VALUE ADDED TAX (VAT):

ITS IMPLEMENTATION AND IMPLICATIONS

Submitted By:

SANISH MAHARJANShanker Dev Campus

Campus Roll No.: 41/065

T.U. Reg. No.: 7-2-39-315-2005

2nd Year Symbol No.: 390259

A Thesis Submitted To:

Office of the DeanFaculty of ManagementTribhuvan University

In partial fulfillment of the requirementfor the degree of

Master of Business Studies (MBS)

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Kathmandu, Nepal

July, 2013

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ABBREVIATION

C-VAT Consumption VATFY Fiscal YearGDP Gross Domestic ProductGNI Gross National IncomeGNP Gross National ProductIRD Inland Revenue DepartmentI-VAT Income VATMODVAT Modified VATMOF Ministry of FinancePAN Permanent Identification NumberP-VAT Product VAT

SAARCSouth Asian Association for

Regional Cooperation

SAFASouth Asian Federation of

AccountantsTPIN Tax Payer Identification NumberVAT Value Added Tax

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CHAPTER - IINTRODUCTION

1.1 Background of the StudyEconomic development has been one of the most

popular slogans in almost all the developing

countries all over the world. Similarly, achievement of

high rate of economic growth rate, reduction of

income disparities and poverty and improvement of

living standard of people are some development strategies

towards which most of the government efforts have been

directed in developing countries. Economic growth won’t

solve all of our problems, but we can’t solve any of them

without it. We feel that too many policymakers in Nepal

fail to understand the power of growth or where it comes

from. Economic growth is the force that provides

opportunity for the young and security for the old.

It is known that government needs more revenue

mobilization for overall economic development and state

welfare. Besides this, for meeting day-today expenditure,

the government also requires some sources of income which

is called revenue. The role of revenue in the development

of a country is not less important than the role of

oxygen for the existence of human body. In this context,

a government needs to mobilize a lot of internal

resources to fulfill its responsibility towards its5

nation and people. In the developing country like Nepal,

there is a necessity for raising a larger volume of funds

for the development and administration expenses. (Kumar,

2011)

The revenue collection is a challenging task in itself

which demands increasing necessity of regular expenditure

in general and development expenditure in particular.

However, resource mobilization is very low compelling the

government to rely heavily on foreign assistance.

Development expenditure has been dependent almost

entirely on the foreign aid. External assistance is

uncertain, precarious, inconvenient and not conducive to

the healthy and overall development should there be heavy

dependence on it. The foreign aids are not bad for

economic development of the nation per se. But the

experience of the most of the developing countries shows

that there are negative effects of increasing

international grants and loans to finance the public

development activities. Thus the government should depend

on its own resources for generating revenue in

order to finance these regular and development

activities. The government can collect revenue from

taxable and non-taxable sources. Tax is a key source for

revenue generation and mobilization. (Kumar, 2011)

Taxation has become one of important sources of resource

mobilization to meet the financial requirement of the

government. The tax system should be helpful in income

redistribution and economic stability. The taxation is6

the function of economic development to combat inflation,

alleviate poverty, reduce the gap between rich and poor,

narrow the size of revenue expenditure, promote the

national economy, mobilize the domestic resources for

economic development and save the domestic economy.

The direction and tax reform in developing countries

established that, among other things, the Value Added Tax

(VAT) is the most important choice and ingredient of tax

reform. The tax reform and adoption of a VAT is,

therefore essentially connected with the efforts of many

underdeveloped countries to achieve the goals of economic

development. Since, the VAT is one of the component of

indirect taxes developed in the past, is probably the

best tax system that had never been at the top of the tax

system. VAT may be adopted by developing countries with

no extra difficulties. VAT is an important instrument

for mobilization of internal resources, and mobilization

of internal resources decrease the pressure of VAT in

economic activities. Since VAT is an indirect tax, no one

can deny because of its illusiveness and tax payers don't

feel direct burden of in developing country in Nepal.

Indirect tax is a major source of the tax revenue in

Nepal. It covers about 80% of tax revenue. Major heading

of indirect tax is custom duty and excise duty. In fact

custom duty and excise duty are a kind of narrow based

sales tax. Custom duty is followed by sales tax (now it

is called VAT) in case of contributing in indirect tax

revenue. The tax reform and adoption of VAT is,

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therefore, essentially connected with the efforts of many

underdeveloped countries to achieve the goal of country's

economic development. Value added tax system is designed

to address various problems associated with the

conventional sales tax system.

VAT is the most important innovation of the 20th century.

It is a scientific tax system, which was first introduced

in 1954 A.D. in France. It has been spreading all over

the 1960's and now this tax has become one of the

mainstays of the tax system in over 145 countries. In

Nepal VAT has come into consideration to replace of old

indirect taxes. It was introduced on 16th November, 1997.

It is a modern tax system intended, when fully

operational, to improve the collection of taxes, to

increase efficiency and to lessen tax evasion. VAT will

replace the existing Sales Tax, the Contract Tax, the

Hotel Tax and the Entertainment Tax. It has been designed

to collect the same revenue as the four taxes it

replaces. VAT is the supplementary of sales tax,

entertainment tax, contract tax and hotel tax. It is

believe that successful implementation of VAT will helps

to generate customs duties and income tax also and it is

expected to enhance the revenue collection and it is

closely associated with the GDP. The self-policing and

catch up effect of vat has turned out to be the rationale

of the VAT system.

VAT is the transparence tax system that is based on the

tax payer's transition. VAT is not only transparent in it8

but also demands transparency in other tax system as

well. Unless such environment is created, VAT cannot be

implemented effectively. VAT is the youngest member of

the sales tax member of the sales tax family, which is

broad based. Since the base of the VAT is extensive,

under this tax resume more revenue can be collected

through lower rates. The effective implementation of this

tax can help in reducing the rates of custom duties and

income tax along with reducing smuggling of imported

goods and hence improves that balance of payments,

reduces the unintended distortions, services horizontal

equity in a greater degree and makes the tax system

simple and natural.

