Revenue and Taxation

The International Development Cooperation Policy, 2076 guides Nepal in receiving foreign aid and directs it to national priorities. Cooperation is accepted in line with national plans, and it must be consistent with national priorities, be transparent and accountable, and be channelled through government systems as far as possible. The main priority areas are:

1. Infrastructure and connectivity — roads, bridges, railways, airports, hydropower and other energy, irrigation, drinking water and urban infrastructure.
2. Agriculture and rural development — modernisation and commercialisation of agriculture, food security and rural livelihoods.
3. Human resource development — quality education, health, nutrition and technical and vocational skills.
4. Employment and poverty reduction — productive jobs, inclusive growth and support to industry, trade and tourism.
5. Tourism and cultural heritage — tourism infrastructure and conservation of natural and cultural heritage.
6. Environment, climate change and disaster management — renewable energy, climate adaptation, conservation and disaster risk reduction.
7. Good governance and federalism — public financial management, accountability and capacity building of federal, provincial and local governments.
8. Science, technology and innovation — research, digital infrastructure and technology transfer.
9. Social inclusion and gender equality — women, children, senior citizens, persons with disabilities and marginalised communities.
10. Balanced regional development — backward and remote areas such as Karnali and Sudurpaschim.

Aid should be untied and without unnecessary conditions, aligned with Nepal's periodic plan, and recorded in the Aid Management Information System.

Strategies relating to revenue policy of the 15th Periodic Plan (FY 2076/77–2080/81)

The Fifteenth Plan adopted a revenue policy aimed at making revenue collection fair, broad-based and growth-friendly. Its main strategies were:

1. Broadening the revenue base — gradually reducing dependence on a few taxes (customs and VAT) and expanding the tax net to the untaxed and under-taxed sectors such as services, capital gains, land and property, and the informal economy.
2. Improving tax administration and compliance — simplifying tax laws and procedures, expanding e-filing and e-payment, strengthening tax audit, and reducing tax leakage, evasion and revenue loss through transfer pricing and under-invoicing.
3. Making the tax system progressive and equitable — shifting the burden towards those with higher ability to pay, rationalising exemptions and concessions, and protecting the poor through a fair structure rather than blanket tax holidays.
4. Promoting domestic resource mobilisation and federal fiscal balance — developing a clear intergovernmental revenue-sharing system among the three tiers of government and strengthening the revenue capacity of provinces and local levels.
5. Encouraging investment and reducing distortion — using revenue measures to promote productive sectors, import substitution and export promotion, while avoiding excessive taxation that discourages investment.

Review of implementation status

• Revenue base: Partially successful. Revenue collection grew steadily and tax/GDP ratio remained around 20–22 per cent, but dependence on customs and VAT has not fallen as intended; the informal sector and many service areas remain outside the net.
• Tax administration: Considerable progress. E-filing, e-payment, PAN registration and online systems expanded, and the Inland Revenue Department and customs modernised. However, audit coverage, dispute settlement and curbing evasion remain weak.
• Progressive structure and exemptions: Limited success. Exemptions and concessions have not been rationalised as planned; revenue leakage through exemptions continues.
• Federal fiscal balance: Partially implemented. The Intergovernmental Fiscal Transfer Act and revenue-sharing arrangements were put in place, but provinces and local levels still depend heavily on transfers and their own revenue mobilisation is weak.
• Investment-friendly measures: Mixed. Some concessions for industry and export promotion were introduced, but an unstable tax environment and frequent policy changes have reduced investor confidence.

Overall assessment: The 15th Plan's revenue strategies were directionally sound and produced moderate gains in revenue mobilisation and administrative modernisation, but full implementation was constrained by the COVID-19 pandemic, political instability, weak enforcement and slow federal fiscal adjustment.

Differences between Tax and Non-Tax Revenue

Example: An individual earning Rs 5,00,000 pays income tax of Rs 25,000 — this is tax revenue. The same person pays Rs 5,000 for renewal of a passport — this is non-tax revenue, as a service is received in return.

