From the fiscal year 2019/20, the Government of Nepal has imposed a 10% custom duty on import of books. While many Nepalese readers and experts have already termed it as an unacceptable tax on knowledge, there is no doubt that this protectionist policy also comes with many long term consequences that directly affect the local consumers, industry, as well as government.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
Mounting grievances and inefficiency of government institutions in Nepal which operate on taxpayers’ money makes us wonder if tax is really the necessary evil it is often touted as being. In principle, the rationale behind tax is justified. However, the current scenario does not do justice to the rationale.
Citizens have incentive to pay taxes as long as the benefits of what is asked by government in various forms of taxes is higher than the services rendered by authorities. But the government is not doing what it is supposed to do for compensating taxpayers’ giving up of their hard-earned money; we get much less services than what we paid for.
The notion of paying tax brings second thoughts to my mind. There are a number of reasons why:
As a Nepalese citizen, I pay my share of taxes and by this virtue alone, the authority is obliged to ensure effective and efficient public service delivery to me. Sadly, this rarely happens. The service delivery mechanism has a lot of loopholes; there is excessive red-tapism, no proper delegation of authority and the idea of good governance is limited to plans and policies.
Furthermore, the government has failed to create conducive environment for the private sector. A substantial portion of the fiscal budget is spent on different administrative headings than making capital investments on infrastructure. There is lack coordination between authorities which results in significant wastage of resources. For instance, roads built by department of roads are frequently dug down by others, once for drainage, again for water supply, and so on and so forth. Moreover, with dismally low results, wastage of resources inherent in Nepalese bureaucratic structures implies that our tax money is going down the drain.
Corruption in Public Sector
Corruption in Nepal ranges from nepotism to significant monetary scam. It is dispersed like an epidemic in almost all government organizations. Corruption Perception Index (CPI) published by Transparency International gives Nepal a score of 31 on a scale of 0-100, where 0 and 100 represent “highly corrupt” and “very clean” respectively. Abuses of authority, secret deals and bribery have lasted for years.
While the commitment of Commission for Investigation of Abuse and Authority (CIAA) is commendable, our tragedy still remains that the corrupted receive clean sheets due to dysfunctional mechanism. Moreover, recent CIAA report reads rampant corruption at local levels, particularly at Village Development Committees (VDCs), Municipalities and District Development Committees (DDCs).
I can’t foot Public Enterprises’ Loss and their Inefficiency
As of today, the number of fully and partially owned public enterprise has reached thirty seven, out of which sixteen operate in net loss. The total cumulative profit of fourteen public enterprises is about NRs. 65 billion and loss incurred by seventeen others is around NRs. 43 billion. Here, NTC alone accounts for NRs. 39.5 worth of cumulative profits. (Source: Yellow Book, Performance Evaluation of Public Enterprises: Ministry of Finance, 2014)
Janak Shikshya Samagri Kendra, a public institution that has the responsibility of ensuring timely production of subsidized education materials for public school students across the country has not been able to deliver for quite some time now. There have been instances when the books have reached students in the second half of the academic year only. Another example is that of Nepal Electricity Authority (NEA).Despite of a lot of money being poured in for the purpose of electrification it has not been able to cut down hours of load-shedding. Nepal Oil Corporation (NOC), similarly, has not been able to deliver—long queues in the petrol stations despite over NRs. 39 billion worth of taxpayers’ money floated to them being a constant reminder of that failure.
The more I understand government and its actions, the more doubts I have over having to pay taxes to fund its inefficiency.
Nepal’s education system has long been pointed fingers at—enrollment rates, dismal performances, and education-market mismatch are just a few points of accusation. We said that the public schools lacked infrastructure and quality services and we also said that private schools charged too much for the services they provided. While we continued to raise concerns over the kind of education system we have, the government went a step further and put a ban on the registration of new private schools. Their usual sense of reasoning brought forth these replies—private schools have been growing like mushrooms; we have enough schools already, we need to focus on strengthening the existent public schools—well of course!