To conclude, VAT has been the most essential choice for

the most developing countries as an ingredient of their

tax reforms because it is the most improved form of sales

tax, which leads to revenue enhancement and economic

efficiency. VAT, being a multi-point tax, provided a

number of opportunities to the Government to gain access

to the revenue. It is an important instrument for the

mobilization of internal resources. There is tremendous

scope for increasing the revenue from VAT. The tax reform

with adoption of VAT is, therefore essentially connected

with the efforts of many underdeveloped countries as one

of the major elements of tax revenue to achieve the goal

of country's economic development. (Shrestha, 2008)

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1.2 Statement of the ProblemTax system plays a major role for the development

of the country, Nepal has introduced comprehensive

tax reform program after the restoration of the multi-

party democratic system in BS 2046. Since the base of the

VAT is extensive, under this tax resume more revenue can

be collected through lower rates. The implementation of

Value Added Tax has been taken as an important part of

this process. It is envisaged that through the

implementation of this tax, the base of tax will become

wider and thereby increase tax collection, make

the tax system economically efficient and increase

transparency in our entire tax system. In order to create

conducive policy environment to implement Value Added Tax

more efficiently, Government made several changes in the

customs and income tax system. Prior to the introduction

of VAT on 16th November, 1997 efforts were made to

establish a legal and institutional basis for this and

through tax payers' educational and awareness program

regarding various aspect of this tax was imparted to

potential tax payers as well as different sections of the

society. (Kumar, 2011)

In the implementation of VAT, the main glitch has been in

terms of lack of public awareness. Until the time when a

situation is created where the consumer himself/herself

is self-motivated to ask for an invoice, it will be an

uphill to climb for VAT. In the beginning stage of

implementation of VAT, government had to defense to the

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market. VAT was a subject of strict opposition from the

business community in the period of introduction. There

was eleven-day strike in the main city of the country-

Kathmandu based. The administration had to struggle to

get tax payers registered. The businessmen and

industrialist, who directly or indirectly benefited from

the VAT, were motivated to spread negative publicity.

Despite these hurdles, the VAT was implemented in 1997

but the factors such as custom valuation not being

based on actual price, lack of tendency to

execute fair business amongst the businessmen, tax

payers not used to paying taxes, inability of the revenue

administration to make the audit system systematic and

reliable, instability and insincerity of the government

may be the main reason for this system not being

as successful as in other countries. But the lack

of awareness regarding this system amongst the tax

payers, tax administration (those who have knowledge are

also motivated to cheat or evade the tax) and the general

public is also one of the main reasons for

ineffectiveness of VAT system. (Kumar, 2011)

Government made VAT the main source of revenue collection

but the mainstream of VAT, billing system is still very

weak. Still the consumers could not get genuine bills.

Businessmen try not to issue the bill and if issued, they

ask for high price (Value Added Price). Therefore the

consumers have tendency of not taking the VAT bills. In

year 2068/069, Government has made target to collect

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Rs.4806.78 crores and Rs.2467.52 crores from import and

internal sales respectively, while they achieved to

collect Rs.4653.73 crores from import and Rs.2565.08

crores from internal sales with total of Rs.7218.81crores

almost 99% target achieved. The wholesale and retail

stores are still could not came to the mainstream of VAT.

(Annual Report, 2068/69-IRD)

General expenditure only could not cover by the internal

source of revenue. Now the revenue saving is zero. This

discourages the foreign assistance and only one way to

the government is to broaden the tax base. To increase

the VAT rate, where peoples' income is low, is giving

more financial burden to the public.

The self-policing and catch up effect of vat has turned

out to be of no use. Tax payers are barely interested in

observance of law in regards to its payment. The

malignant taxpayers cash in illegal benefits from the

unawareness of the innocent taxpayers to manipulate their

transaction. Inland revenue Department (IRD) has been

pursuing two-pronged strategies, namely (i) increasing of

services delivery with high quality to lure taxpayers

towards tax administration and (ii) administering

stringent legal actions to the tax evasion. Some

fraudulent taxpayers have collusively involved in the

fake tax and refund claims. Hence, tax refund system of

vat is no longer able to retain its beauty.

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The government via the Inland Revenue Department (IRD)

had launched investigation into tax evasion in November

2010 coinciding it with the Tax Enforcement Campaigning

Year 2011/12. Since then, the department has investigated

227 trading houses, 83 contractors, 58 industries, 44

automobile traders, 37 hardware suppliers, 9 service-

sector businesses, 4 department stores and 56 other

enterprises. These firms were found to have evaded Rs

3.06 billion in VAT, Rs 3.32 billion in income tax and Rs

205.2 million in excise duty. Of the amount, the

government has recovered only Rs 115.5 million so far. At

least 518 firms, including 154 major taxpayers, evaded a

total of Rs 6.59 billion in value added tax (VAT), income

tax and excise duty by issuing fake bills or providing

misleading information to the government which results in

tax evasion and revenue loss to the government.

(http://www.myrepublica.com/portal/index.php?

action=news_details&news_id=33957)

To be more specific to the problem, the study tries to

answer the following questions:

What is the current scenario of VAT in Nepal?

What are problems faced by the taxpayers while

collecting and reporting VAT to the government?

What is the contribution of VAT on GDP, Total

Revenue and Tax Revenue? Do the businessmen and consumers are aware enough

about VAT?

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1.3 Objectives of the studyValue added tax is the latest innovation in the field of

taxation and is considered as the reform tax system of

the 21st century, which has already been implemented

popularly in more than 145 countries in the world. As the

vat is indirect tax which depends on the consumer, its

implementation was not east in the initial days. It was a

matter of great debate and even after its enactment;

there were a loss of constraints and difficulties in

introducing and implementing vat in Nepal. But now it is

well receipted by the consumers as well as business and

industrial communities. Vat considered as the account

based tax system as it leads to transparency and

accountability on the both part of tax payers and tax

collectors.

Resistance from the business community, ignorance of

general people, lack of full support and commitments from

the politicians and government officials has been of

great hindrances in effective implementation of the vat

system.

However, specific objectives of the study are:

To explore the current scenario of VAT in Nepal.

To analyze the contribution of VAT to GDP, total

revenue and tax revenue

To know the collection and reporting procedure of

VAT.

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To analyze the problem faced by taxpayers on the

collection and reporting system.

1.4 Significance of the studyValue added tax (VAT) is a recent phenomenon in the arena

of tax administration. VAT in Nepal has many ups and

downs and twists and turn so far. Despite of all the

odds, it has been able to prove itself as a strong

internal revenue source, around 30% of the government

revenue. The presence of VAT has been associated with a

higher ratio of general government revenue and grants to

GDP. Sometimes it is argued as a particularly complex and

costly tax to comply with and administer.

This paper aims to assess critically the performance of

VAT in Nepal since its inception to date, focusing

basically on three aspects of it, viz, (i).Collection and

reporting of VAT, (ii).Problem faced by the taxpayers and

(iii) Actions required to be taken. So this study will be

beneficial in terms of viewing the current taxation

scenario and will be helpful for administration for the

effective and efficient implementation of the vat system

minimizing the evasions and possible loopholes and may

bring positive impact in overall tax system. (Koirala,

2010/11)

It will be helpful in

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Identifying the practice scenario of VAT in Nepal.

