Nepal's Informal Market Exceeds 43%, Undermining Revenue and Economic Stability

According to data from the Ministry of Finance, 43 percent of the Nepali market is informal. However, in reality, this figure is even higher. The indirect taxes paid by marginal customers and distributors when spending in the market not reaching the revenue, shops operating without registration, smuggled goods being sold in the market, import of goods through non-banking systems and Hundi, goods reaching the market through informal 'carrying' services, and artificial import of industrial materials beyond demand and supply being exported to third countries are symptoms and causes of the informal market.

Both government and private sectors have made numerous attempts to improve Nepal's economy through financial treatment. The belief was that if government fiscal policy is appropriate, the private sector will be attracted. In principle, this is correct. However, the creators of government economic policy did not realize or ignored that market dynamics operate on economic principles. It is true that most policymakers rely more on the private sector for this matter. Financial policy alone does not encompass the psychology of demand and supply; economic rules must be monitored alongside, a point the government side never considered. This is because the private sector has always insisted that 'the market should be free.'

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Unfortunately, our market has not been able to attract fiscal policy to date. This is evident from the private sector's attraction to investment areas. The main reason for this is that the private sector remains engrossed in the informal market. Even today, leaders of business associations are protesting, saying 'MRP should not be applied.' What does this mean? It is not difficult to understand. The informal market not only generates profit but also holds corrupt influence in politics and government sectors. The evidence for this is proven by the files of collusion between the corporate sector and government corruption.

Somewhere, there are also complaints that tax rates are determined by setting MRP as the minimum price. However, MRP is not the invoice price.

An informal market of 10 percent can be considered normal, as markets sometimes require natural flexibility. However, the informality of our market is above 50 percent. This directly affects revenue, consumption, production, and price stability. If not regulated in time, black marketing will flourish. Ultimately, this becomes a vicious cycle for economic governance, and it has already become one.

Here are some factual measures that can regulate the informal market:

1. Justification and Importance of MRP and Invoice

MRP is the maximum retail price of a product. It makes the price transparent from production to the marginal seller. It makes customer satisfaction and market price competition more market-oriented. The maximum price list does not reduce the profit of the trader, nor does the customer have to pay extra. MRP is prepared by including the expenses and profit of everyone from the producer to the marginal seller. The purchase and sale of goods are based on the will and demand of the buyer and seller. One cannot charge more than the MRP. However, the seller can reduce the price of the goods and sell them according to customer satisfaction and purchasing power.

The invoice price is the selling price according to the bill taken from the seller; it is not the MRP. Ordinary tax rules are self-evident. Somewhere, there are also complaints that tax rates are determined by setting MRP as the minimum price. However, MRP is not the invoice price. The taxable value is the invoice price issued by the seller at the time of sale. In some places, auditors' attitudes may also have contributed to this, and this attitude needs to be removed. This is because it is the duty of government auditors to set tax rates based on the actual selling price for the seller. The seller's duty is to provide a bill to the customer. After receiving the price of the goods, proof must be provided. This may seem simple, but billions in liquidity are being siphoned off within it. The seller is indirectly paying revenue to the government when purchasing goods or services. Large marts currently issue bills, and registered shops should also issue bills. This ensures that the indirect taxes paid by the public go directly into the state treasury and also discourages income tax evasion.

Legally, MRP must be applied to packaged, labeled, imported packaged, and internally produced goods and commodities.

Individuals or sellers can issue 'credit cards' as a return for their tax obligations. Currently, customers are not even able to receive returns for the taxes they have paid, which is unfortunate. Credit cards are very popular abroad. If invoices are issued, credit cards can be put directly into the hands of marginal customers and sellers. The market is unaware that it is losing potential financial achievements by not keeping proper records of the expenses incurred by individuals or sellers.

When both buyers and sellers are conscious of their expenses, it attracts employment, markets, and production, and trust in the banking system increases. Currently, the informal market has completely consumed this opportunity. The banking sector's opportunities are being taken by this informal market. Currently, more than 40 percent of total imports are transacted through Hundi. Some banks and financial institutions are thriving on this transaction. Banks do not trust those who spend in the market. It is this trust of indirect taxpayers and the banking sector that attracts people to investment, employment, and production in developed countries. We, on the other hand, have lost this attraction.

2. Difficulties and Challenges of MRP and Invoice

Legally, MRP must be applied to packaged, labeled, imported packaged, and internally produced goods and commodities. The MRP sticker also includes the 'Exim Code,' which provides information about the source, quality, and types of production and import. For traditional goods determined by weight and measure, such as local products, the legal provision is to determine the price based on weight and measure, not MRP.

