Corporate Law

VDIS Scheme and its Trauma in the mind of Nepali Taxpayer

By Gandhi Pandit

VDIS has really created hue and cry among Nepali taxpayers and citizens. The scheme is actually initiated by Internal Revenue Department (IRD) with an intention to bring many of the tax payers under tax net who are required to pay tax under existing income tax law on their taxable income, but have failed to or chosen not to file tax return yet. Through this scheme, the IRD is requesting those who have not paid tax or who had paid the tax but had not disclosed all of their taxable income in their tax return to disclose their income voluntarily and pay ten percent as tax by the end of Paush which has now been extended until the end of Magh 2058.

If we look into the reaction of taxpayers concerning this VDIS scheme, it can be said that they had mixed reaction. Many of them were scared to come into tax net by declaring their property, as there is no clear-cut provision or mechanism in law to determine which property is taxable and which is not. For instance if some one had earned some money twenty years ago with which he has purchased some land in commercial area the price of which has gone up, in such a case what is the actual value of taxable income of such property in comparison to its present value?

The common taxpayers are also very suspicious of the honesty and sincerity of tax officer as the Financial Act 2001 gives wide range of discretionary power to them that could be susceptible of misuse. The sour reputation of tax officer is also a reason for such fear and suspicion.

Theoretically speaking, there is no reason to oppose or condemn VDIS scheme as the very purpose of such scheme is to expand the tax net in order to oblige those to pay taxes whose income is taxable but who have not being paying taxes. Even FNCCI could not object to this scheme directly. The VDIS was introduced by Financial Act 2001, which aims at bringing as many taxpayers as possible within the tax net. The other purpose of this scheme is to rectify the failure of tax department to implement income tax law efficiently and effectively and at the same time to give an opportunity to those who have voluntarily or involuntarily chosen to remain away from tax office thereby accumulating property and wealth without paying any tax. If we overlook some short falls of the scheme, it is very good and promises long- term benefit to government in revenue generation. This scheme will help bridge the large gap between the number of taxpayers and non -taxpayers. It is a great concern to those who have been paying tax to be treated at the same level as those who are making taxable income but are not paying tax. This move will certainly console them.

What is the VDIS scheme ? Which law allows this VDIS scheme to apply or to be introduced to public? This VDIS ( Voluntary Disclosure of Income Scheme) scheme which was introduced and subsequently launched by Internal Revenue Department encourage people to disclose their taxable income voluntarily thereby avoiding legal hassle or legal investigation to be initiated by the tax department. Article 73 of our constitution says that tax can be imposed only by the Act enacted by the parliament. It does not speak about tax exemption as the VDIS scheme is providing tax exemption by allowing just to pay 10% on there taxable property. There may be a valid question on the legality of this scheme as income tax law is a specific law that deals with tax matter only. Instead of amending tax law in order to incorporate this provision, why the government have chosen to bring this scheme by Financial Act? This is a subject of great concern for legal experts to investigate.

According to this scheme, a person who has property that is taxable under existing income tax law but has not yet paid tax on such property is given a chance to do so by voluntarily disclosing the income earned and thereby paying ten percent of the income. According to IRD, if someone pays their tax by this manner, no government agency or law -enforcing agency would investigate or scrutinize into the sources of their income for any purpose other than assessing the income tax.

The VDIS has not only set the rate of tax of 10%, but also has extended protection to tax payer from prosecution irrespective of their sources of income. It also protect the taxpayer by assuring that the disclosure of income cannot be used for in any criminal prosecution. These are the two important aspect of VDIS agenda that make this scheme so important and valuable in luring those who are not yet in within the tax net.

Many experts have vehemently opposed this scheme on the ground that it may also give protection to those who have earn their property illegally and unlawfully. They are of the opinion that how could such scheme may give protection to those who should have been brought under the justice are being rewarded. This type of argument has contributed in creating negative image or confusion about the importance of VDIS scheme.

