Om Prakash Khanal

BIRGUNJ: The private sector claims that the advance income tax system implemented by the government is contrary to universal principles and norms. The government has increased the advance income tax to 10 percent through the budget for the next fiscal year (FY) 2081/82. There is a provision that such tax must be settled in the same year and cannot be transferred to the next fiscal year.

Importer Om Prakash More argues that this system of income tax violates universal principles and norms of taxation.

"The government has imposed a 10 percent income tax on goods but it is not possible to generate income from those goods to pay that much tax. Moreover, the requirement that the tax must be settled within the same year and cannot be carried forward is against the principles of taxation," said More.

The budget presented by Finance Minister Barshman Pun for the next fiscal year has provisions to collect 1.5 percent, 2.5 percent, and 10 percent income tax in advance. The 10 percent rate has been set for daily consumption goods.

Items subjected to 10 percent tax include potatoes, onions, pulses, vegetables, fish, and flour. Finance Minister Pun has stated that the policy of high-rate of advance income tax aims to boost domestic production and discourage imports.

Importers argue that domestic production cannot meet local demand. Subodh Kumar Gupta, outgoing president of the Nepal Rice, Pulses, and Oil Industry Association, says that the finance minister's statement lacks truth since most of the food industries in Nepal rely on imported raw materials.

Under the new system, up to 10 percent income tax must be paid at customs. However, traders claim this is exploitation and unjust to consumers.

Currently, 20 percent income tax is imposed on production and 25 percent on business. Based on this, a 50% profit would be needed to justify paying a 10% income tax on the customs value of such goods. Moreover, if total profit exceeds 20 percent, it is legally considered black market activity.

As the tax paid in advance to customs cannot be carried over to the next year, authorities suggest it be shown as an expense. Businessmen argue it is against financial principles to take a loan to pay tax in advance in businesses where banks invest up to 70 percent.

"Income tax is a tax on earnings. It is not meant to be paid by taking a loan from the bank. Even general accounting principles do not allow it to be recorded as an expense," said More. The private sector claims that the rules of customs and internal revenue are contradictory.

Navneet Agarwal, a businessman, states that showing the income tax amount as an expense will directly affect the price of goods. "It seems the government is trying to fill its coffers at the expense of common consumers, leading to higher prices. This will also increase the illegal import of such goods," said Agarwal.

Hari Gautam, Senior Vice President of the Birgunj Chamber of Commerce and Industry, agrees with Agarwal. Gautam claims that the burden of advance income tax will increase the price of goods and that illegal imports through the open border with India will rise.

"This policy will lead to the smuggling of most daily consumables, except for petroleum products, vehicles, and industrial raw materials. Illegal imports of pulses, rice, flour, clothing, and electrical equipment will increase," he said.

Importers, demanding the removal of the 10 percent advance income tax, have not released hundreds of containers of goods that have arrived at border customs.

Gautam notes that due to the excessive tax imposed by customs, the price difference between goods in the market of Nepal and India is significant, leading to illegal imports. The private sector claims that smuggling has increased, with goods being delivered to homes at a lower cost than the market price.

"Most Indian goods are being imported illegally. In an attempt to collect more revenue, the government is losing revenue and facilitating illegal activities," said a businessman.

Private sector stakeholders claim that maintaining high customs revenue creates an environment that fosters illegal trade which benefits high ranking government officials. As a result, they adopt a policy to maintain high customs duty.