Identifying the contribution of VAT in GDP, total

tax revenue and total revenue.

Identifying the procedure adopted by a company to

collect VAT and report the same to the government.

Identifying problem faced during the process of

collection and reporting.

1.5 Limitation of the studyVat has been the latest innovation in the international

scenario and it has been just 15 years of history in the

country. It is only a portion of the overall taxation

system. Effective research in the topic is yet to be

made. Lack of taxpayer education and the consumer

awareness campaign can be hindrances in the primary data

collection. This will have following limitation:

Questionnaire was not fully filled up or refuses to

fill the questionnaire.

Lack of resource person.

It covers certain topics of VAT

1.6 Organization of the StudyThe project is organized into five different chapters as

shown below:

Chapter I Introduction

It describes the background, statement of the problem,

objective and significance, limitations of the study.

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Chapter II Conceptual Framework and Review of Literature

It includes conceptual framework, and review of related

studies.

Chapter III Research Methodology

It contains rationale of the selection of the study area,

research design, sampling, nature and source of data

collection, data processing and analysis, limitations of

the study and viability of study.

Chapter IV Data Analysis and Presentation

The data collected are presented, tabulated, and

calculated as required by the research objectives.

Chapter V Summary, Conclusion, and Recommendation

This chapter includes the summary and conclusion of the

whole Thesis and also includes the valuable suggestion

and recommendation.

Bibliography and Annexes

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CHAPTER - II

CONCEPTUAL FRAMEWORK AND REVIEW OF LITERATURE

2.1 Conceptual Framework

2.1.1 Introduction to VATVAT is the youngest member of the sales tax family. This

tax was proposed for the first time by Dr. Wilhelm Von

Siemens for Germany in 1919 as an improved turnover tax.

“The improvement consisted in the subtraction of previous

outlays from taxable sales with the results that the tax

base of each firm would be reduced to the value which it

added to the product.” In 1921, VAT was suggested by

Professor Thomas S. Adams for the United States of

America who observed “sales tax with a credit or refund

for taxes paid by the producer or dealer (as purchaser)

on goods bought for resale or for necessary use in the

production of goods for sales.” VAT was also recommended

by the Shoup Mission for reconstruction of the Japanese

Economy in 1949. However, the tax was not introduced by

any country till 1953. France led the way in 1954 by

adopting a VAT that covered the industrial sector alone

and the tax was limited up to the wholesale level. The

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tax was limited to the boundaries of France until the

fifties.

VAT has, however, been spreading rapidly since the

sixties. France, Senegal, Denmark, Brazil, Netherlands,

Sweden, USA, UK etc. introduced VAT in sixties and later.

In the South Asian Association for Regional Cooperation

(SAARC) region, VAT has been considered in great depth in

India. This country introduced VAT in a different way

under the name of modified value added tax (MODVAT) in

1986. Among the other members of the SAARC countries,

Pakistan adopted VAT in 1990, Bangladesh in 1991, and

Nepal in 1997 while Sri Lanka introduced VAT in 1998.(A

study on VAT in SAFA Countries,2005)

As VAT is less distortive and more revenue-productive, it

has been spreading all over the world. This tax had been

adopted by eight countries by the end of the 1960s. Since

then the tax has been introduced by at least one country

each year except 1974, 1978 and 1979. By 2000, about 120

countries have adopted VAT and it is under consideration

in many other countries. In fact, VAT has become a

popular topic for tax reform in recent years. In VAT

system, Personal end-consumers of products and services

cannot recover VAT on purchases, but businesses are able

to recover VAT (input tax) on the products and services

that they buy in order to produce further goods or

services that will be sold to yet another business in the

supply chain or directly to a final consumer. In this

way, the total tax levied at each stage in the economic19

chain of supply is a constant fraction of the value added

by a business to its products, and most of the cost of

collecting the tax is borne by business, rather than by

the state.(System of Value Added Tax in Nepal: An

Overview)

2.1.2 Meaning of VAT VAT is a broad based tax as it also covers the value

added to each commodity by a firm during all stages of

production and distribution. It is a modern tax system

which enables to efficient collection system, to increase

efficiency and to reduce tax evasion. VAT is based on the

principle of self-assessment system. VAT applies to

supplies of goods and services for consideration other

than exempt goods by taxable persons. VAT is collected by

taxable person. A taxable person is entitled to deduct

the input tax from the tax collected by the sales.

Similarly if the input tax exceeds the tax collected, the

taxpayer may adjust in any tax payable. After adjusting

it, if any tax amount remains, taxpayer is entitled to

deduct from tax payable in next month. VAT Act has made

provision regarding tax refund also. Conditions and

procedures of tax refund are also stipulated in the VAT

Act.

VAT replaces the old Sales Tax, Contract Tax, Hotel Tax

and Entertainment Tax. It is believe that successful

implementation of VAT will helps to generate customs

duties and income tax also and it is expected to enhance

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the revenue collection and it is closely associated with

the GDP. This Act classifies good and services under

three category they are Vat able goods and services,

exempted goods and services and zero rated goods and

services. It is applied at a single rate (presently 13%,

initially 10%) based on addition of value of the goods

and services at each stage in the process of supply and

delivery of goods and services.

The VAT is a general, broad based consumption tax

assessed on the value added on the goods and services. It

applies more or less to all goods and services that are

bought and sold for use or consumption in the community.

Thus, goods which are sold for export or services which

are sold to customers abroad are normally not subject to

VAT. The success of the VAT system depends upon the

proper account keeping, registration of business,

effective billing system and so on.

A VAT is a form of consumption tax. From the perspective

of the buyer, it is a tax on the purchase price. From

that of the seller, it is a tax only on the value added

to a product, material, or service, from an accounting

point of view, by this stage of its manufacture or

distribution. The manufacturer remits to the government

the difference between these two amounts, and retains the

rest for themselves to offset the taxes they had

previously paid on the inputs.

Figure 2.1Multistage VAT

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Sales value: Rs. 100Gross VAT 13% Rs.13/-Net VAT Rs.13

‘A’ Raw Material

The value added to a product by or with a business is the

sale price charged to its customer, minus the cost of

materials and other taxable inputs. A VAT is like a sales

tax in that ultimately only the end consumer is taxed. It

differs from the sales tax in that, with the latter, the

tax is collected and remitted to the government only

once, at the point of purchase by the end consumer. With

the VAT, collections, remittances to the government, and

credits for taxes already paid occur each time a business

in the supply chain purchases products. Value added tax

(VAT) in theory avoids the cascade effect of sales tax by

taxing only the value added at each stage of production.