The ban on registration has meant that no new schools have been registered for quite some time and that many hold school licenses so that they can sell them at premium rates. Adding to the artificially hiked prices of schools are the additional costs pertaining to the Institutional School Criteria and Operations Directive 2013. Following the directive (which is mandatory) means that the schools need to undergo a lot of infrastructural changes—the size of classrooms to playgrounds as prescribed—all of which cost money. And the only way through which such private schools can make money is through hike in fee. The fees, however, has been regulated by the government as the Supreme Court has passed a decision on the price ceiling for school fees.
If these were not enough, private schools have to comply with end number of contradictory regulations. Private schools, as such, can be registered as a profit making company as per the Company and once they are registered they have all legal rights to make profits. If only the government stopped interfering then and there. Sadly, it does not. The same schools as per the Education Act as required to provide scholarships to a certain percentage of their students. Provided that most schools do not have problems complying with the same; just that to regulate every bit of their operation seems too strangling to an entity. The Company Act allows schools to be opened in any location deemed necessary for business while the Education Act asks the same schools to follow a lot of procedural requirements when it comes to choosing a location (taking permission from two neighboring schools is included in the deal). And taxes are an altogether different ball game. Schools pay 25% income tax as any other private company as per the Company Act and on top of that the government levies 1% as Education Service Tax. There is no clarity over whether the government wants to treat private schools as profit making companies or service oriented organizations. This this ambiguity has translated into laws that have repercussions on the operations of private schools.
With these many contradictory policies in place; with the kind of regulations that exist—it sure is a climb up steep hills for any school that wants to provide services at competitive prices. And yet, they say that we need no more schools (probably in the light of their capacities in not being able to monitor existent schools).
It is no surprise that government policies do not always bring out the desired consequences, but it is definitely fascinating to see how those policies can sometimes downright backfire. Human behavior is unpredictable and often times driven by self-interest. Hence, people are quick to find ways to beat the system. Policy makers who ignore this basic foundation of human behavior while making regulatory decisions might likely find themselves prey to “The Cobra Effect”.
Cobras had become a growing problem for British officials in India during the colonial era. To solve this problem, a bounty was offered for every dead cobra. However, entrepreneurial locals were quick to see an opportunity for profit and started farming these poisonous snakes. When the government got a whiff of this, the bounty was cancelled and numerous now useless cobras were released in the open thus making the initial problem worse. Hence came the name: “The Cobra Effect” which explains the event whereby an attempt to solving a problem makes the problem even worse.
A similar incident occurred in Bogotá, Colombia where the government’s attempt to control traffic and check pollution by allowing number plates with only certain last numbers run in the streets on certain days, failed miserably. Following the rule, people in Bogotá started buying additional cars and most of these replacement vehicles were old and not environment friendly. This rule did not stop people from using private vehicles on a daily basis, but definitely did increase pollution. More examples from round the world can be found here.
Now let’s look at examples much closer to home:
Of course I can afford to kill you!
In an attempt to curb road accidents and fatality, the Government of Nepal set NRs. 18,000 compensation for every death resulting from a road accident and fulfillment of lifelong medical expenses in case of injuries by the offender. The value of a human life cheaper than a 21 inch LED TV! What happened next is sadly something we all know too well. Instead of reduced reckless driving, drivers of public transportation vehicles purposely ran over and killed any surviving victims in accidents so that they could just pay the low compensation for death instead of covering massive hospital bills. This disastrous regulation was removed and replaced by a compulsory third party insurance system; however by then numerous lives which could have otherwise been saved, were already lost.
One of the major reasons for a mammoth vehicle tax of 241% in Nepal, is revenue generation through the so-called “luxury items”. This has resulted in majority of the people only being able to afford two wheelers which are inherently unsafe and have caused thousands of deaths every year. Speaking purely in terms of revenue, reducing the tax percentage by even just half the current rate would dramatically increase the pool of people who would be able to afford vehicles. It is very likely that vehicle purchases would more than double and revenue collected in terms of taxes would increase many folds! Whether or not the government can then properly utilize the resources to improve the roads to facilitate those extra vehicles is a whole different story. However, the bottom line is: The government is losing out on revenue by setting exorbitant tax rates and its reduction would be a win-win for both the government treasury and the general public!
