Policy Stability Crucial for Tax Reform: Auditor General Offers 9 Key Recommendations

KATHMANDU — The Office of the Auditor General (OAG) has pointed out a critical lack of policy stability in Nepal’s tax system, urging the government to halt the practice of frequently tweaking tax rates through the annual Financial Act.

In its 63rd Annual Report, the country’s supreme audit institution presented a nine-point reform package designed to make Nepal’s tax structure predictable, investment-friendly, and transparent. To achieve long-term policy stability, the OAG has strongly recommended developing a robust medium-to-long-term tax policy framework.

Fostering Investment and Simplifying the Tax Code

The report emphasizes restructuring the tax system to encourage entrepreneurship, boost domestic manufacturing, and incentivize investments in research, development, and new technologies. To broaden the tax base, the OAG suggested reviewing the current complex structure of multiple rates and extensive exemptions, advocating instead for a simplified, progressive, and ratio-friendly tax system.

Digital Transformation and Automated Compliance

To enhance the efficacy of the Value Added Tax (VAT) system, the OAG advised the government to rigorously promote electronic billing (e-billing) and transition to an automated, transparent tax refund mechanism. Additionally, the report outlines the need to modernize tax administration into a fully digitized, data-driven entity capable of executing risk-based tax audits.

Customs Reforms and EV Capacity Standardization

The Auditor General also highlighted loopholes in customs and imports, urging systemic reforms to ensure that the valuation of imported goods and services strictly aligns with internationally recognized transaction values. Notably, the report calls for establishing clear, scientific criteria to verify the motor capacity of electric vehicles (EVs) to ensure accurate customs duty determination.

Transparency in Exemptions and Accountability to Parliament

Addressing fiscal leakage, the OAG warned that granting untargeted tax exemptions to foreign-funded projects distorts actual project costs and invites misuse. It recommended making the exemption process entirely transparent and mandated that a comprehensive report detailing all tax exemptions—alongside their broader economic impact—be regularly submitted to Parliament.

Strengthening Governance and Dispute Resolution

The report concludes with a call to improve governance within tax administration by ensuring a minimum tenure for employees to prevent arbitrary transfers, enhancing professional capacity, and maintaining transparency in decision-making. Furthermore, it recommends making the tax dispute resolution process fast, fair, and independent by strengthening review bodies and enforcing strict timelines for resolving pending tax disputes.