Did tax exemptions really help MSMEs?
On March 24, 2020, the Government of Nepal initiated a country-wide lockdown to contain the Covid-19 virus. The lockdown which lasted until 21 July 2020 severely impacted all aspects of the lives of Nepalis. The year post lockdown has been a tumultuous one. And, with vaccines finally arriving, everyone had hoped that things could return to normalcy. However, new coronavirus strains, the daily uptake in covid-cases, and the governments’ inability to acquire sufficient dosage of the vaccine for the population has led to rumours of another country-wide lockdown.
The first lockdown and the subsequent restrictions that followed severely affected the fragile MSMEs of Nepal. The Government of Nepal keeping this in mind provisioned tax discounts ranging from 20 to 75 per cent for pandemic-affected businesses from their tax liability for the last fiscal year. In overview this seems huge, 512,753 taxpayers receiving income tax waiver amounting to Rs. 2.16 billion.
But, if we dive into the details, the relief gets minuscule. On average, the government relief would amount to Rs. 4,212.55 per taxpayer. The first category of taxpayers received 75% tax exemption and consist of those whose annual transaction is up to Rs. 2 million. The second category, annual transactions Rs. 2 million to 5 million receive 50% tax exemption, the third category, annual transactions up to 10 million received 25% exemption, and the fourth category of taxpayers with annual transactions greater than 10 million received 20% tax exemption.
In terms of tax exemption received, the first three categories consist of 512,475 taxpayers and receive Rs. 2.1 billion tax exemption at an average of Rs. 4,105 per taxpayer. The last category of taxpayers consisting of 278 taxpayers received Rs. 56.29 million exemption at an average of Rs. 2.02 million per taxpayer.
This goes to show that the actual relief that MSMEs are receiving is quite low. A tax waiver of just Rs. 4,212.55 would be of little help to a struggling MSME facing the wrath of the pandemic. At a time when the second wave of the pandemic is raging on and a subsequent lockdown is taking place in parts of the country, this minuscule relief has not done the MSMEs any good. This shows that the government has either done little or no research to understand the needs of the MSMEs or does not care about the struggling MSMEs enough to provide them with actually needed relief.
It also begets the question of whether a strong lobbying arm of the bigger business houses motivated the government to provide them with larger exemptions while smaller businesses still suffer. Although bigger businesses might generally require larger bailouts the difference between Rs. 4,105 and Rs. 2.02 million per taxpayer is enormous. With the new fiscal year starting soon and the second wave of the pandemic hitting the country, the government needs to realign its priorities and learn from the mistakes made in the previous year to help the population.
According to a Rapid Assessment Study by UNDP, done back in May 2020, both formal and informal MSMEs saw a fall of 95 per cent in average monthly revenue and three in five employees lost their jobs in the micro and small businesses that the study surveyed. The study also found out that cash subsidy from the government was ranked the most important kind of support expected as part of an economic stimulus, followed by a subsidy on the interest rate, concessional loan, and rental waivers by landlords.
The government needs to understand that the percentage relief system dividing taxpayers into categories did not help provide actual relief and saw a disparity in relief distribution among big and small businesses. It, therefore, needs to step up efforts in not only providing income tax waivers which are positive steps forward but taking other measures such as cash subsidies to help MSMEs survive and provide actual relief to the taxpayers.
*Analysis based on the information of the article:
Over 500,000 taxpayers hit by pandemic get tax waiver worth over Rs2 billion
In the Financial Act, the government provisioned tax discounts ranging from 20 to 75 per cent for pandemic-affected businesses from their tax liability for the last fiscal year.
First published on Nepal Institute for Policy Research Blog.
