Nepal's Tax System Faces Major Overhaul as IMF Calls for Smarter Revenue Policies and Reforms

The IMF has urged Nepal to strengthen its tax policymaking through a skilled Revenue Policy Unit, better revenue forecasting, transparent tax reforms and evidence-based decisions. The proposed reforms aim to improve government revenue collection, reduce policy uncertainty for businesses, protect household interests and support sustainable economic growth.

The International Monetary Fund (IMF), through its Fiscal Affairs Department, has urged Nepal to strengthen its tax policymaking system, warning that weak institutional coordination, limited technical expertise and inadequate revenue analysis could undermine the country's efforts to improve government finances. In its 2026 report, Nepal: Building an Effective Revenue Policy Unit, prepared by IMF experts Li Liu, Rasmi Das and Michael Keen, the institution recommends major reforms to make taxation more transparent, predictable and evidence-based. The findings follow an IMF technical assistance mission to Kathmandu from March 30 to April 9, 2026, conducted at the request of Nepal's Ministry of Finance. The report highlights how stronger tax institutions could help the government increase domestic revenue, improve fiscal planning and make better-informed economic decisions.

Nepal's Tax Reform Ambitions Face Institutional Challenges

Nepal has introduced several initiatives to modernize its tax system and strengthen revenue collection. The Domestic Resource Mobilization Strategy, launched in 2024, provides a five-year framework for improving tax policies and administration. The High-Level Recommendation Committee on Tax System Reforms, commonly known as the Mallick Report, offers additional recommendations for medium-term reforms.

The government's 100-point agenda reinforces these commitments by prioritizing measures to reduce revenue leakage, improve tax administration and strengthen international cooperation. However, the IMF finds that progress remains uneven despite tax reform measures introduced during fiscal years 2024/25 and 2025/26.

One important achievement is the Ministry of Finance's Tax Expenditure Report, which highlights opportunities to improve transparency and review tax exemptions and concessions. Such preferential treatments reduce potential government revenue, making regular assessments necessary to determine whether they deliver sufficient economic and social benefits.

The IMF believes stronger evaluation of these concessions could help Nepal protect public resources while supporting a fairer and more efficient tax system.

New Revenue Policy Unit Could Transform Tax Decisions

A major concern identified by the IMF is the limited progress in making Nepal's Revenue Policy Unit operational. Established in November 2025, the unit represents an important step toward improving tax policy coordination. However, during the IMF assessment, its responsibilities, institutional position and long-term functions remained unclear.

The report warns that simply creating a new government office will not improve taxation unless it receives adequate authority, skilled personnel and clear responsibilities.

Nepal's existing tax policymaking process is largely reactive, with decisions frequently developed under tight budget deadlines. The Revenue Advisory Committee, which oversees tax-related budget proposals, meets mainly during the annual budget cycle. This leaves insufficient time for consultation, detailed economic assessments and consideration of alternative policies.

The IMF also identifies limited analysis of how proposed tax changes would affect government revenue and different income groups. Unbalanced stakeholder representation and potential conflicts of interest further weaken the existing process.

To address these problems, the IMF recommends establishing a permanent, high-level Revenue Strategy Group to guide the Revenue Policy Unit. The unit would provide technical analysis, develop reform options and support government decisions. Eventually, it could become a division reporting directly to the Revenue Secretary.

Better Data, Skilled Experts and Forecasting Are Essential

The IMF emphasizes that Nepal must invest in professional expertise to build an effective tax policy institution. The Revenue Policy Unit would require economists, statisticians, data analysts, accountants, legal specialists and professionals familiar with Nepal's tax and customs systems.

Recruitment should prioritize technical competence, supported by continuous training and stronger cooperation between government departments. Access to anonymized taxpayer-level data would also help officials understand the effects of proposed tax measures.

The report identifies three immediate priorities. First, the unit should develop reliable revenue forecasts to improve fiscal planning. Second, it should strengthen tax expenditure analysis to evaluate the costs and benefits of exemptions and concessions. Both functions should become operational within the unit's first year.

Third, the unit should build its ability to provide evidence-based policy advice. Analytical tools already supplied by the IMF could help assess proposed changes to value-added tax and personal income tax, including their potential revenue and distributional effects.

Developing key tax indicators would further strengthen the government's ability to monitor tax performance and evaluate reforms.

What Stronger Tax Policies Mean for Businesses and Households

The IMF recommends restructuring the Revenue Advisory Committee into a government-only decision-making body while allowing independent experts, academics, civil society organizations and private-sector representatives to contribute through structured consultations.

These discussions should begin before mid-January, giving policymakers more time to evaluate proposals before budget decisions are finalized.

For businesses and traders, better-designed tax policies could improve predictability, reduce uncertainty and support investment planning. Earlier consultations could also help policymakers understand the practical challenges businesses face when complying with taxation requirements.

For consumers and households, stronger distributional analysis could help authorities assess whether proposed tax changes place disproportionate burdens on particular income groups.

For policymakers, improved forecasting and more transparent evaluation of tax concessions could support better fiscal decisions. International development partners could contribute through technical assistance, training and institutional capacity building.

Ultimately, the IMF's message is that Nepal needs more than ambitious tax reform commitments. Building a capable Revenue Policy Unit, strengthening consultation and using reliable economic evidence will be essential to improving domestic revenue mobilization and creating a more transparent, effective and sustainable tax system.