Tax Compliance cost Survey: Tax compliance costs high in Nepal

KATHMANDU, APR 17 -

Businesses in Nepal, especially the smaller ones, have to bear substantial compliance costs while paying taxes. According to the Tax Compliance Cost Survey conducted by International Finance Corporation (IFC), the compliance cost is highest for value added tax (VAT) among the various types of taxes.

The overall average compliance cost, according to the survey, is Rs 9,382. There is a significant increment in the compliance cost from below the VAT threshold (less than Rs 2 million) to the initial VAT applicable slab (above Rs 2 million).

The survey has revealed a number of interesting facts. It says a majority of the businesses in Nepal don’t have a bank account. Small and medium businesses in Nepal are generally proprietorships, and the owner uses his/her personal bank account for business purposes, says the survey. Hence, the business transactions of such firms are basically done in cash. In case of firms having bank accounts, around 75 percent of their revenue is received through their banks and the rest in cash.

Under-reporting of sales and inflating expenses are both done to evade tax, according to the survey. It says Nepali businesses generally overstate the actual expenditure in their tax returns by 40 percent. Similarly, they declare only 80 percent of their annual sales for tax purposes.

According to the survey, 83.5 percent of the taxpayers having a turnover below

Rs 2 million and 54.9 percent of the taxpayers having a turnover in the range of Rs 2 million to Rs 10 million do not use computers for business.

The survey says that Nepali firms are still at a nascent stage when it comes to using information technology for accounting related practices.

The use of specialized and non-specialized accounting software was present among a few business enterprises. It shows that only 5.2 percent of the firms use specialized accounting software while 10.7 percent use non-specialized software.

The more complicated the tax, the more firms depend on outside help. The report shows that 71 percent of the businesses carry out tasks related to corporate income tax in-house, but in the case of VAT, only 29 percent of the businesses conduct the tasks related to VAT completely in-house.

According to the survey, 35.4 percent of the taxpayers with an annual turnover of Rs 2 million to Rs 10 million do not pay VAT. The reason could be that either the businesses are non-compliant or they are engaged in VAT-exempt businesses. “However, it is unlikely that such a high percentage of taxpayers were from the exempt category,” states the survey.

There is lack of knowledge of VAT among taxpayers, states the report. It says 31.3 percent of the businesses feel VAT will increase the input cost and recommends taxpayer education.

Lengthy and complicated appeal procedures have deterred taxpayers from appealing against the penalty slapped against them. “Taxpayers prefer to settle tax issues by means other than appeals,” says the survey. “It can be further interpreted as the integrity of the taxpayers’ accounts is not as strong as desirable and they do not want to be further investigated as a result of appeal.”

Taxpayers, according to the survey, believe that the Inland Revenue Department’s (IRD) administrative review is biased more towards the assessors than towards the assessees. “The burden of depositing 33 percent for an administrative review and 50 percent for a Revenue Tribunal appeal has also acted as a deterrent for businesses to opt for appeals,” states the survey. However, IRD director general Tanka Mani Sharma said that the director general was neutral with regard to tax assessment.  

The bigger businesses opt for appeals as the amount under contention for them would be significant. IRD officials did not agree with the survey’s finding of lack of a credible appeal system. However, they did accept that the Revenue Tribunal was not working efficiently. “We are restructuring the tribunal,” said Sharma. “We are now deputing a first class officer to the tribunal.”

According to the survey, making unregistered sales, using fictitious/fake invoices and firms and making payments of unofficial salaries are the measures used by taxpayers to avoid paying taxes.

Survey says

The compliance cost is highest for VAT

Majority of businesses in Nepal don’t have bank accounts

Taxpayers prefer to settle tax issues by means other than appeals

Lack of knowledge of VAT among taxpayers

Businesses generally overstate the actual expenditure in their tax returns by 40 percent

They declare only 80 percent of their annual sales for tax purposes

Taxpayers believe IRD’s administrative review is biased

Source: Kantipur