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is rela� vely higher in Nepal as compared to other member countries in the
SAARC region.
Nepal’s tax system lacks simplicity, transparency and compe� � veness,
which is detrimental to a� ract FDI and mobilize indigenous investments.
Since elas� city of taxa� on is found to be below the unity (0.9), there is
tremendous scope for tax reforms in Nepal (Dahal, 2009) especially to design
a compe� � ve tax structure through se� ng-up of Central Revenue Board, a
semi-autonomous body at Ministry of Finance, Government of Nepal (MOF,
2009). The following table provides a compara� ve scenario of tax structure
in selected countries with respect to GNI per capita, tax eff ort ra� o, income
tax rate, corporate tax rate and VAT rate (table 2.1):
Table 2.2 : GNI Per Capita, Tax Eff ort Ra� o, Income Tax Rate, Corporate Tax
Rate, and VAT Rate, As of 2008
24
Countries
GNI Per
Capita US$
Tax Eff ort
Ra� o
Changing paradigms of aid eff ec� veness in Nepal
Income Tax
Rate%
Corporate
Tax Rate%
VAT
Rate%
Nepal 400 10.9 20 20-30 13
Bangladesh 520 8.5 25 27.5 15
Pakistan 980 10.6 20 35 16
India 1,070 17.7 31 34 12.5
China 2,940 17 20 20 10
Saudi Arab 15,500 5.3 2.5 20 0
Singapore 34,760 13 20 17 7
Source: Wikipedia March 2010; World Development Report 2010; Website: h� p://
www.taxrates.cc
In recent years, size of the na� onal budget rapidly swelled-up due to
increase in unplanned expenditures with penetra� on of a large number
of poli� cally mo� vated small and big projects. The budget for current FY
2011/12 is es� mated to be Rs. 385 billion with huge fi scal and budget
defi cits to be conven� onally off -set by growing internal (Rs. 37.4 billion)
as well as external borrowings (Rs. 29.6 billion). Unfortunately, the ra� o
of capital expenditure to total budget is conspicuously low in comparison
to recurrent expenditures, and this is es� mated to be 38.6 percent in FY
2011/12 (Budget Speech, FY 2011/12). The major problem associated with
the implementa� on of capital expenditure is as need under-spending, which
is primarily a� ributed to prolonged transi� on engulfed by fragile poli� cal
situa� ons with growing crisis of confi dence, lack of enduring peace and
stability and poor investment-friendly environment. These are major factors
to spur economic growth in Nepal and also indica� ve of poor economic
strength that marginalized the prospects for economic development. The
quantum of total outstanding debt es� mated to be 32 percent of GDP
leveled at staggering size of Rs. 430.6 billion (appendix 1) with addi� on of