Economists urge Govt to reduce income tax, raise civil servant salaries by 25%

KATHMANDU: Economists and tax experts have urged the government to reduce income tax rates and increase civil servant salaries by up to 25 percent, arguing that such measures could boost consumer spending, stimulate private investment, and support Nepal’s slowing economy.

During a discussion held at the Finance Committee of the House of Representatives on Thursday, economists recommended broad reforms to Nepal’s tax system, calling for a more investment-friendly budget and policies that can restore confidence in the private sector.

Participants in the parliamentary discussion emphasized the need to revise income tax thresholds and lower tax rates, saying Nepal’s current tax structure has become burdensome, particularly for low- and middle-income earners facing rising living costs.

Call for 25% salary hike for government employees

One of the major proposals put forward during the discussion was a 25 percent increase in government employee salaries.

Economists argued that increasing the purchasing power of civil servants would inject liquidity into the market, increase household consumption, and generate positive economic spillovers across sectors.

According to experts, stronger consumer demand could help revive sluggish business activity and encourage broader economic movement at a time when private investment remains weak.

Lower income tax to encourage economic activity

Economist Ram Prasad Gyawali stressed the need for the government to mobilize excess liquidity accumulated in the banking system toward productive sectors.

He argued that Nepal requires policies capable of rebuilding private sector confidence and encouraging investment expansion.

Similarly, economist Dilli Raj Khanal said the national budget should focus on restructuring the economy and making public administration more result-oriented.

Khanal also supported salary increases for government employees and proposed introducing a performance-based budgeting system to improve efficiency in public spending.

Proposal to exempt income tax up to NPR 1.2 million

Tax expert Chandra Mani Adhikari suggested that individuals earning between NPR 1 million and NPR 1.2 million annually should be exempted from income tax.

According to Adhikari, reducing tax burdens could improve taxpayer participation and potentially strengthen revenue collection by encouraging greater compliance.

He proposed a revised tax structure in which low-income groups would pay between 5 and 7 percent tax, while high-income earners would face rates of up to 22 percent.

Adhikari argued that Nepal’s tax system has failed to adequately respond to rising living costs affecting middle- and lower-income households.

He also compared Nepal’s tax structure with neighboring India, noting that despite similar inflationary trends, India allows income tax exemption for annual earnings of approximately NPR 1.275 million, whereas Nepal begins taxing income at around NPR 600,000 annually.

Family-size-based tax exemption proposed

Economist Prakash Kumar Shrestha proposed introducing family-size-based income tax exemptions, arguing that taxation should reflect household responsibilities and living expenses.

He also emphasized improving the government’s capacity in selecting and implementing development projects to ensure better public investment outcomes.

Experts call for tax administration reform

Tax administration expert Dirgha Raj Mainali said Nepal’s tax administration system remains structurally weak and requires major institutional reforms.

According to Mainali, the tax system has operated under outdated administrative frameworks for years, limiting efficiency and effectiveness.

He stressed that modernization, professionalization, and institutional restructuring are necessary to make Nepal’s tax administration more result-oriented and business-friendly.

Push for simpler VAT system

Economist Rupak Khadka highlighted the importance of simplifying Nepal’s Value Added Tax (VAT) structure.

He argued that a single-rate VAT system with a broader tax base would be administratively simpler, more transparent, and more effective than Nepal’s current approach.

Citing New Zealand’s GST system as an example, Khadka said broader tax coverage with limited exemptions has proven more successful internationally. He noted that while Nepal initially adopted a limited exemption approach, tax exemptions have expanded significantly in recent years, reducing efficiency.

Budget expectations rise ahead of fiscal policy announcement

The recommendations come as the government prepares the national budget amid concerns over sluggish economic growth, weak private investment, and declining consumer confidence.

Economists believe reforms in income tax, salary structures, and tax administration could help strengthen domestic demand and improve Nepal’s overall economic outlook.