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

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Vol. 10 No. 2, March/April 1999 VAT MONITOR 67 Table 4: Status of VAT collection Month Amount (per thousand NPR) Change percentage mid-Nov. to mid-Dec. 1997 79,958 – mid-Dec. to mid-Jan. 1998 230,494 188.27 mid-Jan. to mid-Feb. 1998 168,636 – 26.84 mid-Feb. to mid-Mar. 1998 148,928 – 11.69 mid-Mar. to mid-Apr. 1998 161,924 8.73 mid-Apr. to mid-May 1998 189,849 17.24 mid-May to mid-June 1998 200,216 5.46 mid-June to mid-July 1998 205,498 2.64 mid-July to mid-Aug. 1998 Source: VAT Department 235,257 14.48 It was expected that the VAT revenue might fall in the first few months due to the credit claims by registered taxpayers on their stock. Taxpayers have claimed about NPR 400 million as input tax credit in place of sales tax credit. It affected total collection in the first few months. The reduction in the rate of tax from 15% to 10% has been another reason for the shortfall in revenue. Besides, due to the resistance of the business community, not all potential taxpayers have been registered for VAT and not all registered taxpayers have submitted returns and paid tax on time. Also, the government did not take firm action due to the political situation. Further, since not many potential vendors are registered, cross-checking has not been possible and undervaluation and dummy sales by VAT registrants have been common. VAT has not been able to run properly. However, the tax will generate more and more revenue in the days to come when it is fully operational. It will provide a stable base of revenue for the government since it is a tax based on consumption. 4.4. VAT visits Many taxpayers were visited during the initial stages of VAT implementation. The idea of these visits was to introduce taxpayers to VAT formalities. Priority was given to those taxpayers that phoned and asked questions and in this connection wanted to have a visit from the VAT administration. The tax officer has to prepare a report of each visit and keep it in the taxpayer’s file maintained in the district office. VAT officials also visited several taxpayers after a few months of VAT implementation. This time the visits were focused on both education and verification of the records. They discovered several errors in the records maintained by the taxpayers for VAT purposes. For example, some taxpayers had not maintained purchase and sales books as required while some taxpayers had not got their purchase and sales books certified by the tax officers. Some taxpayers had used computer accounting systems without prior approval from the tax office; some had not prepared invoices as specified by the VAT regulations; some had not printed or stamped the words “tax invoice” on the top copy; some had claimed tax credit on the basis of the second copy of the invoices; some had claimed for the full credit even when they used a part of their inputs in producing exempt supplies; some had not charged VAT on goods which are exchanged using the barter system and had not recorded such purchases or sales in the purchase and sales books; some had even claimed import duties as credit; some had not shown tax paid on telephone bills; some had recorded total purchase and sales figures instead of the purchase and sales figure for each invoice. Taxpayers were informed about these mistakes, consequently the number of errors decreased after a few months. 4.5. Tax audit Tax audits by tax officials are a new concept in Nepal. It has been, however, an important aspect of VAT administration. The VAT Department has set up an audit core group of six tax auditors in order to discuss and review audit procedures on a regular basis. They have developed criteria for the selection of taxpayers for audit. A couple of firms have been selected for a detailed audit after 1 year of VAT implementation. Auditors have already found some cases of tax avoidance or evasion. For example, a Coke producer has been splitting the prices of Coke and bottles and crates and was charging VAT only on the price of Coke. Similarly, a company based in India has appointed a stockist in Nepal that has, in turn, appointed dealers around the country. The buying prices and the selling prices of the stockist have been the same and all expenses, including taxes on the stockist’s transactions are met directly by the Indian supplier. Under this arrangement the tax is being levied in the following way: purchase price of stockist NPR 100 transportation cost 5% 5 total (base of import duty) 105 import duty, suppose 10% 10.50 total (base of VAT) 115.50 VAT on import 10% 11.50 selling price of stockist 100 VAT on sales 10% 10 © 1999 International Bureau of Fiscal Documentation input tax credit 1.50 (10 – 11.50) The stockist remains always in the credit position. His dealers, who may be related persons, escalate profit margins and sell goods at higher prices to the consumers. The third interesting case discovered by the auditors concerns a tyre dealer who also has a retail shop selling tyres in the name of his son. As per his records, he issues invoices understating the prices to different firms, other than his son’s firm, which are difficult to identify. The tax