For this reason, throughout the world, VAT has been

gaining favor over traditional sales taxes. In principle,

VAT applies to all provisions of goods and services. VAT

is assessed and collected on the value of goods or

services that have been provided every time there is a

transaction (sale/purchase). The seller charges VAT to

the buyer, and the seller pays this VAT to the22

Sales value: Rs. 150Gross VAT 13% Rs.19.5/-Net VAT Rs.19.5-13=6.5

‘B’ Manufacturer

Sales value: Rs. 200Gross VAT 13%Rs.26/-Net VAT Rs.26-19.5=6.5

‘C’ Wholesaler

Sales value: Rs. 250Gross VAT 13% Rs.32.5/-Net VAT Rs.32.5-26=6.5

‘D’ Retailer

government. If, however, the purchaser is not an end

user, but the goods or services purchased are costs to

its business, the tax it has paid for such purchases can

be deducted from the tax it charges to its customers. The

government only receives the difference; in other words,

it is paid tax on the gross margin of each transaction,

by each participant in the sales chain i.e. from seller

to final consumer.

(http://en.wikipedia.org/wiki/Value_added_tax)

In Nepal, VAT is based on the destination principle. It

is levied on the goods and services where the place of

supply is in Nepal and importation of goods and services

into Nepal. Exports of goods and services are zero-rated.

This means that the tax base is domestic consumption.

Value Added Tax, or VAT, is levied on top of the cost of

a product or service and generates revenue for a

government.

VAT is a multi-point Sales Tax with set-off for tax paid

on purchases. It is collected in installments at each

transaction in the production distribution system. It

does not have cascading effect due to the system of

deduction or credit mechanism.

2.1.3 Principles of VAT Commodity tax is levied on two principles:

i. Principle of origin and

ii. Principle of destination

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Origin Principle:

Under origin principle, tax on goods and services is

levied on the basis of origin of goods. The place where

the goods are originated is situs of sale of place of

sale. Central Sales Tax is typical illustration for this

principle. Under the 'origin principle', value added

domestically on all goods whether they are exported or

internally consumed is subjected to tax. Consequently,

tax cannot be levied on value added abroad and this

principle confines VAT only to goods originating in the

country of consumption. In short, exports are taxable

under this principle while imports are exempt. It is

mostly used in conjunction with income VAT (I-VAT) and is

unpopular for obvious reasons. The origin principle

indirectly gives importance to the goods manufactured

abroad and its amounts to unfair treatment of domestic

producers which is economically and politically

inadvisable. The EEC countries adopted and followed

origin principle in their Tax System but subsequently

shifted to destination principle.

Destination Principle:

Under 'destination principle', value added irrespective

of the place of origin is taxable. All goods are taxed if

they are consumed within the country. In this regime,

exports are exempt while imports are subjected to tax. In

other words, all the goods which are consumed

domestically are subjected to tax. General Sales Tax is

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an illustration. The imports are taxed, while exports are

exempt. This principle treats imported goods at par with

domestic products unlike the origin principle which gives

indirect protection and even preference to the producers

abroad. This method is used in connection with

Consumption VAT (C-VAT). Most of the countries which

introduced VAT follow this principle.

In a federal set-up like India, destination principle is

preferred for taxation of products consumed within the

various States of the country. In the EEC countries,

origin principle was once considered for eliminating

border controls and problems of valuation, but was

subsequently given up as being impractical and

destination principle is now followed.(Views on VAT: An

article series, KPMG)

2.1.4 Variant of VATFor better tax compliance and tax administration, it is

always desirable to have wider tax base. Tax base depends

upon various factors, such as number of rate of tax,

sectors and persons to be taxed, number of exemption, zero

rates etc. It is desirable to keep rate of tax as low as

possible with minimum range of tax and few exemption. On

the basis of tax base, the VAT is classified into three

variant types, namely:

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Figure 2.2Type of VAT

These variants are generally distinguished according to

method of calculation in determining VAT liability. The

different variants are explained as follows:-

Gross Product Variant (P-VAT)

A GNP-typed VAT taxes all final goods and services except

for intermediate goods. Investment costs also enter the

tax base—no capital expensing or depreciation is allowed.

The advantage of this type of the VAT is that the base is

relatively large. The big disadvantage is, however, that

the investment items will bear the full tax burden.

Gross National Product Type = Gross Investment +

Consumption

= Gross value of output - all

current inputs

Income Variant (I-VAT)

This type of the VAT excludes from the base the value of

intermediate inputs and depreciation. The base is,

therefore, similar to the one in income taxation.

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Types of VAT

Gross Product Variant :

Tax levied on all sales with no deduction for capital inputs

Income Variant : Tax levied on all sales with set-off for depreciation on

capital goods

Consumption Variant :

Tax levied on all sales with

deduction for all business inputs

Income Type = Gross National Product - Depreciation

= Net Investment + Consumption

Consumption Variant (C-VAT)

The base excludes the value of both intermediate inputs and

investment items from the gross value of goods and

services. The base as defined is close to the one in

retail sales taxation.

Consumption Type = Gross National Product - Gross

Investment

= Total Consumption Expenditure

Most countries apply the consumption type VAT but introduce

various ways of giving credit for capital goods. Rarely do

countries allow for immediate and full credit of the tax

charged on capital goods. They generally limit the credit

in a certain period to the level of the VAT chargeable on

output and allow the remaining credit to be carried

forward to offset the tax in later periods (for example,

this is a common practice in Latin America). On the other

hand, some countries selectively grant immediate exemption

of the VAT on the purchase of capital goods as part of an

overall package of fiscal incentives to priority

industries.