There is currently great confusion in the market about how to apply MRP to imported goods. If goods imported from a second or third country were exported by the manufacturer with MRP applied, they can be sold by determining the domestic price based on the same MRP. However, this price should not be higher than the price determined in the foreign currency's domestic value.

The main challenge is determining the invoice price of goods at the customs point. The existing policy is to prepare the invoice value of goods based on the producer's price list, the importer's declared price list, or the customs tariff price list, collect customs duty, and set customs duty at a minimum of 50 percent of the MRP. However, importers complain that due to low invoicing, they cannot determine the customer price of goods, and this leads to losses in trade or inability to compete when calculating VAT.

'Low invoicing' has no policy or legal meaning. Customs duty is levied on the low invoice, not the maximum invoice. However, this term is prevalent at customs. Generally, the customs duty is calculated based on the import value of the goods and the associated business expenses. Until uniformity is established between the value addition that occurs from customs to the market and the price paid by the customer, traders will not be motivated to apply MRP. This is natural, as it is a problem caused by artificial low invoicing at customs.

Some traders argue – MRP is not present in Singapore, Hong Kong, and some European countries, so why is it needed here?

Due to unnatural price increases in transactions, traders hesitate to give customers bills and prepare invoices to their convenience. The indirect tax paid by the customer goes into the trader's account instead of reaching the revenue. This is where Value Added Tax and Income Tax are evaded. We need to prepare a rate list for the actual invoice of goods, not a low invoice, in customs duty. And this should be entered into software to track the purchase and sale rates from the customs point to the marginal seller. The software will start doing this automatically. Policy reforms are necessary to establish uniformity in prices in the customs tariff. Otherwise, the difference between customs duty and the price of goods up to the marginal seller will always lead traders to not make their accounts transparent. This gives rise to the informal market.

Some traders argue – MRP is not present in Singapore, Hong Kong, and some European countries, so why is it needed here? There is no infrastructure, and MRP cannot be applied to imported goods. Their religion is to make a profit from trade, and it is their duty to make the price of goods transparent. Avoiding this indicates they are reveling in the undeclared profits of the informal market. Under the pretext of 'infrastructure needs to be built,' the market has been run for the last 30 years. Traders are ready to apply MRP and invoices, and customers are spending money in daily transactions. However, the associations and leadership within are protesting. This argument is not factual but more about tendency.

In Singapore, Hong Kong, and some European countries, not a single rupee is transacted without issuing an invoice. If invoices are issued from 100 percent of shops, MRP can be an alternative. MRP is not the invoice price. It makes customer satisfaction and the market transparent. However, our market is confused about whether to apply MRP or not. Government policy and law are clear. The reason for not applying MRP is more due to the bad market tendency than its difficulties. This must be corrected now.

Approximately 70 percent of transactions in our market occur without invoices. Bill transactions maintain balance in market competition. It is the mandatory duty of the seller to give a bill to the customer. The customer does not need to ask for a bill; it is the customer's duty to pay for the goods purchased, and in return for the money, the trader must provide a bill. There is no limit to the amount. There might be a misconception that 'as soon as a bill is issued, one falls under the tax bracket.' However, there are tax brackets and limits. Those who do not fall within the tax bracket are considered good citizens or sellers, and only those who fall within the bracket have to pay taxes. The government should not adopt a policy of setting bill and tax limits on this matter.

Currently, the government has adopted a policy that goods exceeding one hundred rupees must be imported through regular customs. This is a very commendable and, in a way, historic step.

For this, every shop or establishment must directly connect its software to the nearest tax office. The nearest tax office will know the day's transactions, and like a bank statement, its statement can be obtained at any time. Auditors cannot interfere here, who work to reduce or increase the tax liability in transactions. MRP and invoices also control this anomaly and encourage transparent transactions.

3. Control of Border Smuggling and Customs Policy

Currently, the government has adopted a policy that goods exceeding one hundred rupees must be imported through regular customs. This is a very commendable and, in a way, historic step. However, policies must be clear to regulate this. Goods worth billions of rupees are smuggled across our borders. Smuggling occurs through packages, bicycles, carrying, wedding cards, etc. Currently, it is difficult to distinguish which goods in the formal market are smuggled and which have been regularly imported. This puts genuine and honest traders at a disadvantage and makes them unable to compete in the market.

Generally, for goods imported from a second or third country, any tax like GST, VAT, or other taxes of that country are refunded at the border itself. For small goods purchased by buyers in a second country with an 'excluding tax bill,' individuals can import them by paying customs duty. If all goods exceeding one hundred rupees at the border are subjected to customs duty or tariff, and Indian or third-country taxes are refunded at the border, smuggling will stop. Customers at border crossings consume goods by paying Nepali customs duty. This does not affect the price of goods in both Indian and Nepali regions.

