Finance minister overstates health sector allocation, makes wrong claim about Nepal’s income tax regime

This article was originally published in South Asia Check – an independent, non-partisan, non-profit initiative by Panos South Asia, aiming to promote accuracy and accountability in public debate.

On May 28, Finance Minister Yuba Raj Khatiwada unveiled a budget of Rs 1.47 trillion for the fiscal year 2020/21 in the Federal Parliament. Citing the COVID-19 pandemic, the budget was downsized by 3.8 percent from last year’s 1.53 trillion.

On May 29, a day after presenting the budget, Finance Minister Khatiwada, who also serves as the government’s spokesperson, held a press conference at the Ministry of Finance in Kathmandu. He spoke about various aspects of the budget during the 45-minute press conference.

In the course of his presentation, Khatiwada spoke about the budget allocation for the health sector and income tax rates in Nepal. While talking about the two issues, he made false and misleading claims.

South Asia Check has fact-checked his claims.

First claim

“The budget allocation for the health sector this year is up by almost a third. As you see this is my third budget, and during these years the budget allocation for the health sector has doubled. It is a good thing.”

According to the expenditure estimates of this year’s budget, a total of Rs 115.06 billion has been allocated for the health sector. In 2019-20, this amount was Rs 78.40 billion. And in the fiscal year 2018/19, health sector received Rs 65.34 billion. Khatiwada was right when he said this year’s allocation is a third more than last year’s but he was wrong to claim that the allocation has doubled in the last three years. For this he should have allocated Rs 130.68 billion for the health sector. In other words, he should have allocated an additional Rs 15.62 billion.

Second claim

“Our income tax rates are competitive in South Asia. Whether it’s institutional income tax or personal (income tax).”

We found that the minister’s this claim is also wrong. After a comparative study of income tax rates in South Asia, we found that Nepal’s personal income tax rates are among the highest in South Asia. Personal income tax rates range from 1 percent to 36 percent in Nepal. No other country in South Asia levies a personal income tax of 36 percent.

In Nepal, an individual with a net annual income of Rs 400,000 needs to pay 1 percent (social security) tax.  The income tax rate is 10 percent on annual income of up to Rs 500,000 and 20 percent on income up to Rs 700,000. A 30 percent tax is levied on personal income exceeding Rs 700,000.

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India does not tax personal income of up to Rs 800,000. Indians pay only 10 percent tax on annual income of up to Rs 1.2 million; 15 percent on income of up to Rs 1.6 million; and 20 percent tax on income of around Rs 1.9 million.

In Bangladesh, annual income up to Rs 350,000 is not taxable. Income tax is 10 percent on Rs 570,000; 15 percent on income up to Rs 712,000; 20 percent for Rs 855,000 and 25 percent for up to Rs 4.2 million.

Similarly, annual income of up to Rs 444,000 is not taxed in Pakistan. Similarly, a five percent tax is levied on income ranging from Rs 444,000 to Rs 888,000.

In Sri Lanka, annual income of up to Rs 300,000 is exempt from tax. The island nation levies a 4 percent tax on an annual income of Rs 391,000. The government charges tax at progressive rates of 8, 12, 16 and 20 percent for each income slab of Rs 391,000. Bhutan recently increased the threshold for income tax relief to Rs 480,000 from Rs 320,000.

In an article published on news website www.onlinekhabar.com, Rup Khadka, who headed the High Level Tax System Review Commission, set up to recommend reforms in Nepal’s tax system, said Nepal’s income tax rates were among the highest in South Asia. “Nepal’s average personal income tax rate is much higher than any other SAARC (South Asian Association for Regional Cooperation) country. This is not good for the country’s economic growth. The tax burden should be fixed comparatively,” he said, adding, “Since Nepal is a landlocked country with relatively small economy, from the viewpoint of economic development it is not appropriate for Nepal to impose taxes higher than that of India, Pakistan and Bangladesh.”

After a comparative study of the income tax rates of South Asian countries and based on the comments of a tax expert, we have concluded that Finance Minister Khatiwada’s claim that Nepal’s income tax rates are competitive in South Asia is also false.

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