But I do not agree with this type of agreement, as the purpose of VDIS scheme is not to give any protection to those who have earned money illegally or accumulated property by unfair means. The main objective of this scheme is to give all taxpayers who have not come into tax net yet a chance to contribute in national treasury by paying tax on their taxable income irrespective of their means of earnings. It also does not allow such information to be used for any purpose other than assessing the tax. It does not prohibit any law-enforcing agency or authority to prosecute such taxpayers for earning such property unlawfully if they can gather any other evidences to that effect. But what VDIS scheme does not allow law enforcement authority or agency is to use those information or evidence disclosed to International Revenue Department. Otherwise who would come to the IRD to declare their income if such disclosure is permitted to be used against them. Therefore, it is obvious that such information or disclosure must be kept secrete if VDIS is to succeed. If we interpret or look VDIS scheme from this perspective, I do not think there is any thing wrong with this agenda.

Now the sole question remains to be answered is how effectively this scheme would be implemented ? In other word, the government needs to be very sensitive as to the mode of implementation. The Tax Department must be very careful in implementing this scheme so as not to give any impression of this scheme being misused or misapplied to harass or hassle those who are already within tax net and have been paying the tax, even if they are paying very less tax. Instead this scheme should solely be aimed at encompassing those classes of people who have been earning huge amount of wealth without paying any tax and have not filed tax return yet. This scheme should not be used to prosecute those who have filed the tax return partially hiding other taxable income as our present existing tax law has effective provision of reassessing the income of such tax evader. If we are to expect success in implementing this scheme, the government must try to bring tax-evading citizen within the preview of tax net. This shall have a long-term benefit for the government as it allows government to raise more revenue.

We must concede that this scheme also has created effective awareness between the tax payer and non tax payer citizens. Those who think paying tax is their duty are also very much concerned with how their money is being used or spent by government. Such awareness will certainly help curb misuse of misappropriation of government funds. The citizen will be more aggravated if people’s tax money is used or spent improperly. In other hand, it has also given the very effective message to those who have been evading tax that they can no more be immune from tax liability as one day or other, the government’s long arm will catch them.

It is a civil duty of every citizen to make this scheme a success by not letting any tax evader to remain outside of tax net. The government must also assure through maintaining transparency in the government expenditure that such hard earned money raised in from tax collection shall be utilized or spent for public goods. Let VDIS scheme be a means of making citizens aware of paying tax and at the same time warning the government to use such fund for public goods and welfare only. The present time requires such financial discipline to be expanded to other areas such as office of the customs and excise. There is lots of pilferage in government revenue generation due to rampant corruptions in customs office. It has come to public notice that government employee is paying very handsome money to get posted in custom office. The time has come to take necessary measure by government to control corruption in such area. The validity of VDIS scheme can be proven if the government is serious in curbing corruption.

(Mr. Pandit is a Columbia University law graduate who is currently practicing law in the field of banking, corporation, insurance and international business transaction including L/C and Int. sales contract)

Corporate Movement

Anil Kezriwal has joined Siddharth Finance as Executive Director. Previously, he was involved with United Finance as Manager.

Pratap Rawal has joined the distillery as Vice President, Marketing. Prior to his association with the distillery, Rawal was running his own distribution agency.

Meanwhile, Satish Karna has been appointed Chief of Finance of Himalayan Distillery. A Chartered Accountant, Karna was previously Finance Manager of Taragaon Regency Hotels Ltd.

Siddhartha SJB Rana has taken over as Chairman of Soaltee Hotel Ltd, upon the retirement of his father Prabhakar SJB Rana. Junior Rana is also President of Soaltee Group Pvt. Ltd, and Executive Chairman of Sipradi Trading Pvt. Ltd.

Robin Marston has joined Fulbari Express Pvt. Ltd. as Executive Director. The Fulbari Express, Pokhara, with a branch in Kathmandu, was launched by Fulbari Resort & Spa as its own travel agency.

