New Education Tax in Nepal: An Open Letter to Nepalese Finance Minister

This letter is written as comment to an article published by Dr. Baburam Bhattarai in his Facebook Profile. Dr. Baburam Bhattrai is Finance Minister of Nepal. The article that has been published in Dr. Bhattrai’s Facebook profile is of one of the Editorials published in THE KATHMANDU POST.

My Dear Bhattarai,

I am not sure if you are the same who we presume you to be, the Finance Minister of Nepal. I hope that you are the same Dr. Baburam Bhattarai maintaining your facebook profile by yourself. I will be delighted to know even if your close well-wisher is maintaining your profile on your behalf and of course, on your supervision.

Dear Hon’ble FM, I am after this news of educational tax/educational cess/educational service tax, whatever name is more appropriate, to know more about it and to understand its modalities. My efforts to know more has become very futile and am not able to get any satisfactory answer how this tax will be administered. I have a clear answer why this tax has been imposed but how it will be administered is far from clear, at least to me. The above Post editorial also throws light of Rambhakti only to a babu (referred to government in India) like you but is not clear what negative impact can it make to people of this country.

I have some doubts and opinion about this tax which I am going to raise in this comment and I hope that you will respond at least to some comments. I do not be waiting your direct reply to me as that is probably not possible but hope that you take your own time to address some of the issues.

Now, let me talk about the impacts of this tax. As I read some online news sites sometimes back, one of the eminently respectable Minister in the field of education of your cabinet said that it is the tax that shall be paid by private School organizations whereas the some learned Inland Revenue Department’s officers opined that parents of school going kids need to pay this extra tax out of their pockets. I have not understood if the tax is direct in nature or indirect where the liability is shifted to the customers (school going kids’ parents).

Assume that before the tax is imposed, A School is charging Rs 1000 per admission and Rs. 100 per month as tuition fees for 12 months. Now, does your law prohibits these schools to charge Rs. 1000 as admission cost and Rs. 50 as Education Cess (hereinafter referred as ‘EC’) and Rs. 1200 as tuition fees and Rs 60 as EC for a year? I do not think so. And if they charge in that way, the government hopefully gets Rs. 50+ Rs. 60= Rs. 110 as Education Cess per student and that also when these School administrations do not play fraud and create forge documents bribing notoriously corrupt administration. Assume that your kitty swells by Rs. 110 per student per year, but who has to face the burden finally?

Has the per capita income of people grown up in the last 6-7 months after you formed government? Can they bear this increased cost? If yes, what are the supporting data/statistics in addition to Mao and Marx says so, if their ideology says anything of this nature.

Assume that these school administrators do not raise separate invoices but raise a single amount without bifurcating the basic costs and tax amount and give parents a single invoice of Rs. 2310/- in our above example, what remedy and alternatives these parents have except to sell out more money from their pockets?

Your 5% Education Cess is surely going to burn the customers’ pockets only and the end results is that may be some parents have to drop their kids from the school? is this what you want?????

Any way out?

I think here You and I agree on one point. Yes, the EC should be imposed to education sector and on private organizations but modalities need to be clearly worked out before imposing this tax.

The first and foremost but fundamentally flawed presumption here is that all private schools earn profits and all are there for selfish motive of making surplus profits.

We need to stop seeing private sector as evil organ of state. We need to appreciate the contributions they have made in this country when you revolutionists were busy demolishing state infrastructures without making any distinctions for what communists are known for. Anyway, my point is that there are private schools today even in country side imparting good education. These schools can not be compared with those heavy weight business institutions which are educational in nature.

So, we need to make a distinction between who are liable not to pay tax and who are liable? How?

1. The Amount of Revenue earned: We can make a flat exemption limit something like an institution earning less than Rs. 10,00,000 per year is exempted from this additional tax. This ten or nine or may be five, should be decided from the committee of experts which are naturally endowed with more wisdom than me. Here, when I say ten, it is not profit but the total income received by that private school without any deductions.

2. We can designate areas in various levels and can provide exemptions to schools straightway even if their total turnover is more than that threshold limit. For example, a private school opened in a VDC in Karnali Zone can be exempted from this tax even if their turnover is more than threshold limit. Or we can provide incentives to private schools exempting from this tax if they are opened in less developed areas and where the backward classes reside. Say, exemption from this tax if cost per student per year is less than Rs. 1000, and exemption continues for 10 straight years. If we really need education to all, we need to provide incentives to private sectors to go to villages. There is no point just to encourage YCL to go to villages and continue their unholy violence.

