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Some Tips For Preparing A Budget For FY 2012

Issue 23, June 03, 2012

Siddhi B Ranjitkar

Budget time is coming near every day; the Finance Ministry must be busy with joggling financial figures, as the money has to flow from the finance ministry to different ministries and then from ministries to one department to another and so on. Some of the officials at the finance ministry might be considering tax rise to collect more money from the people to increase the state revenue. Tax lowering has never happened in Nepal. However, the government in general and the Finance Minster in particular have been hyping on attracting foreign and local investments in Nepal for fast socio-economic development but these guys never hit the real problems but only the apparent ones making the realty of investments in Nepal only a wishful thinking.

Let us start off from the very basic issue that concerns all: the tax. Every body pays taxes on everything except for foodstuffs for the government making money to run the administration for enforcing the rule of law and protecting the lives and properties of the people in general. This has been more theory than the reality in Nepal. Anyway, let us dwell on the tax. The government has been grabbing the people’s money as much as possible throughout the history of Nepal without giving any benefits except for suppressing their voices. During the 240-year of the monarchical rule, Nepalis had simply plowed the lands of the monarchists and royals and gave them everything they had keeping themselves in dire poverty. Thus, the monarchists and royals stole the people’s wealth for the last two and a half centuries for their unimaginable luxury life style. Finally, Nepalis have finished off the monarchy in 2008 and then they could challenge the rulers for everything, as they have been awakened of their rights to self-determination. In the current situation of this reality, the rulers cannot steal the money from the people’s pocket directly. However, the powerful tool the government uses for stealing the people’s money remains the tax.

The government uses various names and tactics to collect the money from the people. Currently, the government uses the custom duty or tax on various goods Nepalis import for collecting major revenue for the government. The main part of the government revenue comes from this tax on imported goods, as Nepalis import almost everything of their needs. Thus, every Nepalis no matter whether s/he is a daily-wage earner or a beggar pays tax when s/he buys something for subsistence. If the government wants to protect the poor and the beggars from such indiscriminate tax then remove the custom duty and focus on income tax or property tax. If you buy a car you pay 120% tax on it, and equally you pay tax on gasoline for running your car. Where does this money go? Perhaps, it goes to build a road that lasts six months thereafter your car run over potholes for another three years or more before the road gets another layer of pitch. However, if you are a high state official or a minister or even a former minister, then you have a car, and gasoline free of coast running for it. Then, you can send it to buy vegetables, send your wife to her maternal home on it, or to any picnic you or your spouse like to have. This is a social evil we have inherited from the 240-year dynastic monarchical rule, and has not gone off yet even after Nepal has become a republic in 2008.

Another tax the government uses is value-added-tax (VAT). Previously, we used to call it a sale tax that was imposed on top of the custom duty. We have seen the VAT fraud. Almost every so-called industrialist and businessperson has submitted fake VAT bills causing billions of rupees worth of loss to the government. The irony is that Nepalis have ended up paying the VAT as the profit for the dishonest industrialists and businesspersons. For the obvious reason, Former Finance Minister Bharat Mohan Adhikari came up with pardoning such industrialists and businesspersons that had collected the VAT from the people but did not submit it to the government and kept it in their own pockets. Currently, Finance Minister Barsha Man Pun has repeatedly said that he is going to take actions against the defaulters of the VAT but so far nothing has happened. Most probably, the concerned finance ministry officials including the Finance Minister must have a share in such money otherwise they would have immediately punished such tax defaulters. The remedy for the VAT default is to remove it, as it has neither benefited the government nor to the people. If the government removes the VAT, people will get the goods and services at cheaper rates.

Nepalis in general tended to evade the taxes. The high taxes on some goods encourage the people to bring the goods through illegal means or routes. This is called smuggling. To this end, smugglers include the custom officials, and the police to import goods bypassing the Custom Office and taking the goods to their destinations safely. Without the cooperation of the Custom Officials and then the police, none would be able to bring the goods without paying the custom duty means tax on the imported goods.