There are two important notes. First, both product and

income-typed VATs entail cascading effect as they more or

less charge the tax on investment items. Thus, they are

not production-efficient. The income-typed VAT allows for

27

partial and delayed refunds of tax: investment items are

not immediately expensed but gradually deducted from the

tax base over a specified period in the project’s life—the

investment items, therefore, bear partial tax burden in

present value terms. However, the GNP or income tax base

is relatively larger than the one of the pure consumption-

typed VAT and is not commonly applied in practice-China and

Brazil are among a few exceptional cases, which apply the

GNP-typed VAT (China apply the GNP-based VAT at state

level). On the other hand, the pure consumption base would

relieve production from tax burden and hence makes the VAT

more production-efficient. In addition, as a general

consumption tax, the consumption-typed VAT does not distort

the investment and saving behavior. (Views on VAT: An

Article series, kpmg.com)

When introducing VAT, the most basic choice is to decide

whether or not VAT would be imposed as a Consumption, Gross

product, or Income type tax. The following table

illustrates the difference between the three types:

Table 2.1Difference between three types of VAT

Deductible from SalesGross-Product Income Consumption

Purchases of materials and services Yes Yes YesDepreciation of capital goods No Yes YesInvestment purchases No No Yes

Base GDP NNIPrivate

ConsumptionSource: Sicat, 1988:70

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2.1.5 Tax Credit MethodUnder this method, tax is imposed at each stage of sales

on the entire sale value and the tax paid at the earlier

stage is allowed as set-off. In other words, out of tax

so calculated, tax paid at the earlier stage i.e., at the

stage of purchases is set-off, and at every stage the

differential tax is being paid. The most important aspect

of this method is that at each stage, tax is to be

charged separately in the invoice. In this method, to

determine VAT liability, tax paid on purchase is deducted

from tax payable on sales. The difference is tax payable

to Government or excess refundable to the dealer for the

period. Tax paid on input value of goods and tax payable

on sale value of goods is more important. The concept of

turnover is not important. The purchase invoice showing

tax invoice or voucher, it is called Tax invoice Method

or Voucher Method. Further, in this method, tax credit is

created, in favor of dealer, as soon as he pays tax on

purchases and therefore it is called popularly as Tax

Credit Method.

2.1.6 Rationale for VAT In a nutshell, VAT is a form of indirect tax collected at

various stages of production-distribution chains. If

properly designed and implemented, the tax, at any stage,

is effectively collected on the pure value added

generated at that stage; as such, the VAT can be viewed

29

as equivalent to the single retail sales stage tax but

implemented in a different fashion.

There are some good rationales for a VAT. (Value Added

Taxation: Mechanism, Design, and Policy Issues, 2003)

The VAT replaces other unsatisfactory indirect

taxes: Many developing countries have introduced the

VAT to replace turnover tax or some type of single-

stage sales tax. The replaced taxes are inherently

troublesome in terms of either revenue leakage or

economic inefficiency or both.

Invoice-based credit VAT, the most common form of

VAT, is, in principle, self-enforcing and hence a

buoyant tax: The VAT is, in principle, described as

“self-enforcing.” The description stems from the

nature of the invoice-based credit VAT: a taxable

business can claim for the refund of the input VAT

only if the claim is supported by purchase invoices—

the mechanism provides strong incentives for firms

to keep invoices of their transactions and is an

efficient means for tax authorities to check and

cross-check for enforcement enhancement. In reality,

the tax is, however, not at all self-enforcing

—“ghost” invoices and false refund claims are

common.

Despite certain inherent problems in administration,

the VAT is empirically found to be a buoyant tax

(Tait, 1991). Most countries started the VAT with

30

an initial idea of reforming the existing sales tax

system on a revenue-neutral basis but then realized

that the VAT is revenue-enhancing, largely due to

the improved compliance. VAT: being a buoyant tax,

the VAT may allow for some relief in income taxes;

and if the VAT introduction accompanies a reduction

in income taxes, the whole tax system tends to be

more politically acceptable and hence more stable.

Unlike income taxes, consumption-based VAT does not

distort consumption - savings/investment decision:

Being a consumption tax, the VAT does not have

discriminating effect on savings/investment because

savings are essentially excluded from the

consumption VAT base.

A VAT on destination principle may relieve exports

from indirect tax burden on inputs if the tax is

properly applied: Under destination principle,

conventionally, the VAT zero rates exports. If

properly applied, zero rating removes exports from

all VAT burden: exporters do not collect the VAT

when exporting but are still eligible to claim for

refunds of all the VAT paid on their input purchase.

This is true, however, only in the case where

refunds of the input VAT are made in a timely

manner.

31

2.2 VAT in Nepal

2.2.1 Background The framework of the Nepalese VAT system is specified in

the VAT Act and Regulations. The VAT system is also

governed to some extent by the Finance Act, 1999. Some

procedural matters relating to VAT are also introduced

through operating manual. The government also has

introduced some notifications relating to the VAT system.

Similarly, the VAT Department has issued several circulars

on various procedural matters from time to time.

2.2.2 Basic features Type of VAT

Nepal has adopted a consumption type VAT system. Under this

system tax is levied on value added at each stage in the

process of production and distribution. Practically

speaking, however, value added is never calculated

directly; but the same result is obtained indirectly

through the input tax credit mechanism, i.e. VAT is levied

on output and a credit is allowed for the full amount of

the tax paid on the business input, including capital

goods, at previous stages. The end result is that each and

every VAT registrant pays VAT on its value added only.

Scope

VAT is based on the destination principle. It is levied on

the goods and services where the place of supply is in

Nepal and importation of goods and services into Nepal.

32

Exports of goods and services are zero-rated. This means

that the tax base is domestic consumption. VAT is a broad-

based tax, which applies to all business turnovers through

to the retail stages, with a few exceptions. It is levied

on a large number of goods and services other than those

specifically exempt by law, particularly on administrative

and social grounds.

Exempted goods and services are included in Schedule 1,

which is given at the end of the VAT Act. This schedule can

be changed by the government and does not require

parliamentary approval.

Currently, the following goods and services are exempted

from VAT (A study on VAT in SAFA Countries, 2005):

Basic agricultural products such as paddy, rice,

wheat, green and fresh vegetables, fresh fruits,

fresh eggs, unprocessed cereals, oil seeds,

unprocessed food, etc., but excluding food held out

for sale by hotels; restaurants, cafes and similar

establishments.

Goods of basic needs such as piped water, fuel wood,

coal and kerosene.

Live animals and animal products.

Agricultural inputs such as seeds, manure, fertilizer,

soil conditioners, agriculture hand implements and

pesticides

Social welfare services including medicines, medical

and health services.

33

Goods made for the use of disabled persons.

Educational services.

Books, newspapers, etc.

Artistic and cultural goods and services.

Transportation services.

Specified personal or professional services.

Other goods or services such as postal services,

financial and insurance services, bank notes, and

cheque books, gold and silver, land and building,

betting, casinos, lotteries.

Rate

VAT for a fiscal year is levied at a single positive rate

as specified in the Financial Act made for that year. Goods

and services are either taxed at the standard rate of 13

percent or they are taxed at zero percent. Those taxed at

the standard rate includes all goods and services except

those which are specified as taxed at zero percent or tax

exempt. A few transactions or goods and services are zero-

rated, which are given in Schedule 2 of the VAT Act. Like

Schedule 1, which is related to exemptions, the government,

without a parliamentary approval, also can change Schedule

2.

