Nepal faces fiscal strain as low tobacco taxes hinder revenue and growth

Nepal is under growing fiscal pressure, with revenue shortfalls, a high budget deficit and rising domestic and external borrowing. Cheap cigarettes remain affordable because tobacco excise taxes account for only about 41 % of the retail price, far below the World Health Organization’s 75 % recommendation and lower than neighbouring countries. The low tax level means the country loses billions each year; tobacco‑related costs reached roughly 1 % of GDP in FY2024/25 while tax revenue from tobacco covered less than 60 % of those costs.

The Economic Survey for FY2025/26 projects Nepal’s economy to grow by 3.85 % to a size of NPR 6.6 trillion, with per‑capita GNI expected to hit USD 1,535. Positive signs include a 37.7 % rise in remittances, a strong foreign‑exchange reserve buffer covering 18.5 months of imports, and current‑account and balance‑of‑payments surpluses. However, structural weaknesses persist: capital‑expenditure remains stagnant, the trade deficit widened to 11.2 %, public debt rose to 43.6 % of GDP, and the fiscal deficit stayed in the billions.

Earlier modest tobacco‑tax hikes raised revenue without spurring illicit trade, but recent 3‑5 % increases have stalled revenue growth. Analysts and health officials argue that raising tobacco excise to at least 75 % of the retail price could generate significant additional revenue, reduce consumption and alleviate the fiscal burden.