NABIL Bank Ltd. has a new CEO in Suraj Lal Mehta who replaces Shovan Dev Pant. Pant, who handled the portfolio for some eight months, has taken over the responsibility of General Manager of the bank, the position he held prior to being appointed CEO.

Craig Newton has resigned as General Manager of Hotel Yak & Yeti after a one year stint.

Manoj Goyal has been appointed CEO of Bank of Kathmandu.

Doctrine of Supervening Impossibility of Contract

Narayan B. Khadka

(Advocate & Legal Consultant)

Business contracts are made to achieve certain objectives. After achieving the proposed objective the contract is automatically terminated. In other word by Performance of the contract the Party of a contract is no longer subject to contractual duty. It is noteworthy here that contracts are made for performance also. According to contract law one of the essential element of a valid contract is possibility of performance. In a valid contract, a party cannot enter into an Agreement in which the subject matter of contract is impossible to perform. In that situation the agreement is void.

According to section 13 (h) of Nepalese Contract Act 2056, an agreement impossible to perform is void at the time of contract. In the impossible thing or subject matter no party can inter into in a contract. Even if someone enters into such agreement, the agreement cannot be a contract because there is a lack of essential element of a contract of possibility of performance. Similarly, in respect of impossibility at the time of contract, section 56 Para 1 of Indian Contract Act, 1872 states "An agreement to do an act impossible in itself is void."

Sometimes at the time of entering into contract, the possibility of performance exists but at the time of completion or conclusion of contract the possibility to perform does not exist. In the beginning the parties are obligatory to perform their contractual duty but when the impossibility to perform arises the parties are discharged from the contractual liability. In English contract law impossibility of performance is known as doctrine of Frustration of contract. In continental legal system the Doctrine is known as ‘Doctrine of Force majuere’. Indian Law recognized it as supervening the impossibility. Section 79 of Nepalese Contract Act provides it as fundamental change in circumstances. Our Contract Act has recognized both Doctrine of Frustration of Common Law and Doctrine of force Majuere of civil legal system.

Before entering into analysis of the legal provisions it is better to understand the following concepts.

Subjective impossibility:- After a contract has been made, performance may become impossible in a subjective sense. It is called as subjective impossibility. For example in contracts goods cannot be delivered on prescribed time because of Nepal Bandh or may be due to shortage of transportation. Similarly money cannot be paid on due time because the bank is closed. In those case the party is claiming that the performance become impossible for me not that it is impossible for anyone to perform. Subjective impossibility will not discharge the contract. But the non-performing party normally shall be treated in breach of contract.

Objective impossibility:- When performance become impossible in an objective sense, it is called objective impossibility. In this situation, performance of contract may be impossible not because of incapability of the promisor but because in such type of situation, no one can perform the contract. In such case parties are free from obligation of performing the contractual duty. According to American ‘Restatement’ law four basic situations are generally required on objective impossibility:

a. Where one of the parties to a personal contract dies prior to performance (Restatement, second, contracts, section 262)

b. Where the specific subject matter of the contract is destroyed (Restatement, second contracts, section 253)

c. Where a change in law renders performance illegal (Restatement, second, contracts, section 264)

d. Where performance becomes commercially impracticable (Restatement, second, contracts, section 265 and 266)

Temporary impossibility:- Because of an occurrence or event the performance become impossible for a period that is called temporary impossibility. In this case contract will be suspended for performance until the impossibility ceases. Because of war the performance becomes temporarily possible.

Pursuant to section 56 of Indian Contract Act, 1872 for application of supervening impossibility the following condition must be fulfilled:-

a. The act should have become impossible,

b. That impossibility should be by reason of some event which the promisor could not prevent, and

c. That the impossibility should not be self-induced by the promisor or due to his negligence.

Section 79 of Nepalese Contract Act does not states about the contribution of party of contract to make performance impossible. Generally, the party who caused for impossibility of performance cannot claim of discharged of contract on that basis.

