VAT Implementation Strategy
Streamline The Spirit

By Rup Khadka

IT requires intense efforts and a long time to implement a broad based transparent tax like VAT successfully in any country. It is even more so in a country like Nepal where tax awareness is minimal, the practice of issuing invoices and maintaining tax accounts is limited, accounts maintained by limited taxpayers are also generally not accepted by the tax officials, smuggling and under valuation are rampant and tax leakage takes place with or without collusion between the taxpayer and the tax administration.

Essential

It is essential to implement VAT effectively in order to make the Nepalese tax system revenue productive, sustainable, efficient, sound and transparent. For this, it is necessary to create an environment in which invoices are issued properly, accounts are maintained accurately, tax is based on transactions and there is acceptance of the taxpayers correct accounts. Until and unless such a situation is created VAT implementation will not be easy and pressure will be created in some or another way for the creation of a congenial environment for the proper enforcement of this tax.
Billing has been seen as the biggest problem in the implementation of VAT. While some vendors do not issue invoices/proper invoices others demand an additional 10 per cent if invoices are required. Similarly, the problem of under-invoicing at the customs has not been reduced. Therefore, at this point priority should be given to inculcating the habit of issuing and receiving invoices.

Several policy changes have been introduced to establish a proper billing system. For example, a policy has been introduced to levy import duties on the transaction value. However, this policy has not been followed properly by both customs officials and taxpayers. On the one hand, importers submit fake invoices, on the other hand; customs officials just raise invoice values for customs purpose arbitrarily.

In order to improve the billing of imported goods it must be mandatory to state details such as name, brand name, number, price etc. of goods at the time of opening of the letter of credit. The system is there, but it has not been enforced yet due to the lack of seriousness on the part of the customs administration. It should not be that difficult to implement this system since more than 90 per cent of total import takes place from less than one dozen customs offices.

It is also necessary to reduce the rate of import duties on some specified items, which are more smuggling prone. It is also necessary to maintain the database of the price of about 200 most important revenue productive items, which can be used as the reference price in case of need. Proper implementation of these few steps would substantially reduce the problem of under valuation or smuggling at the customs points. It would, in turn, help reduce the problem of billing in the domestic market substantially.

The traditional turnover type of income tax assessment system has also been hindrance for the issuance of proper invoicing. Under this system, certain percentage of the turnover is considered as the net income in some cases while in othercases, income tax assessment is based on negotiation. In the context of the implementation of VAT, a policy has been adopted to assess income tax on the basis of the accounts maintained by the taxpayers. However, some vendors still do not maintain proper accounts for the purpose of income tax while some tax officials reject the accounts without any basis. The situation is likely to be improved under the Income Tax Act 2002, which has adopted a fully-fledged self-assessment system.

One of the important reasons for not issuing invoices is that some vendors do not want to take invoices in their names thinking that it would increase their transaction leading to a higher income tax liability. On the other hand, some retailers also say that since their suppliers do not give them proper invoices of their purchases, they also cannot issue proper invoice to their buyers.

Besides, it is necessary to continue the launching of the awareness campaign in different forms such as distribution of brochures and pamphlets, airing of VAT videos, mobilising VAT Volunteers and so on. It is also necessary to add new elements in it such as Street Theater, VAT billing cartoon targeting to the children etc.

Further, it is necessary to increase market visits, including sudden visits, mobilisation of a billing mobile squad together with the Revenue Investigation Department and the business community. Further, message-requesting consumers not to forget to take an invoice need to be displayed at the appropriate place in the premises of the taxpayers.

Attempts must be made to broaden the tax base by abolishing the exemptions and bringing all potential taxpayers in the tax net. Currently, several goods and services have been exempted. Exemptons of some goods and services are justified on administrative or social grounds. Exemptions granted to all other goods and services must be discounted Similarly, it is necessary to bring all potential taxpayers in the tax net. Inland Revenue Offices should collect information about potential taxpayers and register all potential taxpayers under their area of jurisdiction.

It is equally important to enhance proper audit and investigation activities. It is also necessary to enhance collection activities. Collection efforts should be concentrated first on the large dues, which constitute bulk of total dues. Waiver of interest and penalty may be introduced through the forthcoming ordinance.

