Tax-free threshold doubled, bringing top officials into the net of exemption

Nepal's government has doubled the annual income-tax threshold to 1 million Nepalese rupees (approximately $7,500 USD), a move that exempts salaried workers earning up to 100,000 rupees per month from personal income tax. This fiscal change, effective from the current fiscal year, significantly benefits some of the country's highest-paid public officials, including the prime minister, ministers, the chief secretary, and security chiefs, who may now fall outside the income-tax net.

While the higher threshold offers relief to millions of salaried individuals, it has sparked questions about equity and progressivity. The exemption extends to top officials whose salaries, even with allowances, might exceed the new threshold, but deductions for mandatory social security contributions and retirement funds like the Employees' Provident Fund and Citizen Investment Trust can further reduce their taxable income. In some cases, individuals earning between 1.4 million and 1.5 million rupees annually could potentially pay no personal income tax.

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The government’s objective is to increase disposable income, generate effective market demand, and revitalise overall economic activity.

Finance Secretary Ghanshyam Upadhyaya defended the policy, emphasizing the government's objective to increase disposable income and stimulate market demand to revitalize the economy. He argued that increased consumer spending would indirectly generate additional tax revenue for the state, citing that 35-40 percent of government capital expenditure typically returns as tax revenue. However, the decision to exempt high earners from income tax has raised concerns about fairness and the progressive nature of the tax system.

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Between 35 and 40 percent of government capital expenditure typically returns to the state as tax revenue.