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

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Vol. 10 No. 2, March/April 1999 VAT MONITOR 71 enue investigation, including an increase in the rates of import duties and income tax, introduction of the tourism services fee, the motion picture development fee and erection of barriers on the highways. In response to these measures, the business community went on strike and closed their businesses for several days. Negotiations took place at different stages between the government officials and the representatives of the private sector in order to resolve the problems. First, both parties agreed not to implement newly introduced proposals until they reached an agreement. Finally, both parties agreed on 39 points on 1 September 1998 when they agreed not only to reverse some proposals introduced through the 1998/99 budget but also to provide more exemptions and concessions and review the tariff structure. These provisions were related to VAT, income tax, customs duties, tax administration and revenue investigation. On the basis of the recommendations made by the representatives of both the government and the private sector, HMG/N made the following decision on 24 September 1998. The decision again did not conform fully to the agreement. VAT-related provisions under the 39 points are as follows: – The VAT threshold will be increased from NPR 3 million to NPR 4.5 million. – Importers will be allowed to import commercial goods from India and Tibet up to NPR 1.2 million per annum without a VAT registration certificate. They cannot, however, import goods of more than NPR 200,000 at one time. They will have to pay 5% advance tax at the customs point. – Vendors who are not registered for the purpose of income tax will be allowed to import commercial goods up to NPR 3,000 at a time from India and Tibet without being registered for VAT. – In the case of old stock, self-declared value would be accepted provided that the vendor has paid 1% income tax on the declared value. – The burden of proof will rest with the tax officers while establishing penalties relating to discriminatory discounts and undervaluation. – In the case of mobile sales, a taxpayer has to send goods together with a dispatch paper with the vehicle number on it and must issue tax invoices in the case of sold goods. – Vendors having transactions below the threshold will be required to issue serially numbered invoices and maintain their records. – A committee representing both the government and the private sector will be set up to resolve the problems relating to VAT and other tax procedures. The VAT office will coordinate this committee. – The VAT office will register new taxpayers as per the recommendations of the above-mentioned committee and the FNCCI representatives will help the registration of new taxpayers. This will not be applicable in the case of those vendors who voluntarily register. – In the case of those districts where there is no VAT office, representatives of the concerned district chamber of commerce and Industry will be included in the committee in order to resolve the problem relating to a taxpayer residing in such a district. The person nominated by the FNCCI will be included in the committee if the concerned district chamber of commerce and industry does not nominate its representative. – A committee of government officials and representatives of the private sector will be set up in order to recommend measures for the improvement of VAT law. – Mid-December 1998, this agreement has still not been implemented. Businessmen are dissatisfied and the tax administration has not been able to work properly. 5.2. Weakness of the government © 1999 International Bureau of Fiscal Documentation There were some weaknesses on the government side as well. There was a lack of coordinated approach and longterm strategy. Several tax measures were introduced in 1997/98 without any consideration of their possible effects. While VAT was scheduled to be implemented from 16 November 1997, the sales tax system was changed drastically in mid-July 1997, only for 4 months. Under the new system, in addition to manufacturers, dealers and wholesalers, retailers having an annual turnover exceeding NPR 2 million were required to register. Similarly, importers with annual commercial imports exceeding NPR 100,000 were also required to register. Taxpayers were required to get their prices approved by the sales tax officers or publish their prices from the manufacturing point to the retail point in the national daily newspaper except in the case of sales by a registered person to another registered person. Taxpayers were given a registration number, meaning that those manufacturers who were already in the sales tax net were provided a new registration number in place of the existing sales tax number. Since the tax administration and taxpayers were not informed about the new system, both parties were confused. Taxpayers did not comply with the new system, which remained almost unenforced. Taxpayers thought that VAT was introduced by the back door, which was not good for confidence building. There was a lack of coordination with other tax measures as well. The rate of sales tax was reduced from 15% to 10%. However, the sales tax rate was fixed at 20% on imports by non-sales tax registered vendors. Customs valuation and income tax assessment procedures, which were obstacles to the implementation of VAT, were not handled properly. While the government reduced the rate of customs duties from 40% to 30% and the income tax rate from 33% to 25%, they were not closely linked with the implementation of VAT. These rates were lowered in July 1997 whereas VAT was introduced from November 1997. Taxpayers had already forgotten these reductions in rates by the time VAT was introduced. The business community called for a strike at a time when the government had reduced the rate of all major taxes drastically. This was due to the introduction of some administrative procedures that were influenced by the tra-