According to section 79 (2) of Nepalese Contract Act, in following situations the Doctrine of Supervening impossibility applies:-

(A) Subsequent Change in Law:- A subsequent change in Law may render the contract illegal and in that case the contract is supposed to be discharged. Law has changing nature. In the pace of time law also has to change. At the time of entering into a contract an kind of Law that existed but late on the some law may have changed. At that situation if subsequent law forfeit the subject matter of contract, the contract become illegal and void.

Section 79 (2) (a) of Nepalese Contract Act, 2056 provide, the illegality of Performance of Contract.

(B) Change in Circumstances:- According to section 79 (2) (b) of Contract Act, due to occurrence of war, fire, earthquake floods erosion, and volcano and events of the same nature are force majuere caused impossibility of performance of contract. In the case of "force majuere" the impossibility will be temporary when the temporary impossibility ceases the possibility of performance may be possible. When war stops the performance of contract may be continued. In the Doctrine of frustration when a impossibility of performance arise, the contract is frustrated permanently.

(C) Destruction of subject-matter:- In case of destruction of subject-matter, the doctrine of frustration of contract applies. At the time of contract subject matter of contract is possible to perform, when the circumstances are changed because of destruction of subject-matter, the contract discharged. In English Law there are a number of classic cases in where the doctrine of impossibility have been established. In Taylor V. Caldwell (1863) 3 B&S 826) Both parties have agreed in a contract in which the defendant has a music hall and he agreed to provide it for the purpose of holding a concert to plaintiff. Because of fire the hall was destroyed without fault of either party. The court held that the parties shall be excused in case performance becomes impossible from the perishing of thing without default of the contractor.

According to section 79 (2) (c) of Contract Act there is no need of performance where the subject matter of contract which was essential for performance is destroyed or ceases to exist or that things which are impossible to acquire.

D) Death or incapability of party:- In case of the death or incapability of a person who has agreed to render personal services the doctrine of Frustration applies Pursuant to section 79 (2) (d) of the Contract Act stipulates that if the parties are entered into an agreement for receiving personal capability, skill and personal talency, in case of death, unsound mind or the party physically and mentally become unable to render such service the contract will be discharged.

According to section 79 (3) of Nepalese Contact Act 2056, in following situations the doctrine of supervening impossibility does not apply.

(a) Difficulty in Performance:- When change of circumstance make the performance of contract difficult the party cannot claim that he/she discharged the contract section 79 (3) (a) provides about difficulty in performance.

(b) Commercial impossibility:- Claiming loss or less profit in the transaction, the party cannot discharge the contract. Because in business or commercial transaction loss or profit are natural. At the time of making agreement, the party should be aware about the loss and profit. That is why commercial impossibility is no ground of discharge of the contract. (Section 79 (3) (b).

(c) Impossibility due to the default of a third person:- Section 79 (3) (c) of Contract Act provides that where a party of a contract depends upon a third party to perform, the contract is not discharged because of the impossibility created by the failure of a third person.

(d) Strikes and lockouts:- Strikes by labourer or lockouts by employer also does not excuse performance because strikes is manageable and latter is self induced. (Section 79 (3) (d)

(e) Additional Tax:- Section 79 (3) (e) of Contract Act 2056 provides that Addition Tax or revenue does not amount impossibility to perform contract.

(f) Failure to one of the objects:- When a contract is entered into for multiple objects, failure of one of them does not discharge the contract. The other objects have to be fulfilled. (section 79 (3) (f).

Consequence from Doctrine of supervening impossibility:-

* Paid amount before the fundamental change in circumstances must be reimbursed (return) to party

* Accordance with contract the payable amount or rest of amount for payment must not be paid.

* If a party has been done something or paid sum of money to another party to fix the amount to pay or receive

* Reasonable expenses can be compensated from another party.

Thus, our Contract Act has mix-up the Doctrine of Frustration and ‘Force Majuere’ of different Legal System. Doctrine of ‘force majuere’ is recognized under section 79 (2) (B) and 79 (5) of Contract Act, 2056.

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