Income Tax Declines for the First Time in Years: What’s Behind Nepal’s −1.8% Drop?

Nepal’s income tax revenue has declined for the first time in recent years, falling 1.8% year-on-year in the first month of FY 2025/26. Government data shows that collections stood at Rs. 22.4 billion, down from Rs. 22.8 billion in the same period last year, breaking a trend of consistent growth in direct tax receipts.

The decline is notable because income tax has traditionally been a stable and expanding source of government revenue. Experts attribute this drop to several factors: sluggish corporate profitability amid slower economic recovery, a dip in business registrations, and rising reliance on informal sector earnings that escape taxation. Additionally, high inflation and reduced consumption may have weakened taxable income across households and small enterprises.

Despite this fall, income tax still contributed 26.3% of total revenue in the first month, making it the second-largest tax source after VAT. However, analysts caution that unless tax compliance is strengthened and economic activity revitalized, Nepal’s revenue base risks becoming more dependent on VAT and Customs duties — both of which are sensitive to imports and consumption shocks.