3. On what turnover, you are going to impose that 5% EC? This is one of the fundamental factor to decide how progressive you are. If you are saying that School A which earns 1000 as profit and School B which earns 20 as profit should pay tax at uniform rate of 5% i.e.; Rs. 50 and Re. 1, that is just proportional to their income and School B is in fact, paying more in terms of money value as determined as per basic principles of economics. The principle of diminishing marginal utility makes Re. 1 for School B more valuable than Rs. 50 for School A. This is a good incentive to hide incomes, not to get registered, to forge documents, to bribe public servants and to do many more illegal things than to pay tax.

Then, what should be done???

First of all, it should be decided that in which income, the tax is to be levied. It comes to my mind that most naturally, it should be levied on profits before tax after all the deductions and exemptions if any as per other fiscal legislations.

Suppose as said by above editorial, the rate of income tax for Educational body is 25% as per company law or under any law as it has been administered today.

Suppose School A earns 1000 Rs. profit and School B earns Rs. 20 as Profit. Then, their tax liability till today will be Rs. 250 and Rs. 5. Now, the 5% EC should come here. It should be 5% of Rs. 250 for School A, and 5% of Rs. 5 for School B. That means total accumulated tax that School A and School B shall pay will be Rs. 262.50 and 5.25 respectively.

This makes their EC liability proportional to Educational tax liability. This is little more scientific than other ways and more progressive.

There can be another way to tax educational bodies which is more progressive based on certain slabs. Therefore, the more they earn, the higher percentage of tax they have to pay. The higher percentage of tax they have to pay, the higher amounts of tax they need to pay. Therefore, instead of imposing anything extra 5% tax uniformly, we need to work out systematic tax levy mechanism where these 5% will be automatically couched and tax be levied progressively.

That’s all for now. Hope I be back to comment more on other matters.

6 thoughts on “New Education Tax in Nepal: An Open Letter to Nepalese Finance Minister

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  2. Very Well Written. I beg to differ from you in the terms of implementation. I would favor flat tax and no slabs, this will discourage people from producing fake documents and invoices.

    Other thing is that Education Cess is required to be levied on the private schools, and the revenue be used to uplift public sector education. Our Health and Education sector is totally privatized, and they can free to charge from their will. So the claim that tax increases fee is baseless. Education institutes charge the maximum they can get from parents anyway.

    So lets indulge in propaganda thoughts which the educational and health business people have made. We need to collect tax, build state infrastructure and work for long term goal.

    — Bhupendra

  3. Thank You Bhupendra Ji for your comment.

    But, I did not understand how you say that flat tax rate makes people to hide less. The people who are crooked and want to evade tax will do forgery and documents in all conditions. To prvent that one, tax rates should be kept low as possible. N there should be a good revenue administration and random revenue audits and assessment should be implemented.

    The Progressive theory of taxation says, and which our Comrades should endorse, that the more you earn, the more/higher percentage of tax you pay, that is considered to be more scientific.

    N When we talk about service tax, why private bording schools have been picked first? We can introduce service tax on various services as indirect tax and burden can be shifted to consumers but let’s start from these sectors like Mobile Telephony, Air tickets, travel tour agents, House Contractors. These are the services which are generally used by consumers from well to do family and indirect tax burden can be shifted on final customers eventhough this increases basic costs of these services.

    When we say that education is for all, imposing irrational tax on education sector is the first measure to deprive many from education.

  4. Bhuperdra ji,
    It is not the case that our education and health system is totally privatized, rather private sectors provide substantially higher quality service with higher price than government conducted schools and hospitals,

    And flat tax has been much criticized and it may bring about transparency, as you said but the its opportunity cost will be massive. It will further create disparity between the big fishes and small fishes in education sector, and equally provide fertile ground for exploitation of the less capable one. And as far as transparency goes, I think it is high time government should revamp its policies to check transparency.

    Tax increases fee is not a baseless argument. If there is a tax, then the burden of tax is always distribute among the producer and consumer (the proportion can differ). I would rather suggest price ceilings, which may not generate the revenue that the government is aiming for but will nevertheless make the private institutions more fair and increase the transparency.

    I just don’t see hurting the status quo of education is a catalyst to the development process. I do not even favor progressive taxes in short term, in the long term I think taxation is very important.

  5. i think the nepali government should:

    1. establish government school which is better in everything for eg. qualified teachers, facilities, rooms, toilets,huge area etc. than the private school.

    2.they should raise the tax the school pays to the government by 15 % or more and the money could be used to maintain the government school.

    By doing this i think the people will automatically starts to send their children to government school. and who will not?? if the government school is better in everything than the pribate school i bet 70% or more students from private school will go to the government school.

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