It has been 25 years since the implementation of Value Added Tax (VAT) in Nepal. By making the objective tax system simple, convenient, efficient and transparent, a single rate value added tax with a broad base was implemented on Mangsir 1, 2054 instead of the previous sales tax, hotel tax, contract tax and entertainment tax to bring sustainability to the country’s internal revenue mobilization.
In the early days, there was a lot of opposition to this tax, both direct and indirect, from various quarters. Its implementation was not smooth sailing. Gradually, as the value added tax was implemented not as an additional tax but instead of other taxes and it replaced the sales tax as well as excise duty, customs duty and income tax, more revenue could be mobilized from the value added tax at a lower cost.
Team had prepared a study report titled ‘VAT in Asia and Pacific Region’ at the International Bureau of Fiscal Documentation in Amsterdam, Netherlands in 2045 about the possibility of value added tax in Nepal.
In that report, they analyzed the theoretical aspects of value added tax and the structure and operation process of value added tax applied in the countries of the Asia-Pacific region until then.
In addition to preparing a suitable value added tax template for Nepal, team also suggested that this tax should be imposed in Nepal only after full preparation. After the restoration of the multi-party system in 2047, the government formed in 2048 formed a ‘Working Group on Economic Policy Reform’ in the National Planning Commission to implement a comprehensive economic reform program.
In its report, the task force suggested that a single value-added tax should be introduced instead of various itemized taxes during the Eighth Plan period to reform taxation.
Preparation for implementation of Value Added Tax
Preparations for implementation of value added tax in Nepal were started from Bhadra 2050. The new government formed after the mid-term elections held in Kartik 2051 formed a tax system review task force in Magh 2051.
Based on the recommendations given by the working group, the government decided to move ahead with the tax reform work, and the preparations related to value added tax were postponed for some time.
Like the Task Force on Economic Policy Reform, I was assigned the task of Value Added Tax in this Task Force. Besides studying various aspects of Nepal’s tax system, the working group had interacted with various stakeholders and collected suggestions and made detailed suggestions about implementing value added tax.
Formulation of Value Added Tax Act, Rules and Guidelines
Drafting of the Value Added Tax Act was started towards the end of 2050. This act envisioned a detailed value added tax to be collected at different levels under the production and distribution process with a consumption based tax deduction system according to the value added tax and international best practices.
The tax rate was 10 percent, the registration limit was 2 million rupees and the number of tax exemptions was limited. A policy was adopted to limit the exemption in future. Taxpayers who must be registered for Value Added Tax must submit monthly tax statements and pay taxes, and taxpayers who voluntarily register must submit statements and pay taxes once every four months.
After the draft of the Value Added Tax Act was prepared, discussions were held at various stages with all the stakeholders. During that time, the draft of the Act was first presented on 11th Baisakh, 2051 for the feedback of the Federation of Nepal Industry and Commerce. Then on 1st Jestha 2051 it was presented to the Nepal Chamber of Commerce for its response.
Thus, the draft was revised based on the suggestions received through nationwide public consultation. The draft was sent to the International Monetary Fund for feedback through the then Finance Secretary Ramvinod Bhattarai. The final form was given after receiving the opinion from the said fund.
During this, about two dozen discussions were also held with the chairman of the Law Reform Commission, Tirthaman Shakya, on each section of the value added tax. The Value Added Tax Bill was submitted to the House of Representatives on 17 Mangsir 2052. The Act passed by the House of Representatives on 15th Poush 2052 and by the National Assembly on 20th Poush 2052 was sealed and published in the Gazette on 7th Chaitra 2052.
This Act was not implemented immediately after its publication in the Gazette. The policy was adopted to implement the Value Added Tax Act only by making various preparations such as preparing regulations and guidelines for implementing the Act, arranging staff and providing training, informing all stakeholders including potential taxpayers, developing a computer system.
After the Act was prepared, the process of drafting the regulations was started. While drafting the law, emphasis was placed on making it well structured, while while preparing the regulations, efforts were made to make it as simple, clear and transparent as possible.
In this context, a policy was taken not to include the various complex procedures under the previous sales tax under the value added tax. For example, for sales tax purposes in the past, the value of goods had to be approved by the tax administration. The tax invoice had to be stamped by the tax administration. Copies of various schedules and tax invoices had to be submitted along with monthly tax returns. Annual tax returns had to be submitted along with monthly returns.
The Tax Officer had to assess the tax. Sales tax registration certificate had to be renewed every year. This made the sales tax very cumbersome and resulted in high tax compliance and tax collection costs for the tax administration.
