How Nepal sets its revenue targets, how often it hits them, and what the gap means for future tax policy.
Every year, Nepal's Finance Minister stands up in Parliament and announces an ambitious revenue figure for the coming fiscal year. And almost every year since the pandemic, the government has fallen short of that number by a wide margin. Tracking the IRD tax collection target nepal has set against what it actually collects tells a consistent story about the revenue collection trend nepal has been living with — one of persistently optimistic targets, real but partial improvement in recent years, and structural pressure that any future tax policy will have to reckon with.
How Targets Are Set Each Budget
Nepal's annual revenue target is not a single official's guess — it moves through a defined institutional process each budget cycle, starting months before the fiscal year even begins.
In practice, the final number that ends up in the Finance Act is shaped as much by the government's spending ambitions and the overall budget ceiling as by a bottom-up estimate of what the economy can realistically generate — which is one structural reason targets have tended to run ahead of actual collection in recent years.
Recent Years' Performance Against Target
Looking at the last four fiscal years side by side shows a fairly consistent pattern of underperformance, with some improvement as targets have become more realistic and as mid-year revisions have been used more actively.
FY 2022/23 and FY 2023/24 both saw the government collect only around two-thirds to three-quarters of its original target, a gap driven partly by an import-compression period when the central bank restricted certain imports to defend foreign exchange reserves, directly hitting customs and import-linked VAT collection. FY 2024/25 tells a more encouraging story: after a mid-year downward revision of the target, the government ultimately collected about 92 percent of the revised figure, helped by an 11 percent year-on-year jump in collection. FY 2025/26, however, was disrupted by the September 2025 Gen Z movement, which forced an interim government to slash the overall budget roughly 14 percent mid-year; revenue collection for the year came in at around 84 percent of target, a reminder that political and social shocks can undo administrative gains just as quickly as they are made.
Sectors Driving Over- or Under-Performance
Indirect taxes — VAT, customs, and excise duty — make up close to seventy percent of Nepal's total tax revenue, which means the country's collection performance is unusually sensitive to import volumes and consumption trends rather than to corporate profitability alone. Years with strong remittance inflows and import growth, like FY 2024/25, tend to lift VAT and customs collection considerably, while periods of import restriction or economic slowdown hit these same categories hardest. On the direct tax side, income tax arrears recovery has consistently underperformed its own internal targets — IRD's own annual report shows tens of billions of rupees in income tax arrears still uncollected from tens of thousands of taxpayers, which represents a persistent drag on overall performance separate from the current year's fresh collection.
What It Means for Future Tax Policy
The recurring gap between target and actual collection has already started reshaping how Nepal approaches tax policy. Recent Revenue Advisory Committee reports have pushed toward broadening the tax base rather than simply raising rates on existing taxpayers, expanding digitalization and e-invoicing to close compliance gaps, and using more realistic, evidence-based targets rather than politically convenient ones. The heavy reliance on import-linked indirect taxes is also likely to keep pushing policymakers toward diversifying the revenue base — through better income tax compliance, more effective property and capital gains taxation, and continued digitalization — so that future revenue is less exposed to swings in trade volumes or one-off political shocks.
Frequently Asked Questions
What happens if IRD misses its annual target?
There is no automatic legal penalty for missing a revenue target — it is a fiscal planning benchmark, not a legal obligation. In practice, a shortfall forces the government to either cut planned expenditure (as seen in the FY 2025/26 mid-year budget cut), borrow more than originally planned, or draw down reserves, and it typically triggers a formal mid-year budget review where both revenue and spending targets are revised to more realistic levels for the remainder of the year.
Why does Nepal set targets that are often not met?
Revenue targets are set months in advance based on projected economic growth, trade volumes, and policy changes, all of which can shift due to factors outside the government's control — import restrictions, exchange rate movements, natural disasters, or political disruption. There is also a structural tendency for targets to be calibrated to match planned expenditure ambitions rather than purely bottom-up revenue forecasts.
Which tax generates the most revenue for Nepal?
Indirect taxes collectively — led by VAT, followed by customs and excise duty — generate the largest share of Nepal's tax revenue, together accounting for close to seventy percent of the total, with direct taxes such as income tax making up the remainder.
Are revenue targets ever revised during the year?
Yes. Nepal's Ministry of Finance conducts a formal mid-year budget review, during which both revenue and expenditure targets can be revised — usually downward — to reflect actual collection trends and any change in the economic or political environment since the original budget was presented.
Disclaimer: This article is for general information only and does not constitute legal or tax advice. Figures are based on published Ministry of Finance and Inland Revenue Department data available at the time of writing and may be revised in subsequent official reports. Please consult an ICAN-registered Chartered Accountant for guidance specific to your situation.
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