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Measures to Widen the Non-Tax Revenue Base

1. Review and revise fees and charges: Update government service fees (registration, licence, renewal, passport, land revenue) periodically to match inflation and actual cost of service delivery.
2. Strengthen royalty and resource-based income: Ensure proper assessment and collection of royalty from mines, forests, hydropower, sand and gravel, and telecommunications.
3. Improve performance of public enterprises: Make public corporations profitable through good governance, reduce losses and ensure timely dividend payment to the government.
4. Effective collection of fines and penalties: Enforce traffic fines, court fines and regulatory penalties strictly through digital payment systems.
5. Expand service coverage: Bring more services under the fee net (e.g., online registration, licensing of new economic activities) and tap new areas like tourism, aviation and digital services.
6. Control leakage and corruption: Use e-governance, online payment and strong auditing to prevent revenue leakage.
7. Proper management of government property: Generate income by leasing government land, buildings and other assets instead of keeping them idle.
8. Public awareness: Make citizens aware of the importance of paying fees and charges on time to increase voluntary compliance.

The Financial Procedures and Fiscal Responsibility Act, 2076 requires the federal, provincial and local governments to prepare budgets and programmes according to set principles and priorities.

Principles of budget and programme (2 marks)

The budget and programmes must be prepared on the following principles:

• Fiscal discipline, with expenditure kept within resources.
• Allocation of resources according to national policy and the periodic plan, using a medium-term expenditure framework.
• Results and outcomes, so that each programme has clear targets and indicators.
• Transparency, accountability and good governance.
• Equity and inclusion, covering gender, region, class and community.
• Sustainability, with recurrent expenditure met from recurrent revenue and borrowing used mainly for capital and productive spending.

Priority in budget and programme (2 marks)

Programmes are given priority in the following order of importance:

• Programmes that reduce poverty and generate employment.
• Capital projects, projects of national pride and projects near completion.
• Programmes that help meet national goals, sector policies and periodic plan targets.
• Programmes that raise production and productivity in agriculture, industry, tourism and infrastructure.
• Programmes for balanced regional development and for social security, justice and inclusion.
• Disaster preparedness, climate adaptation and environmental protection.

Related rule (1 mark)

New programmes should be taken up only after ongoing programmes have been given sufficient funds, and the budget is prepared within the expenditure ceiling fixed by the Ministry of Finance with the National Planning Commission.

Economic policy is the broad set of government decisions and actions aimed at managing the economy — guiding production, distribution, consumption, investment, employment and price levels — in order to achieve national objectives such as growth, employment, price stability and balanced development. It is the umbrella term under which fiscal, monetary, trade, industrial and labour policies sit.

Fiscal policy is the policy relating to government revenue and expenditure. It is operated through the annual budget: taxation (direct and indirect), government spending on development and regular expenditure, borrowing (internal and external), and grants. Its instruments influence aggregate demand, income distribution, resource allocation and the size of the budget deficit or surplus. In Nepal it is framed mainly by the Ministry of Finance.

Monetary policy is the policy relating to money supply, credit and the financial system. It is conducted by the central bank (Nepal Rastra Bank) using instruments such as the bank rate, cash reserve ratio, statutory liquidity ratio, open market operations, refinancing, interest rate corridor and moral suasion. Its objectives are price stability, external sector stability (balance of payments and exchange rate), adequate credit flow to productive sectors and financial system stability.

Interrelationship between the periodic plan and these policies

1. The plan sets the goals; the policies supply the means. The periodic plan (e.g. the Fifteenth Plan) fixes targets — GDP growth rate, investment requirement, employment, poverty reduction, inflation ceiling, sectoral output. Fiscal and monetary policies are the operational instruments through which these targets are pursued. Without a plan, the budget and the monetary programme would lack direction; without these policies, plan targets remain paper commitments.

2. Resource mobilisation and its link with fiscal policy. The plan estimates total investment and its division between public and private sectors. The public investment figure becomes the basis for the size of the budget and the development expenditure ceiling; the required revenue is matched through tax policy. If the plan targets a higher growth rate, fiscal policy must raise both the tax effort and the absorptive capacity of capital spending. Conversely, a weak fiscal position (low revenue, high recurrent spending) forces the plan to be scaled down.

3. Price stability and external balance link with monetary policy. The plan fixes an inflation target and a foreign exchange reserve target. Monetary policy is then framed annually (the Monetary Policy for the fiscal year) to keep money supply growth consistent with nominal GDP growth and to keep the balance of payments within safe limits. In Nepal, the exchange rate peg with the Indian rupee and the open border make monetary policy partly constrained, so the plan's external sector targets directly shape the monetary stance.