It is also time to consider increasing tax period from one month to two months. It would reduce both administrative and compliance costs of VAT.

VAT registration threshold should be maintained at its present level. In real terms, it will be deceased automatically over the years due to inflation. This means it will not be necessary to reduce the level of registration threshold even in the long run. Similarly, the rate of VAT should be maintained at 10 per cent until VAT is implemented effectively. Once VAT becomes fully effective, then it would be desirable to raise the VAT rate. Increase in VAT rate must be accompanied by a reduction in the rates of customs duties and income tax. Attempt should never be made to introduce more than one positive rate of VAT.

Reform

Since VAT cannot be implemented in isolation; it is necessary to adopt an integrated tax reform approach by establishing good coordination among different taxes, including customs duties and income tax, which need to be streamlined with the spirit of VAT. Tax administration also needs to be prompt and positive.

Soil Compaction: Unnecessary Form Of Land Degradation !

STOP the problem of soil compaction in the World's cropping soils- forever ! That was the challenging theme presented by Dr Des McGarry at the World Congress on Conservation Agriculture, which took place in Madrid (October 1-5, 2001).

Opposition

Of all the forms of land degradation in the world, soil compaction is certainly one of the most readily reversible and also totally unnecessary" said Dr McGarry. "From the subsistence farmer to large, mechanised corporate farms soil compaction is a "lose, lose, lose" situation. It is the direct opposite of "Conservation Agriculture" and demonstrates the use of non-sustainable agricultural practices that are degrading the land for future generations."

"Soil compaction is the loss of natural soil structure through excess tillage and traffic - especially damaging in moist to wet soils. Soil effects include human-made "pans" from 10 to 60 cm deep and very rough seedbeds. Crops suffer through restrictions to root growth, poor soil aeration, reductions in water infiltration and water availability, and poor germination in rough seedbeds. Greatly reduced fertiliser efficiencies also occur. Either plant roots cannot reach the fertiliser or the applied nutrients remain locked-up in the compacted soil because of reduced soil water dynamics."

Compaction is commonly cited as the most expensive form of land degradation. Costs occur at many different levels and the effects are additive. The most direct costs are from yield reductions; Dr McGarry citing examples of up to 100 per cent crop loss in dry years. Water-use, seed and fertiliser inefficiencies all cost. Rarely considered are costs of both forming and removing soil compaction. No one aims to form compaction but the tractors, tillage and livestock, individually and in combination are the causes. Cultivation is expensive in itself. However, if that cultivation causes compaction - then that is a "lose, lose" situation. Subsequent use of large (and expensive) equipment to remove that compaction is a further cost. And if conducted in moist-wet soil, will cause the compaction to worsen-a "lose, lose, lose" situation. "This is the downward spiral of land degradation" said DrMcGarry.

The outlook, however, is far from gloomy! Solutions already exist to rid any cropping/livestock system of compaction and to ensure that the problem does not re-occur. And the best part is that the highly practicable solutions are the self-same keys to achieving "Conservation Agriculture."

First is recognition of the problem. It is vital to know if compaction is your problem - to correctly target positive management practices. Investigation is best done through small, spade dug soil pits - and describing the soil structure displayed. Comparison of fields, parts of fields and with untouched land (like tree and fence lines) where possible readily provides information on extent and depth of any problem layers. Dr McGarry regularly runs courses in farmers' fields, worldwide, to empower the farmers in soil description for better management.

Second is commencing repair strategies - once compaction is recognised and located. In the past this involved large tractors and soil rippers. However, it is now known that employing Conservation Agriculture practices are easier, cheaper, more efficient and more environmentally friendly methods of breaking-up soil compaction than mechanical means. This "biological ripping" is achieved through the natural cycles of crop growth. For soils that crack (like Vertisols) the wetting and drying with crop growth activates the inbuilt swell/shrink mechanisms of these soils. Maximum effect is gained through building crop rotations and cover crops into the normal cropping sequences where the different root patterns ensure rapid, deep soil compaction repair. Non-cracking soils (like Oxisols) also respond well to biological means. Combining the Conservation Agriculture practices of zero till, stubble retention, and rotation and cover crops rapidly brings soil fauna back into soils and raises organic matter levels. Earthworms are especially important to improve aeration and to accelerate organic matter incorporation to give better soil stability.

