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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.

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