4. Credit allocation to plan priority sectors. The plan identifies priority sectors (agriculture, energy, tourism, SMEs, infrastructure). Monetary policy translates this into directed credit — priority sector lending, subsidised refinance, interest subsidies — while fiscal policy supports the same sectors through tax exemptions, subsidies and capital grants. The two must be consistent; if fiscal policy subsidises a sector while monetary policy tightens credit to it, the plan target fails.

5. Coordination through the budget and the annual programme. The plan is implemented through annual plans and the budget. The National Planning Commission, Ministry of Finance and Nepal Rastra Bank coordinate through the budget formulation process, the Medium Term Expenditure Framework and the monetary programme. Macroeconomic stability — moderate inflation, sustainable deficit, comfortable reserves — is itself a precondition for plan implementation, so the three are mutually reinforcing.

6. Mutual feedback. Plan performance (revenue shortfall, low capital spending, high credit growth) feeds back into the next fiscal and monetary policy adjustments; in turn, fiscal and monetary policy outcomes determine whether the next plan's targets are realistic. Thus the relationship is two-way and continuous, not one-way.

Conclusion: The periodic plan provides the long-term vision and quantified targets; fiscal policy mobilises and allocates public resources; monetary policy maintains stability and directs credit. Their interrelationship is one of goal-and-instrument, and effective coordination among the NPC, Ministry of Finance and Nepal Rastra Bank is essential for achieving planned objectives.

Public debt at 40.5 percent of GDP — how to keep it within limits and use it productively

1. Keeping public debt within safe limits (2 marks)

• Set a legal ceiling: Fix a debt-to-GDP cap (e.g. 45–50 percent) in the annual budget and a Fiscal Responsibility Act, and keep borrowing below it.
• Borrow only for capital expenditure: Use loans for projects that yield a return higher than the interest rate (golden rule of public finance); do not borrow to meet regular or recurrent expenses.
• Match currency and maturity: Prefer long-term domestic borrowing over short-term foreign loans to reduce exchange-rate and rollover risk.
• Improve revenue and control spending: Widen the tax base, reduce leakage in revenue collection, cut unproductive subsidies, and prioritise projects so that the debt-to-GDP ratio falls through growth rather than through fresh borrowing.
• Maintain debt sustainability: Keep the debt-service ratio within about 15–20 percent of revenue and publish a Medium-Term Debt Strategy (MTDS) each year.

2. Using public debt to raise national income, create employment and increase production (2 marks)

• Invest in infrastructure: Roads, bridges, irrigation, electricity transmission and industrial corridors raise the productive capacity of the economy and attract private investment, which lifts national income.
• Develop human capital: Spend borrowed funds on education, health and skill training so that the growing labour force becomes employable; this directly creates jobs and raises productivity.
• Support productive sectors: Provide cheap credit through the Rastriya Banijya Bank/Agricultural Development Bank to agriculture, small and medium enterprises, tourism and export-oriented industries to increase output and employment.
• Promote domestic production and import substitution: Use debt-financed industrial estates, cold storage and processing plants so that raw materials are processed inside the country and imports fall.
• Public–private partnership: Use public debt as seed capital to leverage private investment in hydropower, roads and agro-industry, generating both employment and revenue to repay the loan.
• Regional balance: Direct investment to less developed provinces (Karnali, Sudurpaschim) so that employment is created where it is most needed and migration is reduced.

3. Conclusion (1 mark)

Public debt is not harmful in itself; it becomes a burden only when it is used for consumption. If Nepal keeps the debt-to-GDP ratio within a legally fixed limit, borrows only for high-return capital projects, and uses the funds to build infrastructure, skills and productive capacity, the debt will repay itself through higher national income, more employment and greater domestic production.

Withholding Tax

Withholding tax is the advance tax deducted at source by a person (payer) from certain payments — such as salary, rent, interest, dividend, royalty, service fee or contract payment — at the time of making the payment, and deposited to the government within the prescribed time. It is not a separate tax; it is a method of collecting advance tax, and the amount so deducted is adjusted against the final tax liability of the payee.

