Thursday, June 28, 2007

Bizarre tax rules peg back growth

Propelled by easy finance schemes on offer by almost all financial institutions and easy availability of latest models, Nepali automobile sector has been growing at a geometric proportion.
Over the last decade, the ever-changing lifestyle has also helped the sector grow. However, an orthodox and exorbitant tax regime and duty provisions have made the road difficult for the automobile sector.
According to the Department of Transport Management (DoTM), the auto sector has seen an impressive increment of more than 12 per cent in new vehicles registrations last year.
Change in existing, rather vague and complicated tax structures, can push this figure to a greater height, bringing the government more revenue.
Automobile sector contributes 14-15 per cent to the total state revenue. Despite this, the government gives it a step-motherly treatment, blame industry insiders. The government continues to levy high import duty, forcing consumers to pay a very high price for vehicles.
"Nepal has relatively high customs duty on the import of vehicles in the whole South Asian region," says Sunil Khetan, president of Nepal Automobile Dealers' Association (NADA).
"Not only that all other accessories related to automobile like engine oil, spare parts, tyre and tube and battery attract high import duties," Khetan says.
"Has there been a more scientific tax system, the pace of growth could have gone up at a better rate," Akash Golchha, executive director of Golchha Organisation says, adding that less taxes mean cheaper vehicles and cheaper vehicles mean more sales, which will ultimately bring the government more revenue.
Agrees Khetan, "If there were pragmatic tax provisions on the import of vehicles, the growth in automobile sector could have been skyrocketing."
According to him, the government on an average levies 40 per cent duty on two-wheelers, 25 per cent on tyres, 35 per cent on lubricants, 15 per cent on spare parts and 15 per cent on batteries.
"The government should not be conservative on revenue matters,” he says adding that policies that are guided by old principals of raising more money through higher rate of tax encourage illegal trade.
The government has increased excise duty to 53 per cent from last year's 32 per cent and decreased customs to 55 per cent from 80 per cent on vehicles to comply with the WTO regime. "The change has done no good," says Khetan, adding that the best policy would be to decrease customs duty so legal trade could be encouraged and the government gets more revenue.
"According to WTO also, government should bring the customs duty down," he says.
On the pretext of complying to WTO, an orgnanisation which is failing in many aspects, the Nepal government should not lower customs duty but take a long-term view, suggest some traders.
However, others think that the government must comply with the WTO commitments as it is a WTO member country and lower the customs duty.
Apart from customs and excise duty, there are myriads of other issues dampening the automobile sector.
Road tax is one of them.
"The government should spend the road tax on infrastructure development and road network upgradation, so that vehicle's life is lengthened and fuel consumption lessened," Golchha adds.
Reducing the use of fossil fuel, which is totally imported costing large amounts of foreign currency to Nepal, should be yet another strategy of the government.
The government should encourage electric vehicles not only for saving foreign currency but also for the sake of environment.
One of the major players in the automobile sector is the two wheelers segment, which is main driving force behind the sector’s growth.
A wide array of models, easy availability of vehicle loans and an increasing living standard of Nepalis have bolstered the sales graph of two-wheelers.
The two wheelers market has witnessed an average growth of 15 to 20 per cent over the last couple of years. However, the two-wheeler segment has also been victimised by the government's exorbitant and bizarre tax system.
Apart from the vehicles itself, accessories like tyres and tubes is also a major segment in the automobile sector. The total value of the tyre market, as estimated by NADA, is around Rs 10 billion.
"However, over 50 per cent of this trade is illegal," says Manoj Sethai of Bridgestone tyre, adding that the government is losing a huge chunk of revenue due to this illegal trade.
"The huge price difference on the Indo-Nepal border market encourages illegal trade," says Sethai. The difference in price of a truck tyre between Birgunj and Raxwal is Rs 3,000 to Rs 4,000. Due to the porous Indo-Nepal border, almost 50 to 60 per cent of Indian tyres enter Nepal as smuggled.
"If the government lowers the import duty, the illegal trade could be checked and revenue could be increased," Khetan suggests.
Similar is the story of Engine oil and spare parts.
"A 35 per cent duty on lubricants and up to 15 per cent on essential spare parts has encouraged smuggling of these products from across the porous Indo-Nepal border," says Khetan.
According NADA's estimation, Nepal is losing more than Rs 300 million annually on the import of lubricants mainly due to high import duty. Nepal consumes about 12,000 metric tonnes (MT) of lubricants but the official figures show that only 6,000 MT is imported. This means around 6000 MT of lubricants are being smuggled through illegal channels.
"Readjustment in the tax structure can encourage official trade," says Amar Jyoti Ranjit, marketing manager at Nepal Overseas Trading Concern, the sole distributor of Castrol lubricants that occupies 50 per cent of the Nepali market.
Similarly, the total value of domestic spare parts market, according to NADA, is more than Rs 300 billion. "Unfortunately, more than half of the spare parts available in the market arrive through illegal channels," said an industry insider, who did not want to be quoted.
The challenge facing the government at present is how to generate more revenue while keeping customs duties low, so that more people have access to vehicles and transport. But the government policy is to milk the existing consumers to the limit.
Most governments think that increasing custom rates and custom evaluation could result in more revenue being generated. But importing goods by paying a high custom rate results only in high prices of goods, making a hole in customer's pocket.

1 comment:

Kunal said...
This comment has been removed by the author.