The high taxes not only encourage smuggling but also to evade the taxes. For example, the government imposes 25% tax on the commercial building rent and 10% on the individual house rent. Such high tax on rent has sent the people renting out their commercial buildings or individual houses to present fake bills to avoid the high tax. Consequently, the government does not receive the real amount of the tax, as the owners of the buildings or houses collect large amounts of rent but declare only small amounts for the tax purpose lessening the tax amount.

The high taxes on goods and services not only decrease the state revenue but also create the so-called black money that goes into the market to distort it. Taxpayers pay fewer taxes than what they need to create a huge amount of money running parallel to the officially declared earnings. When current Prime Minister Dr. Baburam Bhattarai was a finance minister in 2008, he encouraged the people with black money to make it white paying 10% tax on such money. This was an official money laundering. However, it has made the government to collect some revenues but the government has not stopped the people making black money, yet.

So, the Finance Minister needs to take a bold step of decreasing every kind of tax to make it attractive for the people to pay, and discourage the taxpayers to evade taxes enforcing the lax law strictly and severely punishing the people trying to avoid even small amount of tax. Let us take an example of the tax on the house rent again. If the government decreases the tax on the rent from 25% to 10% on the commercial, and from 10% to 5% on the individual house rent, probably, most of the people might not evade the tax. If they do then the government needs to harshly punish anyone evading any such tax.

Reducing tax means keeping most of the money in the pockets of the people. Some of the money goes to chasing goods and services. This tendency might fuels the economic growth but might also increase the imports. So, the government using different tools of rules and regulations needs to attract such money to the productive sectors of the national economy. Thus, reducing tax on various goods and services not only contributes to higher collection of revenue but also to the economic development.

Now, let us turn to the agriculture. Historically, the farmers were the most exploited ones. During the last 240-year of the monarchical rule, the rulers did nothing for the benefits of the people but collected the exorbitant rent on the land keeping the farmers perpetually poor. At that time, almost every body was a farmer. We need to improve their lives making the agriculture more productive and keeping the rent on land low. Even now, farmers are paying high rent on the land they plow. In some cases, they pay off half of their agricultural product to the landlord. So, not surprisingly, the Maoists grabbed the land of the large landowners and don’t want to turn it over back to the landowners despite the heavy pressure put on them by the leaders of the NC and CPN-UML.

The government has been providing extension services to farmers at no cost to them believing the farmers would use such services for increasing their productivity. Extension service providers are not held accountable for the wrong services they provide in other words for the failure of crops caused by the wrong extension services and non-yielding seeds. Farmers had suffered crop failures due to the wrong seeds provided in the past. The government needs to commercialize the extension services and protect the farmers from the crop failures. Initially, the government might pay for the crop insurances for the farmers gradually leaving the crop insurances to the farmers. This might be the good subsidy the government provides on the agriculture.

The most unproductive subsidy the government has provided is on fertilizer. The government of Madhav Nepal had reintroduced the subsidy on fertilizers and allocated Rs 2 billion for it in 2009. Thus, the government has been throwing Rs 2 billion annually on this subsidy. This subsidy has not helped farmers to increase the use of fertilizers for higher productivity of agricultural products, as the government has not been able to provide farmers with fertilizers at the time of plantations. So, most of the subsidy goes to the pockets of the most unscrupulous officials handling the fertilizer businesses.

Most of the poor farmers resort to barter their products for fertilizers. For example, farmers used to barter the fertilizer they required with their products. Farmers take one bag of fertilizer for two bags of mustard seeds from the local traders. Most of the farmers don’t have any cash to pay for fertilizers. If they go to the local moneylenders they need to pay unbelievably high interest on the loans. Farmers cannot get institutional credits, as they don’t have any assets that can be used as collaterals for credits. So, the best option for the farmers have is to get one bag of fertilizers for two bags of mustard seeds paying off at the time of harvest. This serves the interest of the both parties. However, the state officials declared it illegal and stopped this business causing shortage of fertilizers to poor farmers. Thus, the subsidy on fertilizers does not make sense to poor farmers. Most of the cheap fertilizers illegally cross the southern borders for making money to the unscrupulous government officials and their partners in business on both sides of the border. So, the Finance Minster needs to take this fact into consideration and stop the subsidy on fertilizers but create an environment conducive to make fertilizers available to the farmers at the time of plantations by any means of trade.

