The executive order that prohibits selling, distributing and drinking alcohol outdoors in hotels, resorts, restaurants, and bars is done with the intention to reduce the consumption of alcohol in Nepal but instead, this will have unintended consequences. There will be a decline in the amusement, entertainment and hospitality industries as most of them profit from selling legal alcohol. Continue reading
Nepal, like many other nations, has recently planned to adapt regulations which intend to reduce the alcohol consumption of the whole country through supply side interventions. As per the proposed directive, the hotels, bar and restaurants are likely to be restricted from selling alcoholic beverages prior to 5:00 P.M and after 10:00 P.M, while the liquor stores are allowed to perform transactions related to bottled alcohol between 4:00 P.M to 9:00 P.M. Continue reading
The current tax system of Nepal, being overly complicated and lengthy, amounts to an annual loss of more than 24,300,000* hours of the taxpayers. This has resulted in an increase in the relative cost of paying taxes, as the time lost by the individuals could be invested into generating additional income. While the monetary payment that an individual or an organization has to make periodically is already burdensome for many, the requirement to comply with the administrative activities, imposes an additional burden. In such a scenario, it makes sense for firms and individuals to do away with this system, accounting for fewer taxpayers in the economy.
Introducing efficiency into the tax system would not only incentivize individuals to pay tax religiously, but also would allow NRs. 1,142,100,000* to be added to the economy, generating additional NRs. 57,105,000* tax revenue for the government. This makes the simplification of complex provisions that persists, beneficial to both the government and the taxpayers. Continue reading
(This article was first published in the HImalayan Times on the 22nd of July, 2018.)
Sometimes, the most noble of intentions might yet produce severe unintended and negative consequences. Nepal’s minimum wage law comes ominouslyclose to achieving this feat.
We, as a country, are setting out on a mission to achieve unprecedented levels of growth and create new economic opportunities. We need all the international and domestic investments we can secure in order to trigger that growth. Our policies, institutions and hard infrastructures will greatly determine how successful we become towards that end. But the minimum wage law seems to be incompatible with investment targets; it also appears to have overlooked domestic labour scene.
Scaring away investors
From foreign investment perspective, the new minimum wage (Rs. 13,450) which is a 38% growth from previous minimum wage makes Nepalese labour the most expensive in the region. Merge that with Nepal’s dismal performance in other global competitiveness indices like the Doing Business Index or Corruption Perception Index or Economic Freedom Index (just some among many), any prospective investor could quickly put off thoughts of bringing investments here. It already takes months to acquire a business visa to Nepal. According to the Doing Business Report, it takes 339 hours just to pay federal taxes and three years to enforce contracts.
No investor will research all small initiatives regarding foreign investment promotion in a new host country before making investment decision. They will look at these indicators and work out what country offers them the highest prospect of return. Towards that end, such dismal performance plus minimum wages that have grown 400% in the last decade while labour productivity has failed to keep pace will not help.
An ignorance of domestic reality
Cost of labour is an important factor from a domestic investment perspective as well. Formalisation of labour and organic wage growths are other couple of important aspects of labour.
If we look back at the last couple of years of Nepal’s economy, construction industry has grown at one of the fastest rates. Demand of construction workers is therefore high. Consequently, the wages of construction workers have skyrocketed. Today, one can hardly find a mason who will work for below Rs. 1500 a day. This is way above the government-set daily minimum wage. This simple example goes to show that if we create opportunities for investments to flourish and industries to grow, the government does not have to intervene and set workers’ wages in order to guarantee a decent income to them.
But then again, there is a great number of workers in the service and agro industry who have not seen their wages grow at similar rates. This might beg a question as to what we do about them. But even here, we have to be weary of the fact that a great many of these workers (who make the least income) in these sectors are informal workers in the first place. Therefore, a raise in minimum wage does not really enhance their economic positions. In fact, that brings us to another greater risk – the risk of lay-offs.
Risk of lay-off is real
Once again, for an investor (domestic or foreign) labour poroductivity matters. If the labour productivity increases in a similar rate as wages, then s/he can churn out greater profits from her/his business and everybody is happy. But when labour productivity does not increase at the same rate (which is what is happening in Nepal), then it is only a matter of time before the investor starts thinking of laying off workers and getting the same job done through fewer workers. Of course, s/he could offer some raise to those workers who are more productive and can take in some extra load. Such a raise will have come at the cost of the worker that is laid off. In the end, the law that was supposed to help the worker got her/him out of the job.
Minimum wage should not disincentivise
When we argue that minimum wage should cover at least the basic needs of an individual, we should be careful that a minimum wage does not put an individual in a position that s/he no longer needs to worry about being more productive or enhancing her/his economic position further. At best, it should be a support position while s/he starts out as an economic actor. It should be a position that everyone wants to grow out of. In that sense, it should incentivize an individual to be more productive, and not the stagnate.