"Person withholding advance tax" as per the Income Tax Act, 2058

Section 2 (definition clause) of the Income Tax Act, 2058 defines "person withholding advance tax" as a person who is required to withhold advance tax under Chapter 17 (Sections 87–95) of the Act. In general, the following persons fall under this definition:

1. Employer — any person or entity paying salary, wages, allowance, or other remuneration to an employee (Section 87).
2. Contracting authority / payer of contract amount — a person or entity making payment for contract works, consultancy services or other services (Sections 88 and 89).
3. Payer of rent — a person paying rent for land, building, equipment or vehicles (Section 88).
4. Payer of interest, dividend, royalty, natural resource payment — banks, financial institutions, companies and other entities making such payments (Sections 88 and 89).
5. Any resident person making payment to a non-resident — for payments such as interest, royalty, service fee, etc. (Section 89).
6. Any person or entity — including an individual, firm, company, partnership firm, trust, or government body — who is responsible for making a payment that falls under the withholding provisions of the Act.

In short, the "person withholding advance tax" is the payer who is legally obliged to deduct tax at source from the payment and deposit it with the government within the time limit specified in the Act and Rules.

Under the Excise Duty Act, 2058 and its Regulations, the licensing authority may take action against a licence holder after giving a reasonable opportunity to be heard. The order must be in writing and state the reasons.

Suspension of excise licence (2 marks)

The authority may suspend the licence when the licence holder:

1. violates the terms and conditions of the licence;
2. fails to pay excise duty or other amount payable within the prescribed time;
3. produces, stores, sells or distributes excisable goods without maintaining the prescribed records, or evades excise duty;
4. obstructs, or fails to cooperate with, inspection or investigation by the authorised officer.

Suspension lasts until the defect is cured or for the period fixed in the order.

Cancellation of excise licence (2 marks)

The authority may cancel the licence when:

1. the licence holder is convicted by a court for evasion of excise duty or another offence under the Act;
2. the licence holder repeats the offence or keeps on violating the conditions even after suspension;
3. the licence was obtained by false details, forged documents or concealment of facts;
4. the licence holder closes the business, or the licence is no longer needed for its purpose;
5. the licence is not renewed in time, or renewal fees and dues are not paid;
6. the licence holder becomes insolvent or unable to carry on the business.

Related provisions (1 mark)

Goods and records may be seized when a licence is suspended or cancelled, any dues remain recoverable, and the holder may appeal against the order to the prescribed appellate authority within the prescribed time.

Tax Exemption and Zero Rate in the Value Added Tax System

1. Tax Exemption (छुट) — 2 marks

Under the Value Added Tax Act, 2052 (1996), certain goods and services listed in Schedule 1 are exempt from VAT. Key provisions:

• No VAT is charged on the supply of exempt goods or services, and the supplier cannot claim input tax credit on purchases related to such supplies.
• Exempted items generally include basic agricultural produce (unprocessed rice, paddy, wheat, maize, vegetables, fruits, milk, eggs, meat), educational and health services, financial services, and certain social welfare goods.
• Exemption is granted mainly on social and equity grounds — to keep essential goods affordable for low-income groups.

2. Zero Rate (शून्य दर) — 2 marks

• Schedule 2 lists goods and services subject to a zero rate (0%) of VAT. These are mainly exports and supplies to Special Economic Zones and diplomatic missions.
• The key feature: although the tax rate is 0%, the supplier can claim full input tax credit on the VAT paid on inputs used in producing such goods or services.
• This makes zero rating more favourable than exemption, as it removes the tax burden completely and allows refunds, thereby promoting exports.

3. Main Difference — 1 mark

Conclusion: Exemption relieves the final consumer but breaks the VAT chain, whereas zero rating keeps the chain intact and refunds input tax, encouraging exports.

Under the Intergovernmental Fiscal Transfer Act, 2074, the federal government gives complementary grants (samapurak anudan) to provincial and local levels, on top of fiscal equalisation grants, to help them carry out development programmes. The grant is based on cost sharing, so the receiving government must also contribute its own funds. The Act and the recommendations of the National Natural Resources and Fiscal Commission set the rules.

Programmes that can be implemented through complementary grants

1. Physical infrastructure — roads, bridges, irrigation, drinking water, electrification and other development projects within the jurisdiction of the province or local level.
2. Social sector programmes — school education, health facilities and other services that raise the quality of public service.
3. Projects of national priority — programmes that match federal policy, the periodic plan and national commitments such as the Sustainable Development Goals.
4. Programmes reducing regional imbalance — projects in backward and remote areas, poverty reduction and employment generation.
5. Programmes serving more than one province or local level — shared roads, water supply and similar infrastructure.

Conditions

• The programme must fall within the receiving government's own jurisdiction.
• The receiving level must put up its own share of the cost.
• The grant is released only if the prescribed conditions and standards are met, and it is used only for the approved purpose.