68 VAT MONITOR Vol. 10 No. 2, March/April 1999 auditors suspect that the tyre dealer might, in practice, be selling tyres through the retail outlet owned by his son. These are some of the cases discovered by the tax auditors during the course of an audit. As the auditors gain experience, the audit programme is expected to detect complicated cases of fraud, and generate more revenue. 4.6. Tax refund The tax refund is the basic essence of VAT. So it must function properly. The credibility of the VAT system will be questioned if refunds are not processed timely. On the other hand, the tax refund system will be abused if the refund claims are not scrutinized properly. So a proper balance needs to be maintained between the two. Under the Nepalese VAT system, the first refund claim was expected in early January 1998. No refund claim was made until March 1998. Now some refund claims have been made. For example, the number of refund claims was 35 amounting to NPR 57 million by the first week of December 1998. Out of this, 16 claims have been approved and NPR 31 million has been refunded. The number and amount of refund claims made so far is still very low compared to the potential. This might be for the following reasons: – taxpayers do not have confidence in the refund system due to past experience where it used to be a Herculean task to get money back from the government; – taxpayers are scared of having their records audited which might not be maintained properly; – tax officers discourage taxpayers from claiming refunds; – taxpayers do not know enough about the VAT refund system. Whatever may be the reason, it is not a good situation because taxpayers’ money is unnecessarily blocked. This leads to an increase in the cost of the economy and reduction in economic activities and ultimately brings contraction in the tax base, leading to a lower amount of tax collected. So tax officials should facilitate, not discourage tax refunds. The VAT administration must make an effort to run the refund system properly but this certainly does not mean that tax officials should not scrutinize fraud cases. 5. VAT: SUCCESS OR FAILURE? Since experience of VAT is brief, it is too early to make an assessment. While VAT went live on 16 November 1997, the businesses that were not registered were allowed 90 days to register. This means that full operation of VAT was postponed until 14 February 1998. However, due to the strong resistance from the business community, many big vendors did not register by the due date. Since the business community strongly opposed VAT, the government also did not take action against those businesses that © 1999 International Bureau of Fiscal Documentation did not register. Exemptions granted under the sales tax continued. The government has made several compromises in response to strong opposition and the tax has not been fully implemented yet. Not all potential taxpayers have been registered for VAT. Consequently, some buyers are registered but not the sellers. In other cases, sellers are registered but buyers are not. This means, there is no possibility of cross-checking, which is one of the important aspects of VAT. Several VAT registered vendors have been in a credit position for several months, indicating that they grossly understate their sales prices. Some vendors also issue invoices in the name of bogus firms. In some lines of business, a few sellers are registered while the majority are not. In such a situation, the registered one has been considering that he has been at a disadvantage. Registered sellers would not have been at a disadvantage due to the credit mechanism had all their suppliers been registered. But this is not the case today. In some lines of business, some firms do not want to buy goods from VAT registered suppliers due to the fear that the record of such purchases will be available to the VAT administration. As a result, VAT registrants have been finding difficulty in selling their goods to some firms. Some registrants are also subject to high penalties while their unregistered counterparts are free from any VAT formalities. Such a situation discourages new vendors to come under the VAT net. Further, due to the provision that HMG/N, constitutional bodies, government-owned corporations, etc. should make purchases exceeding NPR 25,000 from VAT registrants, some small suppliers such as contractors have been registered for VAT while other big firms are still outside the tax net. This does not seem good from several point of views, including justice. The implementation of VAT, however, has been improving gradually. The number of VAT registrants has been increasing slowly. Despite the huge sales tax credit carried forward and undervaluation, the revenue collection is not bad. The computer system is running well. The VAT administration is now in a position to generate information on VAT registrants, returns, non-filers, revenue collection, due amount, refund claims, credit tax, debit tax, etc. The tax administration has already gained some experience in the area of registration, collection, audit and refund. Technically speaking, the tax system is in good order. The implementation, however, has not been smooth due to the following reasons: 5.1. Opposition from the business community The private sector has been divided on VAT issues from the outset. FNCCI, the apex body of the private sector, which is represented mainly by the industrialists, has been advocating the introduction of VAT with full preparation. The business community, particularly importers, has been
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