Looking back at our minimum wage policy and the growth of minimum wages over the years, this will be another very important factor to look into two years from now when we sit to revise it again; if we continue to live with this policy until then, that is.
In May 2018, immediately after taking the oath for the seventh Prime Minister of Malaysia, Dr. Mahathir Mohamad had announced to take measures to control his country’s escalating public debt. Few days later, his government announced to reducing Ministers’ remuneration by ten percent, canceling the Kuala Lumpur – Singapore high-speed train and requesting citizens to voluntarily donate money; all targeted at helping government to deal with country’s public debt. At the same time, the Government of Uganda, which was enlisted as one of the thirty-nine heavily indebted poor countries by the World Bank in 2012, had amended the existing Excise Duty Bill to tax citizens for using major Social Media platforms and collect necessary resources to finance nation’s debt. Continue reading
This article was originally published in The Himalayan Times on June 24, 2018.
In order to ensure optimal outcome from the federal structure, it becomes imperative to have a proper fiscal arrangement at place. In a system with multiple tiers of government, power and responsibilities, especially regarding fiscal matters should be allocated among various levels of governments. The success of federalism is heavily dependent upon the way in which the powers and responsibilities are assigned to these governments. Principally, the literature on fiscal federalism emphasize on determination of expenditure responsibilities followed by revenue assignments. Tax assignment should be followed by assignment of the expenditure responsibilities as tax assignment is generally guided by the spending requirements at different orders of government. The basic principle that guides the allocation of expenditure responsibilities is the “efficiency principle”. Each expenditure headings should be analysed and allocated in such a way that efficient provision of public services could be ensured.
Scholars with primary focus on “efficiency principle”, have designed a revenue- expenditure framework in order to ensure efficient provision of public services. No countries have exactly replicated such design, however, the design has provided a basic outline for assignment of revenue and expenditure among various levels of government in federal countries. Nepal is no exception. Nepal’s fiscal framework does not exactly match the design provided by the scholars, but we can see similarities. Issues of national and international importance such as defence, international trade, foreign affairs, citizenship and migration have been allocated to federal government. Policies affecting the entire nations such as fiscal and monetary policies are also exclusively handled by the central government. States have responsibilities of managing land, irrigation and drinking water supply, transportation, higher education, intra-state commerce, and state-level electricity. Local government is assigned to look after health, sanitation, local market management, local road, rural road, agriculture road, and irrigation.
The constitution has provided grounds for assignment of revenue rights among three tiers of government. Federal government can levy customs duty, excise- duty, Value Added Tax (VAT), corporate income tax, personal/ individual income tax and remuneration tax. States have exclusive right to levy Agro-income tax, whereas local government can levy wealth tax, house rent tax, land tax and business tax. House and land registration fees, motor-vehicle tax, entertainment tax and advertisement tax are jointly levied by state and local governments. Similarly, on the non-tax revenue headings, passport fee, visa fee, gambling and casino fees are prerogative of federal government. Service charge/fees, tourism fee and fines are jointly collected by federal, state and local governments. The revenue assignment is made in such a way that federal government is able generate higher percentage of the total revenue, which is estimated to be about 70 percent. The rest is generated by states and local government. As large share of revenue goes to central government’s coffer, vertical fiscal imbalance is inevitable. Additionally, as individual states and municipalities do not have same revenue base, horizontal fiscal imbalance can also be predicted.
In order to overcome horizontal and vertical fiscal imbalances, like other federal countries, Nepal has also made arrangements for inter-governmental fiscal transfers. Intergovernmental Fiscal Arrangement Act, 2017 has made provision of revenue sharing and fiscal- equalisation grant as two medium of fiscal transfers. It has been provisioned that the revenue generated out of Value added tax (VAT) and Excise is shared in 70- 15-15 percent basis among federal, state and local governments respectively. The distribution of these funds among the state and local governments are made by taking population, total area of the respective jurisdiction, Human Development Index (HDI), and low development indicators as the parameters. The weightage given to these parameters are 70 percent, 15 percent, 5 percent and 10 percent respectively.
Furthermore, sub-national government are also entitled to fiscal equalisation grant whose main aim is to reduce horizontal fiscal imbalances. The fiscal equalisation grant are distributed by the federal government to the sub-national governments on the basis of gap between need of expenses and capacity to generate revenue, Human Poverty Index, social and economic discrimination indicators, and indicators of infrastructure availability. The weightage assigned to these are 60 percent, 15 percent, 15 percent, and 10 percent respectively.
In addition to fiscal equalisation grant, there is also provision of conditional grants, complementary grant and special grant. The conditions for distribution of conditional grant is prescribed in the National Natural Resource and Fiscal Commission Act, 2017. The criteria for providing complementary grants and special grants have also been specified in the same act.