Under the Local Government Operation Act, 2074, the local level's annual budget classifies expenditure according to its nature into three heads.

1. Recurrent expenditure (chalu kharcha)

Day-to-day spending that does not create a lasting asset. It includes salaries and allowances of staff and elected representatives, office operation costs, repair and maintenance, social security allowances, grants and subsidies, and other regular programme costs.

2. Capital expenditure (punjigat kharcha)

Spending that creates fixed assets or raises productive capacity. It includes construction of roads, bridges, buildings, water supply and irrigation schemes, purchase of land, vehicles and equipment, and major development projects.

3. Financial management (bittiya byabasthapan)

Spending on repayment of loans and on investment in shares or other financial assets.

Local levels must keep accounts under each head. They must show the source of funds for each (own revenue, revenue sharing, grants from federal and provincial governments) and keep recurrent costs within their means, so that capital expenditure is not crowded out.

Customs clearance is the process by which imported or exported goods are declared to the customs authority, their value and classification are verified, applicable customs duty and other taxes are assessed and paid, and the goods are finally released for entry into (or exit from) the country. In Nepal it is carried out under the Customs Act, 2064 and the Customs Regulation, 2065 by the Department of Customs through its customs offices.

Current customs clearance procedures (main steps)

1. Arrival and landing of goods — the carrier submits the import manifest to the customs office, and goods are unloaded and kept in a customs warehouse or under bond.
2. Registration of declaration — the importer or a licensed customs agent files the customs declaration electronically through ASYCUDA World, attaching invoice, packing list, bill of lading or airway bill, certificate of origin, and any licence or permit required.
3. Assessment of duty — the customs officer checks the HS code, quantity, value and origin, and assesses customs duty, VAT, excise and other charges. Value is taken on the transaction value (CIF) basis, with reference values used where under-invoicing is suspected.
4. Examination of goods — physical inspection or scanning at the border or the inland clearance depot, in the presence of the importer or agent.
5. Payment of duty and taxes — the assessed amount is paid at the designated bank or through electronic payment.
6. Release of goods — the customs officer issues the release order and the goods are delivered.
7. Post-clearance audit — records are audited later, and refund or drawback claims are settled as per law.

Problems seen in the process

• Under-invoicing and valuation disputes — low declared values cause disputes and delays at assessment.
• Lengthy documentation and delays — several agencies (customs, quarantine, standards, police) check the same consignment.
• Weak coordination among agencies — the single-window system is not fully effective at many customs points.
• Infrastructure constraints — too few scanners, sheds and parking spaces at border points such as Birgunj, Bhairahawa and Tatopani, causing congestion.
• Smuggling and revenue leakage — the open border with India encourages evasion.
• Limited digitalisation — system downtime and low digital skills among small traders.
• Corruption and rent-seeking — discretionary powers of officials create room for bribery.
• Shortage of trained manpower — especially at remote customs points.

Revenue leakage is the loss of revenue that should have reached the government through tax evasion, under-invoicing, misclassification, smuggling, weak assessment and non-recovery of dues. The statement is justified because the offices that assess, collect, investigate and recover revenue work separately, so leakage continues.

1. Fragmented revenue administration (2 marks)

• Revenue work is split among the Inland Revenue Department, the Department of Customs, the Department of Revenue Investigation, the Financial Comptroller General Office and provincial and local revenue offices. Their systems do not share data in real time.
• The Auditor General's annual reports repeatedly record large unrecovered revenue arrears and unsettled irregularities, running into tens of billions of rupees, which shows weak follow-up between assessing and recovering offices.
• The Department of Revenue Investigation files many leakage cases, but only a small share ends in full recovery or conviction because the investigation, tax and customs offices do not pursue cases jointly.

2. Customs leakage (2 marks)

• Customs contributes roughly one-third of total federal revenue, so even small leakage is large in rupees.
• Under-invoicing and misclassification, especially in third-country trade, are widely reported, and valuation is checked differently at different customs points.
• Smuggling across the open border with India continues because customs, police, armed police and local administration seldom run joint operations.
• Estimates of total leakage vary by study, but they place it at several percent of revenue or GDP, which is substantial.

3. Coordination failures in practice (1 mark)

• VAT credits and refunds are checked against customs records only after delay, because Customs and Inland Revenue do not exchange data automatically.
• The Public Accounts Committee has repeatedly directed the revenue offices to recover arrears, showing that no single unit is accountable.

