VAT 99-2/final - empcom.gov.in

Vol. 10 No. 2, March/April 1999 VAT MONITOR 69
very hostile to VAT from the very beginning16 . While they
could not challenge the principle of VAT, they were
repeatedly saying that this tax could not be implemented in
Nepal for several reasons. They raised several issues such
as VAT is not suitable for Nepal, it is inflationary, it is
complicated and it will encourage corruption. But these
charges could not catch the sentiment of the mass, which
was informed on different aspects of VAT through an
extensive taxpayer education programme. Finally, the
business community demanded that VAT be introduced
from the beginning of the next fiscal year (i.e. from 16 July
1998 instead of 16 November 1997) and the sales tax rate
prescribed for the imports by non-registered persons
should be reduced from 20% to 15%. They also demanded
the continuation of all exemptions granted under the sales
tax system.
On 18 November 1997 government officials and the
FNCCI representatives reached an agreement on VAT
issues, including the creation of a technical committee in
order to identify different problems met in the course of
implementing VAT, to form a permanent revenue board,
and continue with the facilities granted under the sales tax
for 3 months. Under this agreement, all tax exemptions
and incentives granted under the sales tax system were
granted under VAT as well for 90 days and a technical
committee was created on 15 December 1997. Representatives
of the business community presented to the committee
for discussion several issues such as the customs
valuation, VAT and income tax treatment of stock, the
time period for the declaration of stock, a review of the
exemption list, the possibility of limiting VAT only to
imports or the wholesale stage, reform of customs duties
and income tax, partial VAT, penal provisions and creation
of a permanent Revenue Board.
Some of these concerns were genuine while others were
ridiculous. For example, the demand for the improvement
in the customs valuation system was genuine. This is
because the Customs Department fixes values for customs
purposes. These values are lower than the actual values of
some commodities while higher than the actual values of
others. In the case of overvaluation, taxpayers have to pay
more VAT than actually required, while in the case of
undervaluation they have to pay less VAT than actually
required. Such an unrealistic valuation system has made it
difficult to maintain proper accounts. This is because in
the case of undervaluation, importers have to show a lower
value than the actual purchase price in the purchase book.
The importer fixes his selling price on the basis of the
actual price he has paid, not on the basis of the value fixed
for customs purposes. This leads to an artificially high
value added and high profit and hence high income tax liability.
Because of this importers did not issue an invoice
showing actual selling prices, rather they stated much
lower prices on invoices than they actually charged. On
the other hand, in the case of goods subject to overvaluation,
importers had to pay high tax and later on claim a
refund. This created not only a cash flow problem but also
difficulty in getting a refund since tax officials treat cases
© 1999 International Bureau of Fiscal Documentation
of tax credit with suspicion. Because of this problem,
traders tried not to come under the VAT net. So customs
valuation has been an impediment to the smooth and transparent
running of VAT. The business community
demanded the abolition of the customs valuation system.
Another problem was the VAT and income tax treatment
of stock. According to the VAT regulations, only the sales
tax paid on purchases made within 1 year remaining in
stock at the commencement of the VAT Act was allowed
to be deducted in the case of the following goods:
– on goods bought by taxpayers for resale;
– on goods and services partially produced or ancillary
goods for the business;
– on raw materials, auxiliary raw materials, and packing
materials.
A taxpayer may submit an application to the tax officer in
the prescribed form to have a deduction of sales tax paid
by him on his stock of goods at the time of registration.
These goods must have been purchased during the last
year. He is also required to submit invoices of payment of
sales tax and other documentary evidence within 15 days
of registration. There is no provision allowing input tax
credit in the case of goods that were in stock but did not
meet these criteria. In such cases there was a possibility of
double taxation and consequent price rises.
Treatment of stock was a problem from the point of view
of income tax also. This is because in the case of imports
from third countries, income tax is also assessed on the
basis of import documents. This means that importers
have to pay income tax on the stock of imported
goods. The business community demanded that they
should not be asked to pay income tax again on such
income tax paid stock.
The business community also demanded a reduction in the
customs and income tax rates. This was particularly
important in the context that taxpayers would have to pay
full tax in the post-VAT regime through the availability of
the information on the business transactions of taxpayers
under the VAT system. The business community at large
was also scared of the transparency to be generated by the
VAT system. This was also of concern to many tax collectors.
Another concern of the business community was penal
provisions. They considered that the penal provisions
under the VAT law were very stringent and the tax officials
would threaten them with such severe penalties.
The business community also demanded an unusual type
of VAT system, i.e. that for some selected commodities,
VAT should be levied at each stage in the process of production
and distribution without any threshold; for others,
VAT should be limited to the import/manufacturing point,
other items should be exempted from VAT and the tax
should be levied only in some parts of Nepal, not every-
16. The Nepal Chamber of Commerce set up an Anti-VAT Action
Committee, which called for strikes several times.