OPINION (Spotlight Weekly)

Why VDIS Is Not A Good Scheme

By DR. ROOP JYOTI

I spoke out against the Voluntary Disclosure of Income Scheme (VDIS) and the finance minister got upset, saying my remarks were "very damaging". Here, I would like to explain the reasons for my comments.

When the VDIS was announced in this yearís budget, many, including myself, thought that it was just a political gimmick to show to the nation, and probably to the donor community, that the government intended to rope into the tax net those who had amassed wealth through corrupt means, implying that it was a punishment for the corrupt. When the scheme was elaborated, it became evident that the VDIS was only a voluntary scheme, as it could not be legally enforced. There were many exceptions or loopholes in it, whatever the government might have been stating.

It is difficult to establish, even impossible in many cases, how someone had obtained his or her assets, property or wealth ó whether that had been done through legal or illegal means, through honest or corrupt means. The scheme makes several exclusions. First, it excludes the property obtained from oneís parents or relatives as a gift or as an inheritance. However, in Nepal, there is a system of recording transfer of fixed property, i.e., land and building only, and unfortunately, none for other kinds of assets like cash, jewelry, silver or gold. The VDIS also excludes agricultural income, income earned abroad and income on which income tax has been paid in the past.

Attempts to establish that someone had acquired assets through illegal means are complicated in view of the provisions in the past tax policies in Nepal. Traditionally, recovery of income tax has been at the company or the corporate level rather than at the individual level. Tax Deductions at the payment Source, or the TDS, has been the main form of income tax at the individual level ó for salaries, for commissions, for consultancy fees, for house rents and for interest on deposits and bonds. All records of the TDS are kept at the corporate level and are rarely passed on to the individual actually earning the income. Dividends had not been taxed until in the recent past and rightly so, because dividends in Nepal can be paid only out of profits after tax. Even after the finance minister was misguided to impose tax on dividends, for all kinds of reasons but resulting in double taxation, he did so only as another TDS.

Further, several ad hoc policies had been in place for collection of income tax from proprietorship and partnership companies, in the form of "best judgment" assessment method, widely popular with both the taxpayers and the tax officers because it benefited both! Importers paid income tax as a fixed percentage of their import turnover, building contractors paid a percentage of their contract price, dealers paid a percentage of their total purchase, and so on. This was irrespective of whether they made any profit or not. And if they did, then it was irrespective of the actual amount of profit made. This was the accepted, legal and common practice!

Capital gains had not been taxable. Profits made from sale of land, building, property or shares (stocks) were not subject to income tax. It was a common practice to under-declare the value of the land, for recording purpose, to minimize the payment of registration tax, which at one time stood at a high level of 14 percent of the transaction value! Additionally, lump sum tax payments were imposed on many small business establishments. All export businesses and many manufacturing activities were totally exempt from income tax.

One of the most serious impediments to the legal enforcement of the VDIS is that the Nepalese law requires keeping of accounting records for a maximum of five to six years and not beyond. So, no one could be legally required to produce records prior to 2052 BS or 1995 AD!

It was in this background that the VDIS was announced. It was stated that, for those who did not declare their assets under the VDIS, all incomes dating back to 2016 BS or 1960 AD could be questioned! It is true that the intentions were good in introducing the VDIS but it could only be a voluntary scheme. Legal enforcement to recover tax under the VDIS is practically impossible, given the past tax policies and other circumstances described above.

It is true that there are many people in Nepal who have amassed wealth through inappropriate and illegal means, and by evading income tax in the past. They deserve to be punished or at least be made to pay income tax now. But VDIS is not the proper and correct policy for this purpose. It relies on suspicion and hunches rather than legal enforcement. It may allow the questioning of the targeted group but it will expose the general public to harassment from the tax administration. It may increase the opportunities for corruption, the very evil it is meant to root out.

Apart from being unenforceable, the VDIS is also grossly unfair and unjust. The income tax rates in Nepal have been at the level of 30 percent in the past, although in certain years it was as high as 50 percent or more. It has also to be taken into account that only a part of the income of an individual is used to accumulate assets, the part remaining after consumption. The VDIS imposes a tax of only 10 percent on accumulated assets! This is a great injustice to all those who have been honestly paying their taxes in the past at the rates of 25, 30, 50 percent or more on all of their income (and not just on the amount left after consumption). The corrupt and the tax evaders are getting such undue advantage, in comparison to the honest taxpayers.

It is well known that many people who have not paid taxes have visibly prominent and huge assets, and so far no action could be taken on them. Those who belong to this group are mostly politicians, bureaucrats (a majority of them being tax officers and those responsible for government tenders), and agents of foreign companies participating in government tenders. But, rather than being a punishment, the VDIS is a gift for them!

Although so appealing for them, the tax evaders had not been attracted to the scheme. So, the Finance Ministry began resorting to pressure tactics and veiled threats. As it could not target the focus group, it started targeting the business community. All totally wrong

This scheme could have serious negative impact for the long-term future. By giving such incentive to amassing of wealth through inappropriate means, it could encourage similar activities in the future. If the scheme is enforced using threats and coercion, it could result in flight of capital or a creation of black economy, which has not existed in Nepal so far. It could encourage investments in invisible but unproductive assets like gold, rather than in visible but productive assets like shares and stocks of companies.

It has another serious ramification. The VDIS states that those who declare their assets under the scheme will not be subject to any further questioning regarding the source of their income, however ill-gotten they might have been. Will this not be a serious impediment for the investigation of past corruption? For those who have only meager and fixed incomes from government salaries, allowances and perquisites, corrupt activities can often be traced back from the accumulation of disproportionate wealth. So, an important method for investigation of corruption is made ineffective. Doesn't this protect the corrupt rather than punish them?

Income tax accounts for only about five percent of the total revenue of the government if the income tax paid by the banks, finance companies and multinationals, which are just a few in numbers, are excluded. For increasing government revenue, the efforts of the tax administration have to be focused on VAT, which could and should provide the maximum revenue. Unfortunately, the current focus of the tax administration is switching towards income tax, thus resulting in diversion of attention and human resources from VAT. This could have serious and negative consequences on total revenue collection.

I have now described the reasons for speaking out against the VDIS. It is now up to the finance minister and his ministry to tell us how and why I am wrong.

(A well-known industrialist and an alumnus of Harvard University, Dr. Jyoti is a member of National Assembly.)