Another factor influencing the productivity of land has been the law on sharing the land between the landowners and the tenants. This is called duel ownership of land. This provision has made neither the tenants nor the landowners attractive to invest in land causing low productivity of land. On the one hand the government needs to end the dual ownership of the land on the other hand the rent on the land needs to be left to the market. Let the market decide the value of land and its rent neither the owner nor the farmer should but in no case the government. Even if the government sets the land rent as low as possible ostensibly to encourage the farmers to invest in land for higher productivity won’t work, as the landowner might turn the land to something else that might give a higher rent on land thus diverting the agricultural land to something else.

Labor plays a major role in the economics. The Labor law is the most important tool for the economic development of any country. The Nepalese Labor Law has been the hurdle to both the economic development and the welfare of the laborers. However, the Labor law has not affected the agriculture, as the agricultural laborers are seasonal ones and are not organized into labor unions. The Nepalese Labor law lets you to hire any laborer but stops you to fire them. In this circumstance, what the entrepreneurs do is hire the laborers on dally wage means they don’t officially hire the laborers but let them work and pay them for the daily work they do. This method of hiring a labor has adversely affected both the laborers and the business, as laborers don’t get the benefits provided by the Labor law, and entrepreneurs have no incentive to invest in laborers for increasing their skills and their efficiency. These factors have been the great hurdles to business development in Nepal. The government needs to scrap such labor law unfavorable to business and labor, too, and formulate a business and labor friendly labor law leaving most of the things to the market to decide. The government needs to provide laborers with the safety net that is an unemployment benefit.

The government needs to scrap the labor unions that are supposed to benefit the laborers but more often than not, but they go against the interest of the laborers. Such unions have been good for political parties and to protect the most indiscipline laborers. The irony is that even the state employees have unions. So, the government should immediately stop the state employees from forming their unions that often affiliate to one political party or another.

One of the main constraints to our economic development has been the transport cartel. Transport service providers have made their associations to stop others from competing them thus making their monopoly on the service causing the service seekers paying higher prices than would have been otherwise if open it to competition. They set the prices for transportation, and even stopped others to enter into their business preventing the government to issue licenses to others making the competition impossible in the transport business. Consequently, the transport service has been high price. By some accounts, the price of transport has been three times more than what would have been a regular price if let others to compete the service. Federation of Nepal Chambers of Commerce and Industry (FNCCI) has repeatedly urged the government to break the cartels but the government has not done it, so far. What has prevented the government not to break such cartels is not known, yet. Such monopolistic cartels are cancerous to the national economy; so, it should be removed as soon as possible otherwise it would kill the economy.

Another disease causing the bad health of our economy is the fiscal indiscipline. The Nepalese fiscal year is divided into four quarters: each quarter of three months. A fiscal year starts on July 16, and ends on July 15 of next year. The first quarter is the monsoon and festival time. So, the weather is unfavorable for any fieldwork in the first quarter; and most of the Nepalis become busy with celebrating the longest two-week festival called Dashain in this quarter. In addition, the government must be struggling to pass the budget appropriation bill at the parliament and thereafter sending money to different ministries and the ministries in turn to various project-implementing departments and district offices of line ministries. Thus, the whole first quarter of a fiscal year pass by. The second quarter is the most appropriate time for fieldwork, and for construction work as well. However, most of the government agencies spend time on preparing job contracts and calling bids for jobs. Most of the agencies start off implementing projects, only in the third quarter if at all. Some of the agencies deliberately or by the necessity implement projects only in the fourth quarter. Nobody could complete the work designed ostensibly for a year to complete in the last quarter of three months. The construction agencies start digging roads laying sewer pipes, others start building roads and so on in the fourth quarter. By then the monsoon already sets in. Sporadic rains sometimes-heavy ones not only halt the construction work but also cause the hell of the roads for the people in general. In order to spend the budget allocated to them, the government agencies start buying everything they need or not in the fourth quarter causing fiscal indiscipline, as the budget would be lapsed after the end of a fiscal year needing to again follow a new process of budget next year. So, the Finance Ministry needs to scrap this process and discipline the ministries and they in turn the implementing agencies for enforcing the project implementation effectively and efficiently not wasting the most valuable national resources. The practice of spending most of the budget in the last quarter of a fiscal year should be stopped at any cost.

