Nepal's High Tax Burden Fails to Prevent Fiscal Deficits Amidst Poor Services

Despite collecting a multitude of taxes, the Nepali government is struggling with persistent fiscal deficits and sluggish revenue growth, raising serious concerns about the sustainability of public finances. Ordinary citizens, already grappling with rising living costs and diminishing incomes, feel burdened by increasingly high taxes while receiving subpar public services. Most goods and services are subject to a 13 percent value-added tax, and personal income tax rates can reach as high as 39 percent.

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People pay a large portion of their income to the state, but they still face poor roads, weak healthcare, low-quality public education and unreliable public services.

Nepal imposes one of the highest tax burdens in South Asia, not only in terms of rates but also in the sheer number of taxes levied by federal, provincial, and local governments, totaling nearly four dozen. Yet, this extensive tax net has not translated into sufficient revenue collection, which has slowed in recent years and remains inadequate to cover the government's recurrent expenditures. Former finance secretary and tax expert Laxman Aryal noted that citizens pay a significant portion of their income to the state but still face issues like poor roads, weak healthcare, low-quality education, and unreliable public services.

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Nepal now needs to move towards a more integrated tax system and gradually lower tax rates.

Economists point to systemic issues beyond the number of taxes, including weak implementation and a narrow economic base. Nepal's economy has struggled to achieve sustained growth above 4 percent annually, limiting income expansion and weakening consumption. Aryal highlighted the challenge posed by a large informal economy and the lack of accurate GDP measurement, suggesting that without effective revenue system reform and implementation, substantial revenue increases are unlikely.

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The informal economy remains large and the real size of Nepal’s gross domestic product has not been properly measured.

Government reports indicate a notable slowdown in revenue mobilization, particularly since the COVID-19 pandemic. Average annual revenue growth decreased from 14.9 percent in the five fiscal years preceding 2019-20 to 8.7 percent in the subsequent five years. The ratio of federal revenue collection to GDP has also declined, falling from 21.5 percent in fiscal year 2020-21 to 19.3 percent in fiscal year 2024-25. As of May 23, the government had mobilized Rs1.012 trillion in revenue, a 7.7 percent increase from the previous year, but actual collection still falls short of government targets.

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Unless the revenue system is reformed and implemented effectively, there is little possibility of substantially increasing revenue collection.