Zero-rating means some items are taxed at zero rates. This

further means that no VAT is payable on them, but they are

otherwise regarded as taxable. Therefore, a registered

person making zero-rated sales may take full credit for the

34

VAT paid on the taxable inputs to his business.

At present, the following supplies are zero-rated (A study

on VAT in SAFA Countries, 2005):

Export of goods.

Goods or stores taken on board an aircraft, provided

that the goods are taken on board an aircraft on

flight to a destination outside Nepal for delivery to

another country and fuel is used by the aircraft on a

flight to a destination outside Nepal.

Goods that have been shipped for use as stores on a

flight to a destination outside Nepal.

Imports of goods and services' by accredited

diplomats.

2.2.3 Taxable Value VAT is levied on the taxable value of each transaction,

which is the total price charged by the seller (including

all- related charges). The taxable value does not include

the VAT itself, and takes into account any price

adjustments (such as discounts or rebates) in effect at

that time of the sale. Adjustment that becomes necessary

after the time of sale (such as for goods returned) is to

be made in subsequent determination of the tax or credits.

The taxable value of a transaction is the price paid, which

is also consideration for the goods or services, by the

recipient to the supplier, provided that the supplier and

recipient are independent of each other. The price charged

must include all related expenditure borne by the supplier,35

for example, transport costs, if the goods are delivered to

the recipient, or any taxes other than VAT, chargeable on

the goods or services. In the case of imported goods, the

tax base is the sum of import value, freight, transport

costs, insurance, commission, import duties plus any

charges paid by the importer.

In the case of a transaction taking place between

associated persons, or goods being exchanged or bartered,

or at any time when the value declared is lower than the

prevailing market value, the taxable value of the

transaction shall be the market value of the goods or

services, which shall be taken as the consideration in

money agreed between independent sellers and buyers for the

supply of goods or services. If a tax officer is satisfied

that the declared value is substantially below the market

value, he may determine the value of the disputed

transaction to the best of his ability.

2.2.4 Tax CreditIn case of taxable supply

Tax credit is an important element of VAT. Under this

system VAT registrants making taxable supplies, including

the zero rated supplies, are entitled to claim input tax

credit. It is, however, allowed to the extent that the

purchased/imported goods and services are used for goods

and services sold in taxable transactions, including

exports. Since, only VAT registrants are allowed to claim

36

input tax, small vendors falling below the registration

threshold and not registered for VAT are required to pay

VAT on their purchases but cannot claim an input tax

credit.

It is necessary to meet the following conditions for the

entitlement of an input tax credit (A study on VAT in

SAFA Countries, 2005):

The goods or services supplied to the VAT registrant

must be solely for use in his business of making

taxable sales;

The registrant must hold and be able to produce a

valid tax invoice for the goods or services for

which credit is claimed; and

The claim for deduction must be made within one year

of the date of invoice.

In case of mixed supply

A person involved in mixed transaction (i.e. making both

taxable and tax-exempt transactions) is entitled to claim

input tax credit on the purchases related to the making

of taxable sales only, but not purchases related to his

exempt sales.

The VAT registrant is allowed to claim the tax on

purchases which he can clearly identify as being for

taxable sales. A VAT registrant will have overheads, such

as diesel or telephone charges or stationary, which will

be used by both his taxable and his exempt sales.

37

A VAT registrant is authorized to claim a proportion of

his input tax. The proportion to be claimed is the

proportion that his taxable sales bear to his total

sales.

Partial credit

Some goods are used for both the purpose of the business

and for personal use. In such cases, it is very difficult

to ascertain the proportion used in the taxable and tax-

exempt transactions. These include such items as

computers and cars. In these cases, only partial input

tax credit can be taken. For example, 40 per cent of

input tax credit may be claimed on aeroplanes and

automobiles and 60 per cent may be claimed on computers.

No credit

With certain goods and services it is very difficult to

ascertain whether they have been used for the purpose of

the business or for personal use. These include such

items as business entertainment, beverages, alcohol or

alcohol mixed beverages, such as liquor and beer, and

light petroleum (petrol) fuel for vehicles. In these

cases no input credit can be taken. (A study on VAT in

SAFA Countries, 2005)

2.2.5 Administration of VAT Registration

38

Suppliers of taxable goods and services are required to

register under the VAT Act and collect this tax. It is,

however, not necessary for them to register if they deal

with only tax exempt goods and services. Similarly, small

vendors falling below the registration threshold are also

not required to register for VAT.

The existing level of threshold is Rs.2 million. In the

case of imports, traders having annual commercial imports

below Rs.200,000 are not required to register. Traders

dealing with the mixed supply also will have to register

only when the transaction of taxable supply exceeds the

registration threshold. However, vendors filling below

the registration threshold can register voluntarily.

There is no system of group registration under the

Nepalese VAT system. Similarly, the Nepalese VAT Act does

not allow branch or divisional registration system.

The registration process is as follows (A study on VAT in

SAFA Countries, 2005):

Fill in VAT registration application form.

In case of partnership, fill also another form

designed for partnership firms.

Attach copies of business and income tax

registration certificates.

Submit it to the concerned VAT office. On receipt,

the VAT office gives a temporary certificate and

allocates Taxpayer Identification Number (TPIN) and

forwards the details to the VAT department.

39

VAT department processes the information and prints

out a VAT certificate with TPIN assigned by the VAT

office to the taxpayer on it and forwards it to the

concerned VAT office.

The VAT office hands over the certificate to the

concerned taxpayer.

Taxpayer has to display the original certificate at

his main place of business and certified copies at

other places.

Taxpayer has to furnish information within 15 days,

in case of changes in the information mentioned in

the VAT application form.

De-registration

Apply for de-registration under the following conditions

(VAT Act, 2052):

In the case of an incorporated body, if the

incorporated body is closed down, sold or

transferred, or if the incorporated body otherwise

ceases to exist.

In the case of a partnership firm, if it is

dissolved.

In the case of individual ownership, if the owner

dies. If a registered person ceases to be engaged in

taxable transactions.

40

If person is registered in error.

2.2.6 Invoicing VAT is an invoice-driven system. Under this system, each

registrant is required to issue a tax invoice or an

abbreviated invoice.

Tax invoice

A VAT registrant is required to issue a tax invoice in the

prescribed form whenever a transaction takes place. The

format is prescribed in the VAT regulations, which requires

the following information (A study on VAT in SAFA

Countries, 2005):

A sequential identifying number.

The date of the transaction.

The date of issue of the invoice, if different from

the date of the transaction.

The name, address and TPIN of the vendor.

