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This paper is based on a broader study of tariff reform in Nepal conducted by a mission composed of G. Szapary from the IMF’s Asian Department, M.I. Blejer and D. Robinson from the IMF’s Fiscal Affairs Department, and D.B. Keesing from the World Bank. The authors benefited from valuable comments from W. Max Corden and from other colleagues in the World Bank and in the Asian and Fiscal Affairs Departments of the IMF.
Nepal’s population is 17.6 million and its GDP, at about US$3 billion, is equivalent to approximately 1 percent of India’s GDP.
The common border between Nepal and India spans approximately 800 miles.
The Nepalese rupee has been de facto pegged to the Indian rupee with only three changes in the Nepalese rupee/Indian rupee exchange rate over the past decade.
Commodities sold to India (legally or smuggled) are paid with Indian rupees.
Broadly, exports with not less than 80 percent Nepalese and/or Indian materials enjoy free access to Indian markets, while exports with more than 50 percent third country import content are subject to the same Indian tariffs and quantitative restrictions as imports to India from third countries. Exports falling between these two categories receive preferential treatment determined on a case-by-case basis. The import content ratios are measured in physical rather than value terms.
Except a few items which have recently been placed under Open General License (OGL).
There are several exceptions to the usual import charges. The most important exceptions relate to imports under the Industrial Enterprise Act which subjects imports of raw materials, intermediate inputs, and capital goods to a 5 percent import duty and exempts them from sales tax.
The calculation of EPRs has to take into account the level of “implicit” tariff, that is, all nontariff import taxes and the impact of quantitative restrictions. It should also consider export taxes and subsidies. Effective protection is, of course, influenced significantly by other factors as well, most notably the exchange rate, transportation costs, tax concessions, etc.
In principle, the price in India will be equal to the world price, augmented by the implicit Indian tariff, which is the nominal tariff plus indirect taxation and the rent representing the effects of Indian quantitative restrictions.
On a more technical level, another corollary of this conclusion is that it is difficult for Nepal to implement uniformity in the nominal level of import taxation (including tariffs, license fees, and premia) on imports from India and on imports from third countries.
This would be equivalent to the establishment of a free trade area with India: Nepal would have its own barriers against third-country imports, possibly at zero, but there would be practically unimpeded trade with India.
Vis-a-vis India, the import taxes should be set so as to maximize revenue to the Government by minimizing smuggling.