambitious, unrealistic and populist budget. I do not believe
in increasing the size alone without any justification for such
increase. Besides, we should also follow the guidelines of MTEF to
ensure productivity and sustainability of development projects through
their prioritization. Which
particular sectors will have higher resource allocation than in the last
year? We
basically focus on four pillars of the Tenth Plan, i.e. broad-based
economic growth, social sector development including human development,
targeted programs focusing on social inclusion, and good governance. We
are also giving considerable importance to two other important policy
agenda, i.e., reconstruction and rehabilitation and economic reforms.
Therefore, the allocation will basically follow the Tenth Plan
priorities. What
methods are you going to adopt to reduce the regular expenditure and to
increase the development expenditure in the forthcoming year? More
than four-fifth of the regular budget has to be earmarked for
expenditures on personnel and debt servicing. Therefore, ruthless
control of unnecessary expenditures, rigorous measures for resource
mobilisation and prioritisation of development expenditures along with
enhancing the implementation capability of the government will be
continued to keep both regular and development expenditures within
reasonable limits for macro economic stability. Is
there anything being considered to reduce the development expenditure as
well by expanding the scope for the private sector to increase
investment in infrastructure projects? Private
sector investment even in building infrastructure is necessary. For
attracting their investment in infrastructure, several options are under
consideration. How
is the Ministry of Finance planning to raise the additional resources
needed to finance the increased expenditures? Several
options are under consideration. The high level Fiscal Reforms Task
Force has just submitted its report with useful recommendations. We are
also expecting another report of the Revenue Consultations Committee.
Our consultations with business organizations and other are underway. What
about the possibility of introducing a new type of land-holding tax on
big land-owners? Would not such a tax be justifiable on the ground of
equity? As
I said, several options are under consideration. It is too early to
speak of any particular tax measures. Every
year we see a huge gap between the planned and actual development
expenditures of the government of Nepal. What strategies are being
planned to reduce such gap in the coming fiscal year? Specifically,
by making annual budget an effective means of implementing the periodic
plan. The
business community has been vehemently opposing the income tax imposed
on earnings from exports, the dividend tax and capital gains tax. How
likely is the possibility of these taxes being removed by the
forthcoming national budget? We shall try our best to address the legitimate concerns of the business community. |
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