Conclusion

Leakage control has not succeeded mainly because the units work in isolation. A common taxpayer ID, integrated IT systems, joint audit and investigation, and a national single window would improve it. Candidates should add the latest figures from the Economic Survey and the Auditor General's report.

Non-Banking Financial Institutions (NBFIs) in Nepal — Existing Legal Arrangements

1. Meaning and Scope (2 marks)

Non-Banking Financial Institutions (NBFIs) are financial institutions that provide banking-like financial services — such as loans, hire purchase, leasing, housing finance, insurance, remittance and microfinance — but do not accept demand deposits and cannot issue cheques. In Nepal, NBFIs are legally classified into four categories:

• Class "B" — Development Banks
• Class "C" — Finance Companies
• Class "D" — Microfinance Financial Institutions
• Other licensed institutions — Insurance companies, Employees' Provident Fund, Citizen Investment Trust, Nepal Stock Exchange, brokers, remittance companies, etc.

2. Main Legal Provisions (2 marks)

1. Nepal Rastra Bank Act, 2058 (2002) — establishes Nepal Rastra Bank (NRB) as the central bank and the sole regulatory and supervisory authority over banks and NBFIs. Section 6 gives NRB the power to license, regulate, inspect and supervise NBFIs.

2. Bank and Financial Institutions Act (BAFIA), 2073 (2017) — the principal umbrella law governing Class "B" and Class "C" institutions. It provides for:

   • Licensing by NRB (Section 7–9) and minimum paid-up capital.
   • Corporate governance: board of directors, audit committee, internal audit.
   • Capital adequacy, loan classification, provisioning and single-borrower limits.
   • Merger, acquisition and restructuring provisions.
   • NRB's power to suspend, fine or liquidate a defaulting institution.

3. Microfinance Financial Institutions Act, 2075 (2018) — separate legal framework for Class "D" microfinance institutions, covering licensing, capital, area of operation and supervision.

4. Insurance Act, 2049 (1992) and Insurance Rules, 2049 — regulate insurance companies, which are NBFIs licensed by the Beema Samiti (Insurance Board), not NRB.

5. Foreign Exchange (Regulation) Act, 2019 (1962) — governs remittance companies and foreign-exchange dealers.

6. Companies Act, 2063 (2006) — applies to the incorporation and general management of NBFIs as companies.

7. NRB Directives (Nirdeshan) — issued annually under BAFIA; they prescribe detailed prudential norms on capital fund, non-performing loans, liquidity, interest spread, and reporting.

8. Deposit and Credit Guarantee Corporation (DGC) arrangements — small depositors of Class "B", "C" and "D" institutions are insured up to Rs 5 lakh per depositor.

9. Problem Financial Institutions Resolution-related arrangements — NRB may take over management, appoint a liquidator, or arrange merger of a problem NBFI.

3. Conclusion (1 mark)

Thus, Nepal's NBFIs are governed mainly by BAFIA 2073, the Microfinance Act 2075, the Insurance Act 2049 and NRB Directives, all under the overall regulatory umbrella of Nepal Rastra Bank, which licenses, supervises and, when necessary, restructures or liquidates them.

Five major reforms in Nepal's customs administration for trade facilitation

1. Adoption of the Harmonized System (HS) of commodity classification — Nepal adopted the internationally accepted HS coding, which standardised tariff classification, made customs declarations uniform and simplified the assessment of duties.

2. Introduction of ASYCUDA — Customs operations were computerised through ASYCUDA (ASYCUDA World in its current form), enabling electronic declaration, automated duty calculation, risk profiling and faster clearance at major customs points such as Birgunj, Tribhuvan International Airport and Bhairahawa.

3. Adoption of the WTO Customs Valuation Agreement — Nepal shifted from arbitrary or reference-based valuation to the transaction value method under Article VII of GATT, making valuation transparent and predictable.

4. Inland clearance depots and dry ports — Facilities such as the Birgunj ICD and dry ports at Bhairahawa and Biratnagar allow clearance, warehousing and inspection at inland points, reducing congestion at the border and cutting time and cost.

5. Simplification of procedures — The National Single Window, risk-based inspection, post-clearance audit, reduced documents and steps, and alignment with the WTO Trade Facilitation Agreement have reduced physical inspection, dwell time and the cost of doing business.