72 VAT MONITOR Vol. 10 No. 2, March/April 1999 ditional administrative mentality and which were not in line with the broader transparent tax reform measures. On the other hand, due to a large cut in tax rates, the government had to forgo a substantial amount of tax revenue that was reflected in the collection of about NPR 26 billion against the original estimates of about NPR 30 billion in 1997/98. This was a lose-lose situation, indicating mishandling of tax matters. A similar story occurred in 1998/99 although for different reasons. Instead of introducing the measures that help soothe the opposition to VAT from the business community, the government introduced several new measures, including an increase in the rate of import duties, a 10% surcharge on income tax, export duties on a few items, new taxes such as the tourism services fee and motion picture development fee. These measures were not appropriate at a time when the government had planned to implement a fully fledged VAT. International experience indicates that governments do not propose any new taxes and do not increase the rates of existing taxes during the initial stages of VAT implementation. Rather there is a common practice to lower the rate of income tax and customs duties at the time of the implementation of VAT. Nepal chose another way. Further, tax barriers were erected on different highways at the time VAT was introduced. The business community considered it as also a part of the VAT implementation. Several proposals seemed to have been introduced to trap as many taxpayers as possible without broader consideration of revenue mobilization and/or tax rationalization. Because of all these reasons, the business community went on strike. They closed the market continuously for 11 days. The government could not enforce new proposals. It became necessary to amend the finance bill, which was done perhaps for the first time in Nepal. The situation did not improve much even after this amendment. Tax proposals were opposed perhaps more strongly in the recent 2 fiscal years than ever before. This has also affected the implementation of VAT. 5.3. General environment It has become difficult to move to a fully fledged VAT system from sales tax due to other reasons also. Many exemptions and tax incentives were granted under the sales tax system. VAT was supposed to abolish them which was necessary to broaden the tax base and rationalize the tax system. Further, many businessmen are required to register for VAT and maintain proper books and accounts that could make their transactions transparent. It must also be noted that tax compliance is very poor in Nepal and different taxes are not being fully paid in accordance with the law. There is a lack of transparency and both taxpayers and tax collectors took undue advantage of the situation. They thought that VAT would deprive them of this opportunity, and opposed this tax strongly. These were the main reasons for the opposition to VAT and the government has made several compromises in response to the strong opposition. VAT has not been effectively implemented yet due also to the fragile political situation. There was a change in the government five times in a period of about 4 years (November 1994, September 1995, April 1997, October 1997 and April 1998). In such a situation, it is difficult to implement any broad measure effectively. The period from now to the election is critical for VAT. Some politicians may oppose VAT to attract votes. Businessmen can try to put maximum pressure on the government not to make this tax effective and try to destroy the VAT system indirectly. After the election, the government of any party is likely to implement VAT more effectively. Further, the tax administration is still weak. Many positions are vacant even after 1 year of VAT implementation. Turnover of personnel which is not in the interest of the VAT organization is rather high. Most tax officials are not well motivated. The VAT administration is considered the least attractive administration in the revenue administration. Tax officials prefer to work in customs or the tax administration. There is a lack of incentive to work in the VAT administration. There is also a lack of a proper physical working environment. The budget for VAT offices has not been increased even after the manyfold increase in their activities since the introduction of VAT. There is a common feeling amongst businessmen that VAT officers lack proper understanding of VAT and ability to implement it. There is a problem of retaining well-qualified staff particularly in the computer field where remuneration can be higher in the private sector than in the government. Due to the lack of computer personnel, the government has decided to hire private computer technicians to provide technical support to the computerized information system by means of a 2-year contract. 5.4. Teething problems © 1999 International Bureau of Fiscal Documentation As expected, some teething problems appeared after the introduction of VAT. Taxpayers have to maintain purchase and sales books for VAT purposes. In the case of some taxpayers, these books are in addition to their other books showing similar information. Recording of each and every purchase and sales invoices has also created additional work for those taxpayers that were not doing it before the introduction of VAT. As explained earlier, some accounting problems also occurred due to the customs valuation system. Some taxpayers that had already printed invoices in large quantities had to destroy them after the introduction of VAT since they were not in line with the VAT law. Some taxpayers continued to use old invoices. The VAT administration adopted a liberal approach by allowing them to use old invoices and supply information required for VAT purposes, such as the TPIN of both seller and buyer, if the buyer is registered for VAT, and the VAT amount. Hotels were allowed to issue separate invoices with separate
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