Tax is the public’s compulsory contribution to the government. Normally, businesspersons are supposed to be the main contributors of tax. But this does not hold true in Nepal, where income tax contributes only about 20 percent of the government’s total tax revenue. Recent reports show that indirect tax contributes more than 70 percent of the total tax revenue (73 percent as per the midterm review report of Ministry of Finance). VAT is the largest contributor of indirect tax, followed by custom and excise duties. Indirect taxes are paid by the ultimate consumers, i.e. the people, and businesspersons are just facilitators. They collect taxes from people, i.e. the consumers, and pay the same to the government. But whether businesspersons are performing their duties correctly is questionable.
Evidences show that they are not performing their duty as mediators/facilitators well. When investigative report on the use of fake VAT bill to evade tax became public last year, people came to know about businesspersons’ criminal activities in Nepal. The report revealed how businesspersons make money out of the tax paid by people. They seem to be in the business of goods and services, but reality is exactly the opposite: they are working to transfer public money to their own bank accounts. The term “tax evasion” is a misnomer here, because making fake invoices and depositing public money in personal account is a more serious crime than tax evasion.
Business firms need to compete fairly to make profit: it is the motto of liberalization and privatization. In the developed world, businesspersons earn name and fame by paying more money to their governments in the form of income tax. But in contrast, people involved in tax crimes become the most prestigious class in Nepal. Hundreds of transactions are missing every day, resulting in the promotion of black or underground economy. Hungry consumers paying 13 percent VAT for a plate of momo do not care that the VAT amount is going to the large and full stomachs of businesspersons rather than to government treasury.
Government officials are also supposed to be in nexus with businesspersons in the process of diverting possible state revenue to the pockets of tax criminals, politicians, and themselves. When the issue of fake VAT bills was exposed to the public, government officials defended themselves, and promised to take action against the defaulters and collect evaded tax. However, this is not enough, because taking money back from defaulters is only the beginning of action, not action in the real sense. Under-invoicing is another problem that has been ignored by concerned agencies. Thus, nonpayment or underpayment of VAT collected from people has been the main source of revenue leakage in Nepal.
The role played by officials at custom offices makes or breaks the environment for fair business practices, and consequently promotes or restrains underground economy in a country. Custom administration in Nepal is not seen to be capable enough to rightly play the expected role. Under-invoicing is rampant on imports with the intention of illegally reducing custom and excise duties. Officials on duty at custom centers do not perform their duties well, and under-invoiced lots are easily getting custom clearance based on importers’ self-declaration. This has further facilitated the evasion of VAT and income tax. Tax administration has developed different systems to control malpractices of importers. Though there are no resource limitations to operate those systems, results have not been realized. There are limited cases in which under-invoicing has been tracked even after the post-clearance audit. This shows that government officials and revenue administration that let custom points be the centers of public revenue leakage must be doing something wrong.
Also, people do not support the government. They prefer not to take tax invoices on their purchases, because they are charged extra VAT if they ask for invoice. They are not aware that purchase without invoice is equivalent to purchase of stolen items. If the sellers have already paid custom, excise and VAT duties on their purchases, consumers are supposed to pay the same price whether or not they take invoice. If shopkeepers demand additional VAT when consumers ask for invoice, it proves that they have not paid the liabilities on purchases, starting from the custom office. Thus, underpowered and unaware citizens are also a cause of revenue leakages.
Tax evasion up to a certain percentage, especially of income tax, is normally not taken as a serious crime. That is because improper and impractical rules, regulations and systems sometimes prevent income earners from paying tax, even if they have no intention of evasion. In Nepal, some professionals don’t pay income tax because of such problems. Lawyers and engineers are examples in this regard. In Nepal, no business can be conducted without a permanent account number. Every firm needs to file tax return annually. But law firms do not work this way. Very few law firms have fulfilled these legal requirements. If we say that lawyers do not know the law of land, it would be an injustice to them. Engineers are another group that pay tax only on very small portions of their income. In case of the services of lawyers and engineers, most transactions are held between two individuals. Rates are fixed after bargaining, and nobody else knows the price. It might be wrong to call these professionals “tax evaders”, since weak administration lets them operate without paying tax. A system to bring these prestigious professions within the formal sector of economy and make them pay income tax should soon be developed and implemented. This is simply an example, there are thousands of other high earners who don’t know what income tax is.
Perhaps there is no country without tax leakage, but our case is very serious. Reports show that more than one-third of the business transactions are not recorded and almost half of the income earners are out of the tax bracket. This status should be corrected. Taxpayers should be assured that the money they pay in the form of tax is properly utilized. They should also realize that tax is not just a duty of income earners, but also the right of the poor people.
The author is Program Manager at Freedom Forum