If the government wants to attract the private investment in the economic development of the country, the government needs to provide the investors with the safety net for the money they invest in the productive sectors of the economy. Nepalis have started investing in stocks and shares of private limited companies in 1980s. The bitter experience they have had is they have lost their investment in the industrial sector. Only some of the investors have earned dividends from the investment they made in the finance companies. Most of the foreign owned banks, and saving and credit finance companies have been running in profits but most of the industries could not make profits. For example, investors lost their investment made in the public limited companies such as Necon Air and Soybean Milk Company, as they went bankrupt. The long line of people standing for getting forms to fill out for purchasing shares of a recently set up bank shows that some Nepalis have money and want to invest in the company that apparently gives them a high return on their investment.

The government has proved that it cannot manage commercial enterprises for properly delivering the services not to mention making profits even having the monopoly on the business. The best examples we have are the three state-owned major business corporations such as Nepal Oil Corporation (NOC), Nepal Electricity Authority (NEA) and Kathmandu Upatyaka Khanepani Limited (KUKL).

The state-monopoly company NOC has not been able to deliver sufficient fossil fuels forcing Nepalese drivers to line up for several hours for filling up their gasoline tanks losing hundreds of thousands of person hours that could have been productively used elsewhere in the economy. Prices of petroleum products have gone up to keep up the pace with the international prices but the short supply has been endemic in Nepal. The state-appointed NOC management says that the NOC has been selling the fuels at the prices less than purchased prices except for the gasoline, consequently causing a huge monthly and even daily loss. This might be a half-truth, as the government has been increasing the prices of petroleum products almost four times a year to keep up with the international prices. The losses might be due to the theft of the petroleum products by the officials of the NOC and then put it as the loss due to evaporation, and so on. Another reason for the short supply of petroleum products in Nepal might be selling the Nepal-bound petroleum products in the Indian market when the prices in the Indian market are higher than in Nepal.

NEA is another huge state-owned corporations for generating and supplying electricity to the public at a reasonable price. However, it has not been able to provide the people with electricity even for a half day regularly causing an immense loss to the business of the common folks. During the last two decades, the government has neither built any power stations nor the private sector has. According to the local media reports, most of the private companies and people holding the licenses for building power plants and producing electricity have been waiting either for commission to get or to sell the licenses. The power demand has been going up every year but NEA could not meet it. Another reason is the loss of 45% of the power in transmission and due to the theft. NEA has not done anything to improve the age-old transmission lines and substations to improve the power supply. The result is common folks has to suffer from the short supply of power.

KUKL is the third most incompetent state-owned corporation that has failed in supplying water the public even once a week. Most of the neighborhoods in Kathmandu have been without the public water supply for years. The reasons are almost the same of the NEA. The government has not built any significant water supply sources during the last two decades but the demand for water has been increasing. The loss of water during the supply time is quite high causing the short supply to the consumers. In 1990, Prime Minister Krishna Prasad Bhattarai of the then Interim Government had said that he would bring the water from the Melamchi River to wash the streets of Kathmandu. His prophecy had never come true, as his successor late Girija Prasad Koirala had never bothered to build or follow up the building of the Melamchi Water Project. Minister for Physical Planning and Works Hisila Yami of the Prachanda government had given a job of building the Melamchi Project in contract to a company in 2008 but the succeeding government headed by Madhav Nepal did nothing to follow up the Melamchi Water project. KUKL needs to improve the water supply system and build new water supply sources to improve the water supply to the public. However, KUKL has been engaged in selling water to the private water suppliers taking the benefits of the short supply of water according to the local media reports. Most of the well-to-do people buy water from the private water suppliers to mitigate the short supply of water in Kathmandu.

