IMAGE: GOOGLE
WHEN A country’s most reliable tax collector is a customs shed, something has gone wrong. Nepal’s has not gone wrong recently: it has been wrong for decades, and the numbers are getting worse. In the fiscal year to mid-July 2025, the government collected Rs231bn ($1.59bn) from customs duties alone, a 14.9% jump on the year before. Add in the value-added tax levied almost entirely on imported goods—the country manufactures too little for it to be otherwise—and roughly 40% of all government receipts flow from a single chokepoint: the border.
That border is both Nepal’s revenue engine and its cage. The integrated check posts at Birgunj, Biratnagar, Bhairahawa and Kakarbhitta are the administrative gift the state gave itself. Every container must pass through them. The state can see it, weigh it and tax it, with an efficiency the Inland Revenue Department has never managed to replicate on domestic business. What looks like fiscal competence is actually fiscal dependence: the government cannot afford to reduce those inflows even though reducing them is the stated ambition of every industrial policy document Nepal has published since 1990.
The maths is unforgiving. Total VAT collection reached Rs342bn. Since domestic manufacturing is minimal, Katmandu Macro Advisory, our research arm, estimates that 60–65% of that sum—some Rs205–220bn—originates at the import stage. Combined with customs duties and import-related excise, trade-related revenues account for approaching half of all tax receipts. A government that depends on these flows has a financial interest in sustaining the import volumes it publicly deplores. When a ministry must choose between import substitution and meeting civil service salary obligations, salary obligations win.
The problem is not just that tariffs are high, meaning it is that the government relies on them to support its budget. Nepal’s most heavily taxed import categories—petroleum products, vehicles, tobacco—share two characteristics: demand is price-inelastic and no domestic substitutes exist at any scale. Petroleum imports alone generated Rs120.6bn in duties and levies. The government taxes something it cannot produce, cannot stop importing and cannot afford to see taxed less. That is not industrial policy, meaning it is a protection racket against development.
The excise system makes this clearest. Excise duties grew 19.7% in a single year to Rs175bn—faster than any other revenue head. In principle, excise is a domestic production tax. In Nepal’s practice, the domestic production base is so small that excise falls predominantly on imported petroleum, vehicles and tobacco. The same rate structure that levies steep excise on petrol also levies it on the 13,578 electric vehicles imported last year. A government with a real technology-transition objective would exempt EVs from import duties while developing a road-use fee to replace the petroleum revenue over time. Nepal’s government instead taxes EVs because it needs the money.
The political economy sustaining this arrangement is elaborate and durable. Import trading houses, many with political connections, benefit from a tariff structure that raises barriers to new competition while preserving existing supply chains. Customs officials collect extra payments that grow with how complicated and large the system they manage is. Political leaders controlling budget allocation have every incentive to maintain the flows that fund patronage networks. And at Nepal’s busiest border crossings, informal trade equals formal trade in volume, according to survey data collected by SAWTEE, a regional trade body. The syndicates that profit from the tariff differential driving that informality have their own interest in keeping the schedule complex and rates high.
Binding the whole structure together, invisibly, are the workers abroad. Remittances reached Rs1.72trn—25.9% of GDP. They flow into household consumption, which drives imports, which generates border taxes, which fund the state. The 505,957 workers who departed Nepal last year, up 10% on the prior year, are in a sense Nepal’s most productive fiscal policy instrument. They earn in riyals and yen and send home the dollars that buy the Korean electronics and Chinese construction materials that the customs officer stamps and the treasury counts.
The external environment has introduced fresh stresses. America has grown more isolationist under Donald Trump, coinciding with the expiry of a preference programme that had given 77 Nepali export categories duty-free access to the US market. A 20–30% contraction in US-bound carpet and garment exports would remove Rs3–5bn from household incomes in Nepal’s textile belt. Meanwhile the headline export surge—exports up 81.8% to Rs277bn—traces largely to a soybean and palm-oil re-export arbitrage that India can end with a single tariff notification. When it does, the export figure collapses and the processing employment that sustains consumer import demand goes with it.
One structural exception matters. Nepal became a net electricity exporter last year, selling 2.35bn units worth Rs17.5bn to India and Bangladesh. Hydropower requires no recurring imports—the opposite of the soybean-oil model. If Nepal reaches even a third of its ambition to export 10,000 megawatts to India, electricity revenues could surpass $1.5bn a year by the mid-2030s.
The reform path is visible. Domestic tax capacity must be expanded before import tariffs can be rationalised. Property taxation outside major cities is negligible. Corporate tax compliance is low across the informal economy. A credible programme would grow domestic revenues by Rs35–60bn a year over five to seven years before cutting import duty rates. Tariff rationalisation should then follow, waiving duties on manufacturing inputs to improve the cost structure for export-oriented production while maintaining them on final consumer goods. KMA estimates that waiving duties on the top 50 input categories would cost Rs8–12bn a year—absorbable if domestic measures are implemented first.
Petroleum taxation is the most urgent single reform. Rs120.6bn from one import category that faces accelerating technology substitution is an extraordinary vulnerability. A road-use levy on all vehicles—electric and petrol alike—could replace a portion of this revenue without the import-volume dependency that makes the current structure so fragile. No government has modelled the fiscal trajectory of the EV transition. The time to do so was several years ago.
Nepal’s fiscal deficit is about 2% of GDP, the lowest in nine years. That figure hides the fact that around 40% of the revenue creating this comfort comes from imports funded by Nepali workers in Gulf construction. It also ignores the productive investments left undone because the budget prioritises predictable border revenues. The trap is not unavoidable. Escaping it means recognising it clearly and understanding that the short-term cost of reform is smaller than the long-term cost of ignoring it. Nepali policymakers have been drafting development plans for thirty years, and building customs sheds for even longer. ■
