Subject Entry:
As in the past fiscal year, we once again witnessed businesses being forced to shut down under pressure. A similar scenario unfolded in Lalitpur, particularly within the historic city of Patan, a key location along the tourist route. As a businessman, I remained silent during that period, but it became increasingly necessary to voice support for fellow entrepreneurs. This was due to unexpected and aggressive market monitoring practices carried out by the Department of Commerce.
While I held a leadership role within the business association, we did not advocate for shutting down in response to such challenges. Instead, we emphasized the need for dialogue and proactive measures. The association in Lalitpur has consistently focused on raising awareness, conducting regular inspections, and addressing gaps in compliance related to measurement and quality. However, recurring market disruptions have been triggered by arbitrary and often excessive monitoring by various tax-related bodies.
Most entrepreneurs with substantial investments have no intention of evading taxes. However, a lack of clear incentives and policies that support taxpayers creates a situation where evasion appears more advantageous than compliance. It is ironic that those who engage in dishonest practices often go unnoticed by state mechanisms.
Under Nepal’s federal system, the Constitution mandates the distribution of powers and responsibilities across three tiers of government—federal, provincial, and local. The framework includes provisions for revenue collection and financial management, which form a primary source of income for these administrative units.
According to experts like Dr. Chudamani Adhikari, successful federalism requires an efficient intergovernmental financial management system. This includes revenue levying rights, equitable distribution methods, and debt management policies. Ancient principles, like those from Chanakya Niti, remind us that tax collection should be like harvesting honey—done without harming the bees. Applied to modern governance, this implies that tax systems should be fair, business-friendly, and sustainable. In the context of Lalitpur, there is a need to evaluate how taxes, fees, and other revenue streams are being mobilized and whether these efforts align with the needs and realities of the local business community. In Nepal, all three tiers of government—federal, provincial, and local—have distinct rights to impose taxes. The federal government is responsible for VAT, corporate and personal income tax, salary taxes, customs, excise duties, and related fees. These include both direct (corporate and income tax) and indirect (VAT, excise, customs) forms of taxation, requiring businesspeople to remain vigilant and compliant.
Provinces are entitled to impose taxes such as vehicle tax, entertainment tax, advertisement tax, tourism tax, and agricultural income tax. They also manage real estate registration fees and service charges. Similarly, local governments have the authority to collect a wide range of taxes including property, housing, real estate registration, business, construction, tourism, and land taxes (galpot), alongside various fees and penalties for legal violations. Despite these rights, data since the implementation of federalism shows that local governments have been able to fund only about ten percent of their annual expenditure through locally collected revenue. To address the fiscal imbalance between local and provincial levels, the Constitution allows for the distribution of financial resources through grants and revenue bonds from the center to the lower levels. Financial responsibilities for key sectors such as education, health, local services, cooperatives, agriculture, and infrastructure development now fall largely on local governments. Therefore, it is essential for local authorities to transparently communicate to business communities how taxes are being utilized, particularly in areas that affect them directly. This transparency can help expand the tax base, especially for business taxes.
Basics of popular tax system awareness
Within the federal system, revenue policy remains a cornerstone of public finance and resource mobilization. Although local and provincial governments are mobilizing revenue within their constitutional rights, stakeholders often express concern over the lack of strategic and practical approaches in tax collection. We frequently hear that “the government cannot run on revenue alone.” To bridge expenditure gaps, underdeveloped and developing countries like Nepal rely on a combination of domestic revenue, foreign aid, and loans—creating budget deficits if revenue collection is insufficient. Hence, there is a pressing need to make revenue mobilization scientific, transparent, and investment friendly. Even if the government meets its obligations today, future debt repayments rely heavily on consistent revenue streams. While the federal government has provided frameworks and support, local governments are often too hasty or hesitant in enforcing taxation, which may affect public perception and long-term sustainability. A more balanced approach should include policy reforms that encourage production, introduce clear tax rules based on entrepreneurs’ capacity, and reduce the administrative burdens on businesses. This will create a fairer system where taxes are based on ability to pay and services rendered. Revenue mobilization should not be about achieving numerical targets; it should reflect a responsible partnership between the government and its taxpayers.
Entrepreneurs demand a scientific method of revenue projection and a direct correlation between tax rates and tax participation. When tax rates are excessively high, the temptation to evade increases. Instead, reasonable rates, streamlined business processes, and supportive infrastructure will naturally draw more investors and increase compliance, thereby broadening the tax base and stabilizing national accounts. The Laowa Association has repeatedly emphasized that reducing tax rates could increase compliance and overall revenue. We are ready to support studies that explore optimal tax rates for entrepreneurs and urge for programs that benefit both consumers and businesses—proposing that 25% of total business tax collections be allocated for direct business development support.
Conclusion:
Currently, citizens are burdened with nearly three dozen different taxes and fees, making it necessary to thoroughly review and streamline the entire system. Local governments must shift their focus toward property-based and service-linked taxes and fees, ensuring these are determined in a scientific and practical manner. Tax mobilization in Nepal still instills fear among many entrepreneurs. With the arrival of the festive season, the pressure from increased inspections and overlapping monitoring activities by multiple agencies intensifies. This often leads to panic among business owners and results in organized shutdowns—a situation that must end. We must transition from a climate of fear to one of cooperation, where taxation is understood as a shared responsibility. All three levels of government must prioritize investment in technology, infrastructure, and a business-friendly environment. When economic activity and citizen income increase, revenue naturally follows. Before expanding the scope and rate of taxes, governments must demonstrate that public funds are being used effectively and transparently. If citizens can clearly see the value and efficiency of the services they receive, they will be more willing to pay taxes.
Finally, to create a scientific tax system, we must focus on defining a fair tax base, determining appropriate rates, improving collection mechanisms, and strengthening the tax administration process. Tax policy should be aligned with public service delivery and long-term development goals. As Dr. Chudamani Adhikari wisely stated: “Let us harvest honey without harming the bees.” Only then can we build a prosperous, stable, and civilized society.