Third are the prevention practices. Once soil compaction is under repair it is vital to reconsider on-farm practices to ensure the problem remains gone - forever! There are five main factors and again these practices are the foundations of achieving Conservation Agriculture: reduced (or zero) tillage, controlling traffic placement in the field, strategic tilage where only the plant zone is lightly cultivated, flotation tyres to spread the loads of heavy tractors and harvesters, and the use of crop rotations and cover crops. The aim is to get these factors working together and pickout the parts that are best suited to your individual farm and farming practices. In this way not only will soil compaction become a thing of the past but also the soil structure will become better and better. The aim is soil structure optimisation - to actually make the soil health better through simpler, yet more productive farming practices.

Vital

"It is time to change the mindset of farmers and policy makers," says Dr McGarry. "Moving from animal drawn equipment to tractors may be attractive and necessary in today's economic climate. Hewever, serious land degradation will ensue if Conservation Agriculture practices are not "imported" with the machinery ! Vital is achieving a working-balance of the five prevention factors listed above. Only then will farm mechanisation achieve the combined goal of improved productivity and long-term land sustain ability."

D+C

Dr Des McGarn is a Principal Soils Officer with Natural Resource Sciences, Queensland Government, Australia.

Strengthening The Civil Society

By S.N. Sharma

LIKE the previous general strikes called by the outlawed Maoist, the latest three-day bandh remained suffocating and disappointing as it crippled life across the country. The irrelevant bandh has unveiled the real character and motive of the organisers among those who had not known them well before.
Hundreds of thousands of workers, who earned their bread and butter by working on daily wage basis, were bound to live without food. Many patients were deprived of health facilities and services. Apart from affecting the lives of such people, the unwanted bandh paralysed the industrial and tourism sectors besides having adverse impacts on the education, health, transportation and communication sectors. The industrialists and shopkeepers did not open their business because of the fear created by the terrorists. The academic institutions were also closed down and the private and public vehicles were off roads. This does not mean that all of them had support the bandh orgnisers. Rather they detest such a step as they are totally fed up with the word bandh.

But it is ironic that the organisers, who have assessed the bandh as their 'successful' effort, claim that they are involving themselves in such activities for the 'welfare' of the general public, especially the underpriviledged section of the society. The organisers must seriously ponder over the consequences before taking any such step. They must seek other options if they are really committed to the wellbeing of the people and the country.

Whether they claim to be a great revolutionary force or nationalist group, the organisers are not true to their word. They will always fail to win the hearts of the people because of their involvement in the criminal activities. It is crystal clear that they have directly been associated with killing innocent people in a merciless manner and destroying development infrastructure. Their activities have proved that their sole intention is to terrorise the people and push the country to lawlessness and backwardness.

The country has lost properties worth billions of rupees because of the terrorist activities. The terrorists have already destroyed more than 1,300 Village Development Committee (VDC) buildings in different parts of the country. They have caused damages to various essential development infrastructures such as tele-communication, electricity airports and road. Because of the terrorist activities and the fashion-like bands and strikes, Nepal, which once known to the outside world as the birthplace of Lord Buddha as well as a peaceful and secure tourist destination, is losing its very image in the international front. Then, who stands to benefit from such strikes, murders and destruction of public properties? Do the organisers have any satisfactory and logical answer regarding the activities they are involved in?

The organisers are encouraged to call for such unnecessary bandhs and strikes to filfill their petty interest in the absence of an organised and strong civil society. Massive awareness and education campaign has to be launched to enable the civil society to raise voices against the activities that are not in the public interest. It is the duty and responsibility of the responsible political parties and social organisations to empower the civil society. As long as the civil society is weak, the people will continue to face such problems. So, the government has to have plans to educate and empower the civil society, which alone can tackle such anti-social moves.