The current government, formed with a two-thirds majority following the major political turmoil that accompanied the Gen-Z movement last year, has introduced the budget for the Fiscal Year 2026/27. Numerous studies have pointed out that the lack of good governance in Nepal remains the primary obstacle to economic transformation. Notably, the youth-supported Gen-Z movement had put forward this exact issue as their main agenda.
The budget brought by this government, which guarantees stability, good governance, and transformation, carries a special responsibility. It must address an incoherent market, a private sector stuck in a wait-and-see position, a confused financial sector, a sceptical general public, and overall social welfare. By guiding a production-oriented economy, maintaining international prestige, driving technology-oriented change, and establishing a result-oriented governance system, this budget has guaranteed an uplift in the economy and social welfare.
Along with this, many national and international organisations have forecast that ongoing global political conflicts and this year’s sluggish monsoon will have an adverse impact not only on Nepal but also on the international economy, factors that require due consideration while moving forward.
Revisions have been made to the tax structure, altering existing rates and introducing new levies with a focus on supporting businesses and boosting the middle class. The income tax exemption limit has been doubled to Rs. 1 million for individuals, while the maximum personal income tax rate has been reduced by 10 percentage points. Similarly, tariffs on 273 types of industrial raw materials have been lowered, and excise duties on 360 items have been completely abolished. However, since more than 60% of Nepalis are engaged in informal employment and the majority do not file income tax returns, only a small portion of the middle class will be affected by this income tax revision. Beyond the high and medium-income brackets, the low-income segment of the middle class will not receive any relief from these changes.
Furthermore, while excise duties have been removed from certain items and custom duties slashed for a few industrial raw materials, a green tax, an internal production and promotion protection fee, and a clean infrastructure investment fee have all been introduced. In the stock market and real estate sectors, capital gains taxes, which were previously levied at 5% and 7.5%, have been increased to 7.5% and 10%, respectively. Additionally, a 3% equity fee has been imposed on private educational and health institutions, and a 5% VAT has been applied to electricity consumption exceeding 50 units per month.
The critical question remains whether this overall revision has added a net tax burden and what its implications will be for consumption, investment, production, and the broader economy. Ultimately, these revisions will not be counterproductive as long as they manage to energise a prudent economic cycle and make the market dynamic.
Fiscal and non-fiscal measures have been put forward to attract investment. A strong commitment has been expressed to establish policy and legal arrangements for investment promotion, economic reform, and smooth service delivery, including the repatriation of foreign investment. Generally, however, such investment promotion commitments remain reiterative due to weak implementation. One prime example of a measure that has been repeatedly promised but poorly executed is the one-window policy.
The budget prioritises agriculture, industry, the expansion of quality industrial infrastructure, and tourism, while taking steps to increase economic utilisation along with the proper protection and enhancement of natural and mineral resources. Of course, Nepal does not seem to be properly utilising its natural and mineral resources. Instead, their illegal encroachment is widespread, and proper utilisation must be increased to reduce this illicit use.
Additionally, the budget aims to develop human resources to leverage the emerging information technology and artificial intelligence sectors, while seeking to widely mobilise new enterprises, innovation, and entrepreneurship. It also aims to increase investment in regional development across rural and urban areas with the highest potential.
Furthermore, the budget proposes to restructure the hydropower sector by unbundling the NEA and creating separate entities for generation, transmission, and distribution, which will ease private sector participation in the international trade of hydropower. Despite repeated commitments to implement this unbundling of the NEA, which has been a policy debate for a long time, it has yet to materialise. Ultimately, progress in the economic sector depends heavily on political stability, good governance, and market confidence.
It is also stated that the budget will regulate credit transactions, provide long-term, fixed interest rate credit to priority sectors, and effectively manage non-performing loans. To encourage digital financial transactions, a 10% discount on value-added tax has been introduced. It is essential to focus on reforms such as the proper utilisation of credit, financial access, financial discipline, and credit flow to productive primary sectors, all of which should be addressed by the upcoming monetary policy. Finally, the budget mentions making special provisions for the currently accumulated foreign exchange, but in doing so, it is also necessary to consider the volatility that the country’s large trade deficit can cause.
It is stated that quality education, improvements in healthcare, and the restructuring of health insurance will be pursued. To fund this, a 3% equity fee will be imposed on services provided by private schools and private health institutions. It is important to note, however, that not everyone who enrolls their children in private educational institutions or visits private health institutions for medical services is wealthy. Many individuals with low incomes, earning around 30,000 to 40,000 rupees per month as gardeners, plumbers, and similar trades, utilise these private institutions because the quality of public alternatives is poor and, in some cases, securing services is too time-consuming. Therefore, alongside imposing an equity fee, it is equally vital to improve the quality of services provided by public institutions to encourage the masses, specifically the low-income middle class, to use public schools and public health institutions. If the quality of public institutions is not improved, this tax burden may adversely affect a large segment of service recipients.
Additionally, a 5% value-added tax will be imposed on electricity consumption exceeding a minimum of 50 units. Imposing this 5% tax seems counterproductive in the context of persistent unannounced power cuts and ineffective service delivery caused by the inefficiencies in the electricity distribution system. It would be more appropriate to introduce such taxes only after effective service delivery has been consistently achieved.
To ensure good governance, it has been proposed to merge various government bodies and eliminate redundant ones to streamline the administrative machinery and bring it to an appropriate size. Similarly, the salaries of civil servants, which have remained stagnant for a long time, have been increased. This adjustment was highly necessary under the current circumstances, and alongside it, there must be a focus on improving employee performance. A mechanism should be established to motivate and reward those who perform exceptionally well rather than favouring those who are simply preferred, which is a reform that has not yet taken shape.
The government has introduced a budget of Rs. 2124 billion for the Fiscal Year 2026/27, which is 25% more than the revised estimate for the Fiscal Year 2025/26. In terms of allocation, the government has designated 59.8% for recurrent expenditure, 20.3% for capital expenditure, and 19.1% for financial management. While it has set a target of collecting Rs. 1405 billion in revenue, the fact that the budget size is significantly higher than last year means the budget deficit is likely to widen, shifting the burden onto public debt.
Along with pledging aggressive reforms in good governance, the government has committed to improving expenditure management and the procurement process to expand capital expenditure, thereby encouraging private sector investment and making the economy and market dynamic. Through these governance and thrift measures, the currently high recurrent expenditure is expected to gradually decrease in the near future.
The budget assures that revenue collection and administration will be improved over time and made more efficient. However, the budget simultaneously appears to complicate revenue administration by introducing new taxes. It is worth noting that many of the taxes levied today collect less than 0.5% of GDP, and it is not sensible to impose taxes merely for the sake of stabilising public finance when the government should, in parallel, effectively provide public services related to such revenue.
This budget, which carries the special responsibility of establishing good governance and transforming Nepal’s economy, which has been in a state of flux due to repeated political uncertainties, has set an economic growth target of 7% while aiming to limit inflation to 6%. Ultimately, this budget must be implemented effectively by actively addressing the adverse impacts of its policies. Otherwise, the country risks sliding into an even worse economic situation.