The irony of it all
Time and again government regulations that emerge to help have failed us; some even to the point of losing lives. Unintended consequences are a huge threat to policy making and analyzing each possible scenario before implementing any regulation is extremely important. Be it looking at all proposals from lobby groups with a reasonable doubt or pushing hard to think out of the box; trying to identify these inadvertent results is definitely key to reducing these mishaps. Although it is impossible to predict actual results, the power of keeping an open eye through effective follow up and monitoring does lie with the regulators. Thus, allowing something like burdensome tax regimes to motivate people to dodge taxes, foster bribery and discourage enterprises from entering the formal market for decades is pure folly. Do we have more well-meaning disasters in store for us? Only time will tell!
Established in 1981 by Government of Nepal with an objective of utilizing the immense range of herbs found in the country while also creating employment, Herbs Production & Processing Co. Ltd. (HPPCL) is well known among consumers for the production of Sancho, a herbal oil used for curing common cold, cough, rheumatism, fatigue, body ache, headache, neuralgia, sprain, and itching.
Annual Performance Review of Public Enterprises, 2070 published by Ministry of Finance indicates that HPPLC has a net worth of negative NRs. 1494.95 lakhs. Similarly it owes the government a total of NRs. 6421.06 lakhs as loan. The enterprise employs a total of 204 staffs and has unfunded liability of employees benefit worth NRs. 1035.76 lakhs. HPPLC has been unable to perform financially since its establishment for various reasons and has accumulated cumulative loss of NRs. 1775.26 lakhs until the year 2068/69. It also incurred a loss of NRs. 393.37 lakhs in 2068/69.
Recent news published in a national daily indicates that HPPLC is planning to sell off its property to pay its employees’ salaries. The Ministry of Finance has given it the permission to sell off the land on conditions that employees are to be laid off and commercial production is to be started. The Head of Privatization Cell in the ministry, Mr. Bashudev Sharma is skeptic of the whole idea and believes the enterprise can only perform post privatization.
While HPPLC, Ministry of Finance, and the Privatization cell all have their own agendas, the most important stakeholders i.e. the citizens are completely sidelined and forgotten. Since government and other government institutions are the major shareholders of the enterprise, it directly or indirectly implies that “we the people” own HPPLC and it is us who are losing our hard earned (taxed) money to an inefficient enterprise which essentially sells us products that private players are selling more effectively. Sancho and other products that HPPLC produces are not even essentials like petroleum and electricity. Then the question arises as to why the government needs to play “god” and poke its nose in every other business.
The intentions of the government were well and good during the 50’s and 60’s when the private sector was not contributing much to the economy. With time and with changes in the system we have experienced a growing private sector capable of producing goods and services for the people at affordable rates while also creating much more employment opportunities than the public sector could possibly imagine.
Most of the public enterprises in Nepal along with HPPLC suffer from the phenomenon that is most encapsulated in the form of “tragedy of the commons”. In simpler terms what belongs to everyone does not belong to anyone. Take for example our own Ratna Park, a governmental park which is free and open for everyone. The park is in a very sorry state while Garden of Dreams, a privately run park where an entry fee is required has been doing way better.
Coming to the point, although the amount of loss incurred by HPPLC when divided among the citizens comes up to being a very small sum adding up losses of all the PEs is a very alarming issue for the taxpaying citizens. The taxpayers neither have the time nor have intentions to question the government on the viability of running HPPLC and other PEs. Keeping tracks of 37 enterprises run by the government is not going to be an important agenda for the taxpayers when they are busy running their own lives and paying taxes to fund government’s businesses. While few of us are concerned we are merely small fishes in a big ocean and such issues raised by concerned citizens like you and me never reaches the concerned authorities and even if they do it does not fall under priority issue when we all are more focused on constitution and politics. They will ignore you once, they will ignore you again and again but they cannot ignore you forever so it is time we ask questions and demand satisfactory answers from the concerned authorities.