KATHMANDU: The Bidyadhar Mallik-led High Level Advisory Committee on Tax System Reform has recommended the government to change the income tax rate structure and to impose additional taxes on high-income earners.  The Ministry of Finance on Sunday released the report which the committee had submitted its report to the government more than two months ago.

The committee determined that the government should adopt a policy of restructuring and reducing income tax rates. It has suggested that the personal income tax rates be consolidated into three slabs: 10%, 20%, and 25%.

Currently, the tax slabs are as follows: only a 1% social security tax is payable for those earning up to Rs 500,000 per annum. A 10% income tax is charged for the next slab of up to Rs 700,000. For income up to Rs 1 million, a 20% income tax is levied. For the next slab up to Rs 2 million, a 30% tax is levied. An additional slab of Rs 3 million attracts a 36% tax, while an annual income of more than Rs 5 million is taxed at 39%.

The committee has suggested imposing an additional 20% surcharge on the final rate for those with an annual income of more than Rs 5 million. This means that those earning more than Rs 5 million annually will have to pay up to 45% tax on income.

The government revised the income tax system in the fiscal year 2075/76, setting the personal income tax slabs at 10%, 20%, and 30%.

Tax expert Chandramani Adhikari criticized the committee's suggestion as regressive. According to him, imposing an additional 20% surcharge on those with incomes over Rs 5 million may not be progressive. "Individual income tax should be progressive, not just increased," he said. Adhikari emphasized that high taxes could hinder individuals' ability to invest in health, education, and social security. He pointed out that when individuals contribute to social security, it supports large projects and provides returns to the country, which the state should consider.

The Mallik-led committee also recommended gradually reducing the corporate income tax rate by 1% each year, from the current 25% to 20%, and keeping it stable for the next 10 years. The committee suggested maintaining a 30% corporate tax rate for alcohol and tobacco products and financial institutions, while reducing it to 25% for other businesses in this category. Additionally, it proposed a 10% tax rate for export trade and businesses, and a 20% rate for all other businesses.

The committee further suggested imposing a 7.5% tax on profits from securities held for more than 365 days and a 10% tax on interest for periods of 365 days or more.

Lastly, the committee proposed canceling the current 1% social security tax and reducing the tax exemption on taxable personal income by 3% for the first 10 years, while making arrangements for a 5% social security contribution tax.