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

Vol. 10 No. 2, March/April 1999 VAT MONITOR 73
serial numbers for the restaurant, bar, laundry, etc. as per
their business practice. Some departmental circulars were
issued in response to queries from taxpayers.
Some foreign businesses, which were not registered under
any organization in Nepal, could not be registered for
VAT since they were required to attach a copy of a business
registration with the VAT registration application.
Similarly, abolition of several exemptions granted under
the sales tax system also created havoc in the business
community. Some unscrupulous people spread rumours in
the market to give VAT a bad name.
Some confusion has been created due to compromises
made in response to opposition from the business community.
As a result, VAT law has not been implemented
effectively. Tax officers who were trained in different
aspects of VAT law are not in a position to implement it
strictly. Some provisions introduced through the Finance
Acts have also created confusion. For example, the applicability
of 10% or 20% sales tax/VAT rate has created a
lot of confusion throughout the 1997/98 fiscal year. The
government has introduced some new taxes such as the
motion picture development fee and tourism services fee
in 1998/99. Since these taxes were introduced without
proper preparation, they created considerable confusion
and VAT was unnecessarily blamed for this too.
6. THE TASK AHEAD
The formulation and passage of the VAT Act, design of
VAT regulations and its final approval, preparation of the
VAT operational manual, creation of a functional VAT
organizational structure and creation and recruitment of
VAT officials have all been done in a short time by Nepali
standards. The VAT Act, Regulations, Manual and
Brochures have been in line with international standards.
Preparations for VAT in Nepal have been comprehensive
and much more detailed than for the introduction of any
other tax. This preparation has contributed towards creating
a favourable environment for the implementation of
VAT and gaining gradual acceptance by taxpayers as well
as the people at large.
Since the implementation of VAT is a great jump from the
traditional tax system to a modern one, several things still
need to be done for the successful implementation of VAT
in Nepal.
6.1. Political commitment
Strong political commitment is the key to the success of
VAT. In many countries the politicians at the highest level
support VAT. For example, in Singapore, the Prime Minister,
Deputy Prime Minister and many ministers, including
the Finance Minister defended VAT on various occasions.
In Nepal, however, only the Finance Minister has
advocated VAT frequently. This was also the case in the
past. Since implementation of VAT is one of the major
tasks of the government, other members of the cabinet
should support it as well. One important point from a political
point of view is that no major political parties have
opposed VAT so far. Since several governments of various
parties have been involved in one way or another in
the implementation of VAT, major political parties are
unlikely to oppose it.
6.2. Administration
© 1999 International Bureau of Fiscal Documentation
An effective and efficient administration is crucial for the
proper implementation of VAT. Although in view of this
VAT organization has been reorganized in the functional
line and several positions have been created, many positions
are still vacant and VAT administration is still weak
and least attractive for personnel. So the tax administration
should be strengthened significantly. It must be noted that
under the sales tax system taxpayers were subject to several
controls, such as, renewal of registration, approval of
prices by tax officials, certification of tax invoices by the
tax authorities and submission of copies of invoices to the
tax offices. Rightly or wrongly, tax officials used to have
an effective control over taxpayers due to these formalities,
which were used as a lever for the payment of tax. In
addition, tax officials insisted taxpayers should pay tax in
such a way that they fulfil their revenue targets. Tax officials
do not have any of these leverages or controls under
VAT.
VAT is based on the principle of self-assessment by the
taxpayers that are required to pay tax on transaction values.
Tax officials have to monitor taxpayers from a distance.
For this, the tax administration has to be more efficient
and well equipped than under the sales tax. This is
because under the sales tax system tax officials can easily
reject prices declared by taxpayers and can increase taxable
values arbitrarily. VAT law does not permit them to
do so. Now tax officials have to establish facts. Their job
requirements have changed from physical control to an
audit-based control system. This means that the VAT
administration demands a large number of qualified and
trained officials. VAT officials have to conduct a survey
of potential taxpayers from time to time so that potential
taxpayers may not remain outside the tax net. It is equally
necessary to detect non-filers. The VAT administration
must process the returns submitted by taxpayers on a continuous
basis and should notify taxpayers if they have
made any mistakes. Books of account must be audited on
a sample basis. For this, officials must have advanced
accounting and auditing skills. Tax auditing, which is necessary
in order to prevent abuse of the credit mechanism,
to detect fraudulent refund claims, and to enhance tax
compliance, is not carried out by the sales tax administration.
It is a critical aspect of VAT control.
It is equally important to reorient the tax administration in
the light of this modern tax. Officials should be mentally
prepared to accept the prices declared by taxpayers at face
value. Tax investigations and audits should be effective in