Flaws in revenue system exposed

KATHMANDU:

The Auditor General’s report has pointed out a raft of flaws in the revenue system with regards to revenue laws and enforcement. As a result, taxpayers are found to be evading taxes using such loopholes. The report has said that the government has been losing revenue due to such flaws.

The report has cited some interesting examples about how taxpayers have been evading taxes, which could be instrumental for the government to crack down on such tax evaders. The report has suggested the government to introduce reforms in some tax laws and its enforcement, apart from conducting an investigation based on a few cases that have been cited.

As per the report, a food supplier of Butwal that is registered at the Inland Revenue Office (IRO), Butwal has submitted documents showing its annual turnover to be worth Rs 32 million in fiscal 2012-13 and its stock to be worth Rs 356,000 at the tax office.

But, in fact, the firm had imported food worth Rs 874.37 million in the year as per the customs data. This discrepancy was detected during the Office of the Auditor General (OAG)’s cross check with customs data.

IRO, which fixes the tax as per the bookkeeping of the respective firm, was unaware about the exact transaction of the firm, as per the report. The IRO had not crosschecked the data with the customs office. Whether the IRO genuinely believed the concerned firm’s documents or if they were acting hand in glove needs to be verified.

“These are problems of enforcement,” as per the report. “The government must scrutinise aspects relating to import as it is main contributor to revenue system. The government may lose inland taxes if it fails to properly monitor imports.”

Deducting the turnover and stock that was declared by the firm from the import amount, a mismatch of Rs 841.99 million (that includes probable tax exemption from the government) was found on the transaction of that single firm. The firm had submitted tax of only 3.66 per cent of its annual transaction, as per the report. The report has said that the government should investigate this case and other similar cases.

Likewise, OAG also suspects firms to be evading taxes by increasing the portion of their debt.

OAG found that the portion of debt in some firms was 768 times more than share capital. Taxpayers here seem to be more inclined towards increasing the portion of debt rather than equity because the Income Tax Act allows firms to report interest cost on loans as expenses. Such expenses reduce profit of firms and ultimately affect government’s income.

Although many countries have fixed the portion of debt and equity, the country does not have such provision. The OAG had identified the need to create a legal provision on debt-equity ratio in the fiscal year 2012-13, ‘but nothing has happened so far’.

These are only some representative cases that the OAG’s report has mentioned.

Source: THT