Thus, the government has amply shown its incompetence to run any business enterprises that work on the market. The government corporations could ignore the market and keep the demand rising at the same time causing short supply not responding to the demands. So, the government needs to gradually transfer these corporations to the institutions that promptly respond to the demand and supply in other words the market. Such institutions thrive in the private sector. However, the government needs to be careful to deliver these corporations to the private companies, as the private companies having monopoly on the business perform worst than the state-owned companies. The government needs first to formulate laws, rules and regulations that inhibit the private companies from exploiting the consumers. The government needs to put the consumer protection law in place and enforce it strictly to protect the consumers from the deceitful private companies. Then, the government could gradually loosen its control over the state-owned corporations releasing certain percentage of the business starting with the 10% of the market share to the private companies to run and see how they perform. Depending upon the performances of the private companies, the government could gradually increase the private sector share in the business and then withdraw its hands from this business. However, the government should make sure the consumers’ protection and timely material and service delivery to the people. The government should take strong actions against cartelization.

Such a soft approach is applicable to the privatization of the state-owned enterprises, hospitals and educational institutions. The government needs to be careful to turn over the state-owned enterprises to the private sector. To this end, the government needs to formulate various laws to protect the consumers, and needs to remove all the existing laws that hinder the growth of the private sector. The government needs to follow the recommendations of the concerned private agencies such as FNCCI concerning the labor laws, tax law and other laws pertaining to the industries and commerce, and listen to the educationists concerning the educational sectors, and medics and doctors for improving the medical services.

Education is another sector of the economy the government needs to be concerned with very much. Proper education makes the humans more productive. Every child needs to have basic education at least. The government has been allocating a large chunk of every annual budget to education but the basic education every child acquires has not been improving, as it should because majority of the education budget goes to support the university education. Consequently, schoolchildren in far away districts don’t even receive textbooks not only on time but also might never get in some districts. Billions of rupees are spent on printing textbooks and sending them to the children in districts but poor children have rare access to such books. The government needs to correct this situation.

The standard of learning at the private schools and the public schools sponsored by the state has been widening. Sending offspring to private schools cost fortune to the parents. Majority of the parents have no choice but to send their children to the public schools. So, the government needs to take measures to improve the teaching and learning standard at the public schools but the government never should interfere in the business of the private schools, as we need certain schools that cater the need of the rich and super rich people. Making available teaching materials and paying good salaries to good and discipline teachers might improve the teaching and learning standard significantly at the state-sponsored schools. This is one of the many ways of providing people with social equity.

Another important service the government needs to provide the people is medical services. Today most of the state-run hospitals are running in miserable conditions. Anybody visiting such hospitals could see how the hospitals look like. The maintenance of hospitals has been at the lowest level possible. Doctors have little chance of improving their career due to the law that states doctors without serving in certain remote areas would not be eligible for promotion. However, doctors find that they could not go to remote areas to serve, as the remote hospitals have no sections of the service they are specialized in. So, the government needs to amend such laws immediately, and pay attention to the maintenance of state-run hospitals. In urban areas particularly in Kathmandu, private hospitals have been catering the needs of the people at the affordable prices. The primary health care the government has been providing at the health centers and health posts needs to be improved significantly by providing medicines and keeping health workers at the service centers.

Nepalis working in the Middle East, East Asia and elsewhere has been remitting huge amount of money to Nepal. According to the recent report, the remittance comprises 25% of the Gross Domestic Product (GDP). This amount of remittance has created a huge paper wealth in Nepal, and significantly improved the lives of the people in general. If the government could channel this flow of paper money to fund huge infrastructure projects such as highways, hydropower projects and other water projects, Nepalis might benefit even more than what has been now. The government has floated bonds for the Nepalis working elsewhere in foreign countries to buy but how many of them know such provisions made by the government not known yet. The government needs to properly use such hard-earned money not putting in the pockets of the corrupt ministers and state employees.

Most probably, money is not a problem for the government to fund any project but the main problem is properly utilizing the money intended to development. Most of the state money is spent haphazardly. Cost overrun and time overrun of large projects have been regular phenomena. If anybody takes a look at the annual report of the Auditor General’s report, s/he finds that a large amount of money is shown as irregularly spent in other words money has not been spent following the rules and regulations practically making the waste of money. The government needs to take immediate measures to stop the project people, state employees and even ministers from spending state money not following the rules and regulations. At the same time, the government needs to stop allocating money to the politically motivated projects such as youth employment, money allocated to each lawmaker for spending at his or her constituent and so on.

June 2, 2012

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