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.
*Below is our back-of-an-envelope calculation:
- Assuming an 8-hour work day and a 265-day work year, an average Nepali works for 2,120 hours a year
- Assuming that an average Nepali earns NRs. 100,000 per year, the same person earns NRs. 47 per hour (NRs. 100,000/2120 hour).
- Total number of PAN registered business is 10,00,000.
- PAN is paid once a year. Again, assuming that an average taxpayer lives 30 minutes of commute distance away from tax office (one-way) and that it takes another 30 minutes to file his taxes, it takes approximately 90 minutes to file PAN.
- The total number of minutes lost in this process = 1,000,000*1*90 = 90,000,000 minutes
- Total number of VAT registered business is 4,00,000.
- VAT is paid every month (12 times a year). Assuming that an average taxpayer lives 30 minutes of commute distance away from tax office (one-way) and that it takes another 30 minutes to file his taxes, it takes approximately 90 minutes to VAT.
- The total number of minutes lost in this process = 4,00,000*12*90 = 432,000,000 minutes.
- Total number of payroll taxpayers in Nepal is 2,600,000. Payroll tax is paid every month (12 times a year) and it takes approximately 30 minutes to file a payroll tax.
- The total number of minutes lost in this process = 2,600,000*12*30 = 936,000,000 minutes.
- The aggregate time in minutes lost in this process is, 90,000,000 + 432,000,000 + 936,000,000 = 1,458,000,000 minutes, i.e. 24,300,000 hours.
- If we multiply the total number of hours lost while complying with the process and the per hour salary an average Nepali worker earns, we get the total amount of wealth that could be created. The figure amounts to 24,300,000 *47 = NRs. 1,142,100,000.
- Further assuming a flat tax of 5% on this turnover, the government of Nepal could generate a revenue of approximately NRs. 57,105,000.
On top of that, the figures have been calculated taking into account that only 3 out of 10 entrepreneurs operate in the formal economy. A more efficient tax system could help bring the entrepreneurs into the tax domain by incentivizing them to be legally registered in this process.