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OPINION |
A Glance Over The Income Tax Revenue By Rup Khadka Modern income tax was first adopted by Britain as a temporary instrument to generate revenue required for the war finance. This tax was introduced by many other countries for similar reasons. But due to its revenue potential, the tax has had been used as a permanent instrument by the governments in various counties despite its strong opposition in the initial stage of its implementation. Now this tax is the major source of revenue in the developed world and has been appearing as an important source of revenue in the developing world as well. Income tax revenue collected through the individual and corporation taxes in some selected countries may be seen from Table 1 while the relative importance of income tax in the tax system of some selected counties is given in Table 2. Table 1: Income Tax Revenue in Selected Countries
In general, as indicated in Table 1, the bulk of the income tax revenue comes from the individual income tax in the developed world while corporate tax provides the bulk of the income tax revenue in the developing countries. In India, corporate and individual income taxes provide equal amount of revenue. Bolivia generates income tax revenue only from the individual income tax while Kuwait and Maldives receive income tax revenue from corporate tax only. As indicated in Table 2, income tax provided almost 73 percent of total tax revenue in Australia in 1997. Similarly, this tax provided more than half of the total tax revenue in the USA, Poland and Bhutan. Income tax is one of the important sources of revenue in many other countries also. Table 2: Relative Importance of Income Tax in Selected Countries
Regarding the revenue potential of income tax in Nepal the then Finance Minister in his 1951 Budget Speech, the first Budget Speech of Nepal said, "income tax will not fetch much revenue in the coming two, three years. Initially, the tax will be used to familiarize people with this tax rather than as a revenue earner. As the tax develops, it will be a major source of revenue". While attempts had been made to introduce income tax in the early 1950s to generate some revenue, this tax was introduced only in 1959/60 when it generated a revenue of Rs. 203 thousand. Income tax revenue doubled in the second year of its introduction. Income tax revenue increased to Rs. 7 million in 1965/66, when income tax was the fourth largest source of revenue after customs duties, land revenue and excises. Income tax became fifth largest source of revenue in 1966/67 because of inclusion of sales tax in the tax family in 1965/66. Income tax again became fourth largest source of revenue in 1976/77 when it surpassed the land revenue. Income tax also exceeded excise duties in 1993/94 and since then this source has been the third largest source of tax revenue in Nepal. Income tax is also likely to surpass the customs duties some time in the future and will be the second largest source of revenue only second to the value added tax. The share of income tax to the total tax revenue was about four percent in the mid-1960s and 10 percent in the mid-1970s and 1980s. The share of income tax to the total tax revenue increased considerably in the 1990s which was about 16 percent in 1995/96 and 21.46 percent in 1998/99. Table 3: Relative Importance of Income Tax Revenue in Nepal
Income tax/GDP ratio was much lower than one percent until 1990/91. However. it increased sharply in the 1990s. For example, income tax/GDP ratio increased from 0.66 percent in 1990/91 to 1.47 percent by 1995/96 which further increased to 1.94 percent in 1998/99. Income tax was initially levied on business income and salary. Revenue from salary tax has not been that important. In 1959/60, business tax provided about 80 percent of total income tax revenue. The contribution of salary tax and business tax to total income tax in the first four years of the introduction of income tax may be seen from Table 4. Table 4 : Composition and
trend in income tax revenue (Rs. in Thousands)
Now income tax revenue is divided into main four groups viz., individual income tax, corporate income tax, interest tax and house rent tax. Of these taxes, corporate tax is collected from government corporations, public and private limited companies and partnership firms. Individual income tax is collected from individuals and proprietorship firms. Interest tax is collected from banks or finance companies that pay interest on all types of deposits and the house rent tax is levied on income obtained from the renting out of land and buildings. Revenue from each category may be seen from Table 5. As in many other developing counties, the corporate tax is by far the most important source of revenue in Nepal also. In 1998/99, the corporate income tax provided about 56 percent of total income tax revenue. The share of the individual income tax was slightly more than 35 percent. House rent and interest taxes provided about 9 percent of total income tax revenue. Table 5: Composition and
Trend of Income Tax Revenue (Rs. in Million)
As in many countries, income tax is one of the most important sources of tax revenues in Nepal. The contribution of income tax has increased considerably both in absolute and relative terms in the 1990s. This source is expected to be the second largest source (second to the value added tax) of tax revenue in Nepal in the future, providing about 25 to 30 percent of total tax revenue. |
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