The name, address and, where applicable, TPIN of the

buyer.

The type of transaction (e.g. sale, hire, rental or

exchange).

A description to identify the goods or services

supplied. The quantity of the goods or the extent of

the service for each description.

The rate of VAT and the amount payable, excluding VAT,

for each description of goods or services.

The value of any goods or services provided in part

41

exchange.

The total amount payable, excluding VAT.

The rate and amount of any discount offered.

The total tax charged.

The total amount charged, inclusive of VAT.

A minimum of three copies of each invoice must be prepared.

The first copy must be given to the buyer and the vendor

must retain the remaining two copies. These must be made

available at all reasonable times for inspection by a tax

officer. The invoices must be issued in sequential

numerical order. However, the invoices can be prepared with

different serial numbers for branches or different sections

(such as restaurants, bars, laundry, etc., in the case of

hotels) with prior approval of the VAT office.

Abbreviated invoice

VAT registrants may make application to use an abbreviated

invoice and the concerned tax officer may allow its use

subject to the following conditions (A study on VAT in

SAFA Countries, 2005):

The recipient of goods or services for which an

abbreviated invoice is issued shall not be entitled to

input tax credit on that purchase.

The abbreviated invoice shall not be used for

transactions exceeding Rs.5000, including VAT.

The registered person must keep a daily record of

sales.

Any till rolls or cash rolls used by the retailer must

42

be totaled daily and retained for inspection at any

reasonable time.

The following information must be recorded on the

abbreviated invoice:

An identifying number issued in sequential order.

The name, address and registration number of the

vendor. The date of the transaction.

A description to identify the goods or services

supplied. The total amount of money paid, including

VAT.

In the case of sales under the abbreviated invoice, VAT is

calculated by multiplying the sales by the VAT quotient.

The VAT quotient is found by dividing the rate of VAT by

100 plus the rate of VAT.

2.2.7 Accounting VAT registrants are required to maintain purchase and sales

books and list all sales and purchases in these books. They

are also required to prepare a VAT account.

Purchase book

VAT registrants are required to maintain an account of

their business purchases for VAT purpose. They have to

record of purchases by invoice. At the end of each

43

accounting period VAT registrant must total the amount of

taxable purchase/ imports, tax exempt purchase/imports and

the tax paid on purchases/imports. Sample of the purchase

book is on annex.

Sales book

Similarly, VAT registrants are required to maintain account

of their sales for VAT purpose. Like purchases, sales also

are to be recorded per invoice basis. At the end of each

accounting period VAT registrants are required to total the

amount of taxable (standard-rated and zero-rated) and tax

exempt sales they have made in the period and the tax

collected on sales. If they make both taxable and exempt

purchases and sales they are then required to calculate the

proportion of input tax they are entitled to the tax

period.

VAT Account

VAT registrants are also required to maintain the VAT

account. It is a monthly summary of taxable purchase and

sales and VAT paid on purchases and charged on sales.

Others

VAT registrants can maintain their business accounts on

computer with prior approval of VAT administration. VAT

registrants must make their accounts available at all

reasonable times for inspection by the VAT officer. In most

instances, they will be produced at the VAT registrants'

44

premises, but their production can be demanded at any

place. The VAT officer may take possession of accounts at

any reasonable time and they may be removed, copied or

taken possession of, as necessary.

All documents and accounts relating to the business must be

retained for a period of six years.

2.2.8 Submission of returnA VAT registrant must complete a VAT return and submit it

to the concerned VAT office within 25 days of the month

following the end of the accounting period. In the case of

compulsory registrants, it is necessary to submit VAT

return every month but the voluntary registrants have to

submit returns on a trimester basis.

The head office is required to submit tax returns for the

transactions carried out by it and its branches and sub

branches, if any. There are no special rules, for example

for seasonal business or others. Even if there is no

transaction, it is necessary to submit a zero return.

Returns could be debit returns, credit returns or zero-

returns. There is no need to attach purchase and sales

invoices or any other documents relating to the tax with

the returns.

If a taxpayer does not submit return within stipulated

time, he will be subject to a penalty of 0.05 per cent of

payable tax per day or Rs. 500, whichever is higher.

45

2.2.9 Payment of TaxIf a registrant's output tax liability is greater than his

input tax credit, he is required to remit the difference to

the government with 25 days from the close of the month in

which the tax liability occurred. Compulsory registrants

have to pay tax every month while voluntary registrants

will have to pay tax on a trimester basis.

There are some circumstances that are beyond the control of

a taxpayer, which can prevent paying the tax .due within

the prescribed time. Natural disasters such as floods, and

unfortunate circumstances such as a fire or death in the

family are-some of those incidents that could cause a

delay. The law grants the authority to the Director General

to waive the payment of the penalty under such

circumstances.

On the other hand, if the input tax credit is greater than

the output tax liability, the balance of credit is to be

carried forward for the next month. If a VAT registrant has

more than 50 per cent of his sales as exports, he can apply

for refund instead of carry forward of the excess credit.

The VAT Act makes provision for the additional charges as

late payment penalties. The rate of such penalty is 10 per

cent of the VAT payable in the first month, an additional

10 per cent in the second month, and then no further

action. There is also a provision for interest on non-

payment. The current rate of interest is 15 percent.

Interest on overdue is charged on a calendar month basis.

46

2.2.10 Tax Assessment General

VAT is a self-assessed tax. Taxpayers determine their tax

liability themselves and pay tax. Under this system, a

taxpayer determines his tax liability and files his

return to the VAT office. However, not all taxpayers may

file their return and- pay tax within the specified time.

Similarly, not all taxpayers may file the correct returns

and pay correct amount of tax. There could be different

situation as follows (A study on VAT in SAFA Countries,

2005):

Tax return is not filed;

Tax return is late;

Tax return contains incomplete information; or

The tax administration has reason to believe the tax

is otherwise than as declared.

In such cases, VAT officials may have to make a tax

assessment. Such assessment could be computer assessment or

management assessment, as described below.

Computer assessment

If a taxpayer does not assess his income himself and does

not file his return within the specified time, he is termed

as non-filer. Computer prints out the list of non-filers

after 45 days of the expiry of the tax period. The VAT

office gives the non-filers a notice. If they do not file

returns within the specified period even after the issuance

of the notice of non-filing, the computer makes a monthly

47

or trimester assessment, depending upon the status of a

particular taxpayer.

The process regarding computer assessment is designed in

the following way (A study on VAT in SAFA Countries,

2005):

Find out highest amount declared by the taxpayer in

his tax returns during the previous 12 months from the

VAT payable.

