Revenue collection is affected by import restrictions amid declining foreign exchange reserves

Government and central bank efforts to rein in imports amid depleted foreign exchange reserves and a rising balance of payments deficit have begun to affect government revenues.

Nepal’s revenue is heavily dependent on imports, with the government aiming to collect more than half of total targeted revenue from customs offices.

The government plans to collect Rs 1,050.82 billion in revenue in the financial year 2021-22 with the aim of collecting Rs 530 billion from customs offices.

But customs offices are struggling to meet the collection target, with imports slowing in recent months, particularly after the central bank announced a number of measures to discourage non-essential imports.

“The collection target for Baisakh (mid-April to mid-May) for the Customs Department is 44 billion rupees,” said Punya Bikram Khadka, information officer at the department. “Until Baisakh 24 [May 7]we were only able to collect 29 billion rupees.

With the government closing international borders 72 hours before local elections on May 13, Khadka does not believe his office will be able to meet the collection target.

In the first five months of the current fiscal year, the customs department collected more than its target, according to Khadka. But with the government tightening imports, especially of vehicles and non-essential goods that were the main sources of revenue, revenue collection has taken a hit.

For example, in December last year, the central bank made it mandatory for importers to maintain a 100% cash margin for opening a letter of credit (LC) to import certain scheduled goods.

According to the Nepal Rastra Bank, traders must maintain a 100% cash margin to import alcoholic beverages; the tobacco; money; furniture; sugar and foods containing sweets; glucose; mineral water; energy drinks; beauty products; shampoo; hair oils and dyes; caps; shoe; umbrellas; and construction materials such as bricks, marble, tiles and ceramics, among others.

Importers of motorcycles, scooters and private diesel-powered automobiles must also maintain a 50% cash margin with banks for opening letters of credit.

And another central bank directive issued on February 9 increased the number of import items requiring 100% cash margin to 43, while setting the cash margin required to import four types of goods at 50%. .

“These measures have discouraged the importation of revenue-generating items and affected revenue collection,” Khadka said.

As of May 7, the department was expected to collect revenue worth Rs 431 billion. “We have collected 419 billion rupees,” Khadka said. “The overall revenue target for the Customs Department by the end of Baisakh is Rs 441 billion. “As international borders are closed ahead of local elections, reaching the target is nearly impossible.”

Since mid-December last year, monthly import figures have been falling. Between mid-November and mid-December, Nepal imported goods worth 188.1 billion rupees. And in the following four months, imports amounted to Rs160.9 billion, Rs148.1 billion, Rs161.27 billion and Rs158 billion, respectively, according to the bank’s statistics. headquarters and the customs department.

Khadka said meeting the target for the entire fiscal year will also be a Herculean task, if not impossible, as the impact of the complete import ban on 10 types of products remains to be seen. “However, there will be no large-scale shortfall in revenue collection against the target,” he added.

At the end of April, the government imposed a complete ban on the import of all kinds of ready-made alcohol [excluding raw materials]ready-made cigarettes and tobacco products, and snacks like potato chips from Lay’s and Kurkure, a crunchy snack.

The government has also banned the import of diamonds, excluding those used as industrial raw materials. The government has also banned the importation of cell phones costing more than $600 and color TVs with screens larger than 32 inches.

Imports of jeeps, cars and vans, except ambulances and hearses, were also banned. Likewise, the importation of motorcycles over 250 cc, all kinds of toys and playing cards has also been banned.

In addition to revenue collection by customs offices, tax offices responsible for collecting taxes generated by internal economic activities also reported a decline in collection compared to their targets.

This has raised the question of whether internal economic activities have also fallen alongside deteriorating indicators in the external sector of the economy.

According to the Inland Revenue Department (IRD), it fell short of the revenue collection target of more than Rs 32.75 billion in the third quarter of the current financial year which started in mid-July 2021 It raised Rs 342.69 billion against the target. of Rs375.44 billion in mid-April, according to the IRD.

IRD Director General Ritesh Shakya told the Post last month that two factors could be responsible for the drop in revenue. “One is the continued slow capital expenditure, which has affected the VAT obligation,” Shakya said. “And the shortage of liquidity in the banking sector has affected economic activities.”