Nepal’s high tax, low returns regime

Nepal's government extracts capital through an extensive system of roughly 50 different taxes, including income tax, value-added tax, customs duties, and specialized charges. Despite this aggressive taxation, the national treasury faces a precarious deficit of Rs179.48 billion as of late May. Citizens are caught in a paradox: the state demands a substantial portion of their income while failing to provide essential services like well-maintained roads, adequate healthcare, or reliable public utilities.

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The three tiers of government in Nepal currently extract around 50 different taxes.

The scale of Nepal's tax burden ranks among the highest in South Asia. Goods and services are typically subject to a 13 percent value-added tax, while personal income tax rates can reach as high as 39 percent. The middle class bears a significant strain, as the low quality of public schools and hospitals forces reliance on private alternatives. Even the national health insurance program is in arrears, with the government owing over Rs16.87 billion to providers. This situation makes continued taxpayer compliance unsustainable when citizens receive so little in return.

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Citizens find themselves trapped in a paradox whereby the state demands a significant portion of their income while providing crumbling roads, inadequate healthcare and unreliable public utilities.

Fiscal reports highlight a worrying trend of slowing revenue mobilization and missed targets. Average annual revenue growth has fallen from nearly 15 percent pre-pandemic to just 8.7 percent recently. The ratio of federal revenue collection to GDP has also declined from 21.5 percent to 19.3 percent. The Nepali economy's structure remains precariously narrow, heavily dependent on external factors. Approximately 45 percent of total tax revenue comes from imported goods, leaving the national budget vulnerable to global supply chain disruptions, as evidenced by the impacts of the conflict in West Asia on fuel prices and logistics.

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The scale of the tax burden in Nepal is now among the highest in South Asia.

Compounding these issues are multi-year contract liabilities exceeding Rs1.03 trillion, with only a fraction funded in the current budget. This creates a massive carryover of debt, potentially forcing the government into a cycle of borrowing to repay existing debt. To resolve this looming fiscal crisis, Nepal must shift from aggressive taxation to administrative efficiency and economic expansion. Taxpayers are often confused about their obligations due to a lack of clear guidance, further hindering compliance and revenue collection.

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Fiscal reports reveal a trend of slowing revenue mobilisation and missed targets.