- Since Value Added Tax is a transparent system based on the principles of self-assessment, none of the cumbersome procedures under sales tax have been included in the regulations. For the purposes of taxation, the regulations were prepared by including only the easy process of maintaining a simple purchase and sale account, issuing invoices, submitting a simple one-page monthly statement and paying taxes.
It was approved by the Council of Ministers on 11th magh 2053. Based on the Acts and Regulations, the Value Added Tax Work Guide was prepared in 9 parts which was approved by the Government of Nepal on Asoj 5, 2054.
Taxpayer Education and Public Awareness Program
Value Added Tax was based on the principle of self taxation. According to this, it was arranged that this tax should be determined by the registered taxpayer and submitted to the government. For that it was necessary to inform the potential taxpayer about this tax. On the other hand, since this is a consumption-based tax, it was necessary to inform the actual tax-paying consumers about it.
Similarly, since this tax affects different sections of the society, it was necessary to inform all stakeholders. Therefore, a comprehensive taxpayer education and public awareness program was conducted with the aim of informing various sections of the society including industrialists, traders, journalists, consumers about the various aspects of value added tax.
In this context, discussions and interaction programs related to value added tax were conducted across the country with the involvement of the Federation of Commerce and Industry officials at various times. Various discussions and interactions were also organized with the officials of Nepal Chamber of Commerce regarding Value Added Tax.
Interactions regarding Value Added Tax were also conducted with various District Chambers of Commerce and Industry. In this context, interaction programs were conducted in Bhadrapur, Dharan, Biratnagar, Banepa, Narayanghat, Birgunj, Pokhara, Butwal, Bhairawa, Nepalgunj, Dhangadhi, Mahendranagar and Kathmandu.
Staffing and training Regarding implementation of Value Added Tax, the former Sales Tax and Excise Department was converted into Value Added Tax Department from Shrawan 1, 2053.
Various training programs were organized for tax administrators as well as officers of the Customs Department, Revenue Investigation Department, Revenue Administration Training Center, Office of the Comptroller General, Department of the Auditor General, Commission on Abuse of Authority and Office of the Attorney General on various aspects of taxation.
Similarly, observation and study tours related to value added tax were organized in various countries for tax administrators.
Implementation of Value Added Tax Value Added Tax was implemented on 1st Mangsir 2054. In the first financial year 2054-55, 7 billion 120 million rupees were collected from this tax, and after that, it is estimated that in the financial year 2079-80, nearly 4 trillion rupees will be collected.
Value Added Tax has been established as the largest source of revenue in Nepal. About one-third of the total tax revenue and about 7 percent of the gross domestic product are collected from this tax. The average annual growth rate of value added tax revenue over the past 25 years was around 18 percent.
This is a very significant growth rate. By abolishing the various concessions given in this, strengthening the implementation, there is a possibility of mobilizing additional revenue of two billion. A total of 290,441 taxpayers were registered for value added tax till the financial year 2078-79. Registered taxpayers must submit their monthly transaction statement to the Internal Revenue Office by the 25th of the month-end.
This type of statement includes debit statements (statements that show the amount of tax owed by the taxpayer to the government), credit statements (statements that show the amount that the taxpayer has to claim tax refunds from the government) and zero statements (due to no purchase or sale, no tax is due to the government or no tax refund is required from the government. description) can be.
The share of debit, credit and zero statement in the total statement of the financial year 2078-79 was 11.03, 58.81 and 30.16 percent respectively. As this is not satisfactory, steps should be taken to significantly increase the proportion of the davit description.
Similarly, in the financial year 2078-79, almost one-third of the taxpayers registered for value added tax did not submit the details on time. By making the monitoring effective, it is necessary to reduce the percentage of the total taxpayers who do not submit details on time to one digit.
In the financial year 2078-79, a total of 4 billion 22 million rupees of value added tax was refunded. This amount was only 1.29 percent of the total value added tax revenue collection which is very low according to international best practice.
Therefore, by making the tax refund system simple, quick and easy, according to the values of value added tax, investment and export should be completely freed from the tax burden.
Value Added Tax is the largest source of revenue in Nepal. VAT is also more likely to generate more revenue at a lower cost than currently implemented excise duties, customs duties and income tax.
Since it is a bill-based tax system, to make it effective, it is necessary for the government to widely implement public awareness campaigns and market monitoring to set the correct type of bill taking and giving in the market.
Reference : setopati.com