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Jun 30, 2010

CNI's demands to the government : An economic analysis!

Just read about some of the demands made by Confederation of Nepalese Industries to the government in view of the upcoming budget. Here is my analysis of the demands:

Curtail the corporate tax to 20 percent from the existing 25 percent for the production, trading and financial sectors.
Reducing taxes is a very good idea. As a general citizen of this country, you are very likely to have been led to believe that increasing taxes on business and industries is a good idea...an idea that benefits the society at large. In fact it's just the opposite. Higher taxes discourage businesses from expanding or scaling up, makes them incompetent due to higher costs, makes goods and services produced by them costlier and transfers resources from the efficient hands to the government which happens to be the  unproductive sector of the economy. When businesses are prevented from scaling up , many employment opportunities as well as the wealth creation opportunities that could have been created are lost. 

You may argue , "well, higher taxes mean more income to the government and more benefits to the society" but it's the opposite again. Let's see an example:

For every 100 rupee our government earns as revenue about 60 rupees is spent on administration which means 60 rupees is spent on either paying for the government employees who are in charge of collecting the same money or maintaining the government offices and procedures for the same purpose. Among the remaining 40 rupees, a portion of it is lost in corruption. Only the remaining small portion reaches our hands in form of some benefits. So basically we are paying 100 rupees to get the services of worth  less than 40 rupees.

If we leave the tax money with the business , then ? Well, in this case, the business is very likely to either distribute the money to its shareholders as dividends or reinvest it to expand business. In either case, general public benefits. If business is expanded more job opportunities are created and more Nepalese can get employment.

My only question is why not demand an overall decrease in tax rate rather than for some sectors only?

Increase the limit on which income tax is imposed to Rs. 250,000 for an individual and Rs. 300,000 for a family.
Good idea! Reasons: same as above!

Remove the dividend tax to encourage domestic and foreign direct investment.
Good idea! For a country as poor as Nepal, foreign direct investment is the only way of raising huge amount of capital needed for economic growth. At the same time, it will also encourage domestic investments which are very crucial for our economy.

Removal of value added tax imposed on the dairy industry, multiple VAT rate and involving the private sector in installing high power transmission lines.
Good idea!

Removal of export services duty and also a softening of the penalty for exporters to 10 percent from the existing 25 percent of the value of the exportable goods.
Good idea! Nepal is in serious need of exports. It would be a great help to the exports and a step towards free trader.

...a difference of 10 percent on the customs duty to be imposed on imported goods and raw materials for Nepali industry to protect domestic industry.
Very very bad idea! Free trade not protectionism is the way to prosperity. Majority of the world has finally learned this truth easy way or the hard way.  Imposing higher import duties prevents us from enjoying cheaper and quality goods and services from abroad and forces us to patronize the inefficient domestic industries. Why should we be forced to pay more for the local industries efficiency? Such protectionist policies benefit the domestic industries at the cost of consumers. Simple put, such policies make domestic producers richer and the consumers poorer. Such ideas are harmful to the economy of a country! But it's not a big surprise to see such fallacious demands from organizations such as CNI as it's in their vested interest to promote such policies no matter how harmful they are for general public!