As capital spending shrinks, VAT collection falls short of target

KATHMANDU, Jan 3: The reduction in capital expenditure has dealt a blow to the government´s biggest revenue source - the Value Added Tax (VAT), the collection of which has fallen short of the target set for the first six months of the current fiscal year.



The government collected Rs 40.31 billion in VAT in the first half of Fiscal Year 2012/13 to mid-January, which is 96.38 percent of the target set for the period. VAT contributes 31 percent of the government´s total revenue.[break]



“The shortfall came because of a squeeze in the government´s capital expenditure,” Tanka Mani Sharma, the director general of the Inland Revenue Department (IRD), said.



The government´s capital spending stood at Rs 7.04 billion, or 13.71 percent of the amount allocated for the purpose, in the first six months of the current fiscal, despite instructions by the Ministry of Finance (MoF) to utilize at least 25 percent of annual allocation within the period.



Such low levels of capital spending affected government-led development activities like construction of infrastructure projects, which in turn hit VAT collection.

One of the main reasons for low capital expenditure this year is reduction in allocation of funds. Many ministries have been allocated funds less than last year´s actual spending because of failure to introduce a full budget. On top of this, ministries have been asked to chart out capital spending plans after setting aside enough funds for salary and other recurrent expenditures.



These barricades, however, did not affect the overall revenue flow into the state coffers.



In the six-month period, the government collected Rs 134.57 billion in revenue, up 21.57 percent from Rs 111.03 billion during the same period last year. Of this, Rs 27.07 billion was generated through collection of customs duties, Rs 17.69 billion through excise duties, Rs 30.65 billion through income tax, Rs 1.74 billion through registration fees and Rs 2.15 billion through vehicles tax, among others.



“Although the government´s revenue collection is satisfactory, rise in imports of goods for the purpose of consumption, rather than capital formation, looks alarming,” Finance Secretary Shanta Raj Subedi said.



Nepal Rastra Bank Governor Yuba Raj Khatiwada said: “The inability to increase government spending in line with hike in revenue collection will make it difficult to manage liquidity.”



He also stressed on the need to discourage excess imports of goods to be able to meet the economic growth rate target.

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