When individuals are allowed to import, they will not resort to smuggling. This is because the price increase imposed on marginal customers by licensed importing associations has become a burden.

This also promotes domestic production and increases employment. In a situation where the balance of domestic demand and supply is deteriorating, border control and regulation increase demand and investment in the domestic market. This can be more effective in border areas. Through this, dormant savings and cooperatives can be revived. However, structural and policy clarity is necessary for determining customs duty and facilitating border crossings for marginal goods and customers.

4. Market Cartelization and Price Increase

Individuals should be allowed to import not only consumer goods but also vehicles, machinery, and all types of goods they need on a personal basis. Customs duty and tariffs already exist for this. Individuals cannot import for commercial purposes. For personal use, any goods can be imported by paying customs duty. This policy can regulate border smuggling.

When individuals are allowed to import, they will not resort to smuggling. This is because the price increase imposed on marginal customers by licensed importing associations has become a burden. And, for some large vehicles and other items, there has been pressure on individual prices and choices. After the privatization in 2047 BS, we abolished licensing systems in all sectors, both government and private, but through various dealer associations, we have maintained the licensing system as it is, creating a situation where additional value must be paid by the customer.

This policy, which directly affects market price increases, has not made the market competitive. Many goods are monopolized. In a way, this is market cartelization. The voice of traders is strong here, but this voice is weak. On one hand, there is the insistence that the market should be free, and on the other hand, the freedom of individuals to purchase is restricted, so the market cannot be free. If there are strict and clear regulations at the border and customs, individual import of goods will increase revenue. This will not affect the profits of market business associations and companies. It will not make any difference to their imports and will not discourage imports. They will simply have to compete fully in the market. And the market will automatically become competitive, and prices will be controlled and regulated. Monitoring where revenue leakage and problems exist can be easily done through this.

Conclusion

In conclusion, the argument 'MRP and invoices should not be applied' or 'it creates difficulties in trade' is just an excuse. If change is to come, it must apply to everyone. Prosperity will come only if traders, employees, politicians, rulers, and the public all change. It is old news that one will not give up their policies, and only another will be the carrier of change.

It is not just the change in politics or leadership that matters; the flaws in the market are affecting many of our policies, and this has a direct impact on politics and governance.

If the market is not analyzed from a 'microeconomic' perspective, voices for political change will arise every year. This is because the informal market cannot tolerate strict policies and regulations. Billions, not just billions, but many trillions of rupees are hidden informally here. This market thrives on political instability. Hundi and non-banking transactions have increased liquidity in the market. To manage market liquidity, the central bank has to withdraw billions of rupees every month. On one hand, investment is not encouraged, and on the other hand, there is liquidity in the market. The meaning of this is straightforward.

Currently, customers conduct transactions through 'digital pay.' Market transactions are becoming transparent. At least marginal customers are adhering to this honesty. The government's tax policy has not been able to incorporate this market liquidity into revenue. MRP and invoices will pave the way for bringing market liquidity to government revenue. This may be harsh, but there is no other way for prosperity and a sustainable economy.

It is not just the change in politics or leadership that matters; the flaws in the market are affecting many of our policies, and this has a direct impact on politics and governance. Therefore, corruption has come hand in hand with the private and public sectors. The immense profit and opaque transactions of the informal sector create an artificial definition of good governance. This artificiality indirectly increases public disillusionment.

When I was the Director General of the then Department of Commerce, I tried to implement MRP and invoice laws in the market, but traders from the informal market not only protested but also engaged in significant manipulation for my transfer, which was a disgrace. Even today, they are trying to do the same. This tendency will not bring about market reform. Ultimately, it is directly affecting the customers and traders of the market. It is raising questions about the integrity of both the domestic and external markets. This is not just a matter of traders but also a question of the honor of all Nepalis.

The government is strong now; there is an opportunity for reform. Let traders, customers, employees, and government policies – all parties cooperate. Applying MRP and giving bills for money paid to customers are not new. However, we have failed to guide both customers and traders towards this policy; we have confused them. And today, the market is operating carelessly. This carelessness is the informal market itself. If we do not reform now, when will we? If we reform today, it will become a practice in six months, and in five years, everyone will find it natural. Otherwise, even after a decade, this will remain a subject of controversy. Therefore, let's start today and realize the dream of nation-building and a developed country.

(The author is a former Joint Secretary of the Government of Nepal.)