Development process of the capital market in Nepal

1. Early phase (1937-1975 AD)

The capital market began with the Companies Act of 1936 and the first public share issues in 1937 AD, by Nepal Bank Limited, the country's first commercial bank, and Biratnagar Jute Mills. For almost four decades there was no organised market, and shares were traded informally through brokers and moneylenders. The Companies Act, 1964 gave a firmer legal basis for joint-stock companies.

2. Institutional phase (1976-1993 AD)

• Securities Exchange Centre (SEC) was set up in 1976 AD to deal in government bonds and shares, the first organised step.
• The Securities Exchange Act, 1983 gave legal recognition to securities trading and brokers.
• In 1993 AD the SEC was converted into the Nepal Stock Exchange (NEPSE), which began trading in 1994 AD.
• The Securities Board of Nepal (SEBON) was established in 1993 AD as the regulator.

3. Modernisation phase (1994 AD onwards)

• Automation: trading moved from open outcry to a computerised, screen-based system, improving speed and transparency.
• Depository: the CDS and Clearing Ltd. (CDSC), set up around 2010 AD, introduced electronic (demat) holding and settlement, replacing physical certificates.
• Legal reform: the Securities Act, 2063 replaced the 1983 Act and strengthened SEBON's powers.
• New players and instruments: merchant bankers, credit rating agencies, mutual funds, debentures and corporate bonds, and wider public participation through IPOs.
• Digital services: online trading through the Trade Management System, shorter settlement cycles and online share applications such as MeroShare.

4. Present status and challenges

NEPSE is the only stock exchange, SEBON the regulator and CDSC the depository. Market capitalisation and the number of investors have risen sharply. Challenges include low financial literacy, price manipulation, few corporate bonds and derivatives, concentration in banking and insurance, and sensitivity to political and monetary changes.

Conclusion

Nepal's capital market has grown from informal trading to an automated, regulated market with an exchange, regulator and depository. More instruments, investor education, stronger regulation and good corporate governance are needed for further development.

(a) Meaning of tax rate and tax base (2 marks)

Tax rate: The tax rate is the percentage or proportion at which tax is levied on the tax base. It determines how much tax a taxpayer has to pay per unit of the tax base. For example, if the tax rate on income is 10%, a person earning Rs 5,00,000 pays Rs 50,000 as tax. Tax rates may be proportional (fixed rate), progressive (rate rises as base rises), or regressive.

Tax base: The tax base is the total amount, value, or economic resource on which tax is imposed. It is the subject matter or the measure of tax — such as income, property, goods, services, or wealth. For example, in income tax the tax base is taxable income; in VAT the tax base is the value of taxable goods and services; in land revenue the tax base is the value of land. A broad tax base means more people and activities come under the tax net, yielding higher revenue at a lower rate.

(b) Tax base of the federal government according to the IRD annual report (2 marks)

According to the annual report of the Inland Revenue Department (IRD), the tax base of the federal government consists mainly of:

• Income tax — on the income of individuals, firms, companies, and other entities (including capital gains and remuneration).
• Value Added Tax (VAT) — on the value added at each stage of production and distribution of goods and services.
• Excise duty — on the production and import of selected goods such as alcohol, tobacco, and vehicles.
• Customs duty — on imports at the border points.
• Other taxes and fees — registration fees, vehicle tax, house and land rent tax, interest, penalties, and non-tax revenue.

The IRD report shows that among these, VAT and income tax contribute the largest share of federal tax revenue. The tax base is largely concentrated in the formal, organised, and urban sectors — registered businesses, import–export trade, and salaried employees — while a large part of the informal economy, agriculture, and the unorganised service sector remains outside the tax net. The report also notes that a significant portion of revenue comes from a small number of large taxpayers and from indirect taxes on consumption, indicating a narrow and concentrated tax base.

(c) Measures to expand the tax base (1 mark)

To expand the tax base, the following steps can be taken:

• Bring the informal and unorganised sectors (small trade, services, agriculture-based business) into the tax net through simple registration and presumptive taxation.
• Strengthen tax administration — expand taxpayer education, simplify procedures, and use digital/online filing and payment systems.
• Improve data linkage between IRD, customs, land revenue, and local governments to detect undeclared income and property.
• Widen VAT coverage by reducing exemptions and tightening registration thresholds.
• Increase voluntary compliance through fair, transparent, and taxpayer-friendly enforcement, while strictly penalising evasion.
• Promote formalisation of the economy by encouraging banking transactions and discouraging cash-based dealings.