If a taxpayer has not filed any return, find the

turnover figure stated on the registration

application. Divide this by the number of filing

periods in a year, and then multiply by the VAT rate.

Pick the highest figure in (i) or (ii) above.

Increase the number found in (iii) by 30 per cent to

get the assessment amount.

Subsequently (A study on VAT in SAFA Countries, 2005):

Such assessments are stored in an assessment

verification file for review. The assessed tax is not

recorded in the taxpayer’s account at the time of

computer assessment.

Tax assessment notice is sent to the Collection

Section of the VAT department for management review.

The Collection Section makes a verification of the

computer assessment; particularly to be sure whether

or not the taxpayers have submitted their returns for

the period for which the computer assessments have

been made.

48

The Collection Section cancels the computer

assessments in the case of those taxpayers whose

return have already been received and accepts other

assessments.

The Collection Section provides this information to

the computer system without any delay and the Computer

Section transfers data from assessment verification

file to the taxpayers account.

The Computer Section prints computer assessment.

The VAT officer signs such computer assessments. If he

does not agree with the computer assessment, he makes

management assessment by correcting figures printed by

the computer.

Assessment orders are issued and distributed to the

concerned parties.

Management Assessment

The tax officers do management assessment when a taxpayer

receives updated information after submitting his returns

and informs it to the tax officer or in the case of those

taxpayers where tax officers find errors during the tax

audit.

The management assessment process is explained below (A

study on VAT in SAFA Countries, 2005):

The tax officer assesses tax, and determines interest

and penalties.

The tax officer creates management assessment on a

trimester basis in the case of voluntary registrants

49

and monthly basis in case of others.

Management assessment must be batched and submitted to

the Computer Section.

VAT assessments will only normally extend back four

years from the time the taxpayer is given the notice

of assessment.

2.2.11 Penalty Penal provisions have been made for any non-compliance. For

example, a vendor will be required to pay liable tax plus

up to Rs.10, 000 or a 10 per cent of payable tax, whichever

is higher, if he fails to register before the commencement

of his business.

Penalty for non-issuance of invoice is Rs.500 each time

whereas the corresponding figure for failure to keep the

required information in account is up to Rs. 10,000 each

time. Similarly, a taxpayer who has committed fraud or tax

evasion will be charged with a penalty not exceeding 100

per cent of the amount of tax, or six months jail, or both.

2.3 Review of Previous Studies

2.3.1 Review of Books

Amatya et.al. (2008), published a book “Taxation in Nepal

(Income Tax, Property Tax & Value Added Tax)”. This book

has been designed for the subject ‘Taxation in Nepal’ of

Bachelor level as per the syllabus prescribed by the

Faculty of Management, Tribhuvan University. Unlike other

50

books available on this subject, this book makes in-depth

approach to the study of income tax, property tax and value

added tax in Nepal. This book was very useful to know the

legal provisions of Income Tax Act 2058 and Value added Tax

Act 2052. Theoretical aspects as well as numerical problems

of income tax and value added tax are covered in this book.

This book has been designed to cover the enough practical

problems and helps to make the reader competent in the

practical aspects of taxation.

Adhikari (2007), had published a book entitled “VAT system

in Nepal” which deals with the theoretical concept of

VAT which includes historical background, objectives,

merit and demerit of VAT, introduction of VAT system in

Nepal, different terminologies associated with VAT,

Tax administration system and legal provision made for

the VAT implementation in Nepal, specimen of VAT related

forms and Accounts, Value Added Tax Rule 1997 and Value

Added Tax Act 1996. This book helps the students to get the

knowledge about the various aspects of VAT, its collection

and reporting procedure and the rationale of VAT in the

context of developing countries like Nepal for the best

uses of VAT system as a revenue mobilization and for the

economic growth of the country.

Bhattarai and Koirala (2006), published a book “Taxation in

Nepal with Tax Laws and Tax Planning” tries to described

the income tax system in depth. This book includes the

separate chapter on Value Added Tax. It describes VAT

51

practices in Nepal with several theoretical aspects and

numerical examples. This book was specifically designed to

cover the syllabus of Master level under Tribhuvan

University. It tries to prove VAT as a substitute of sales

tax and is more scientific, modern, and progressive as

compared to sales tax. It includes taxable transactions,

tax exemptions and zero rate, tax deduction and tax refund,

tax calculation, tax registration, collection, fines,

penalties and appeal.

Silwal (2008), in his book “Value Added Tax: A Nepalese

Experience” discloses the empirical finding of VAT after

its implication and shown that practical experiences about

the VAT system in Nepal. This book has been designed to

know about the effectiveness of VAT system in Nepal. It

covers positive and negative aspects of VAT and problems in

implementation of VAT at initial and current period. In his

own words, Tax base, rate structure, exemption and the

threshold issues were major factors affecting VAT design in

Nepal. Further the author stresses on the proper

implementation of VAT in Nepal.

2.3.2 Review of ArticlesKhadka (2001), an expert of Nepalese tax system in his

article, “Value Added Tax, The Concept on International

Experience and its application in Nepal”, included the

current developments and the status of VAT in the country

as well as international arena. He mentioned VAT as the

52

most recent innovation in the field of taxation, reasons of

growing popularity of VAT and its neutrality, more

equitable than other forms of sales tax evasion on its

favor. A comparison of VAT with the sales tax before the

introduction of VAT was very useful to convince the private

sector for its implementation of VAT system. He had also

tried to justify that after enactment of SAFTA and WTO

agreement, the broad base internal tax system - VAT is

required for a stable source of revenue. (IRD/ DANIDA

Report, 2001)

Joshi (2001), Deputy Director General of IRD, writes the

article, “Tax credit and Tax refund under the VAT system”.

The tax refund process appears to rather lengthy in his

opinion. He disclosed that there has been an increase in

the amount refunded each year (IRD/ DANIDA Report, 2001).

Thapa (2001), in his article, “Implementation of VAT in

Nepal, In Evaluation”, he pointed towards the weakness

inherent in the Value Added Tax system in Nepal. In his

opinion, if market runs in a fair manner, the market

principle will bring welfare to many. He clearly points

state that tax system deserves concerted effort of all

stakeholders. The business person should develop the habit

of quoting the price inclusive of VAT and remind customers

for invoices. The tax administration should increase

surveillance and consumer education level and consumers

participation in finding the fraudulent transactions (IRD/

DANIDA Report, 2001).

53

Jyoti (2002), in his article “VAT: Analysis and

Suggestion” New Business Age, Feb 2002 issue, contains this

article. According to him VAT was introduced in Nepal in

response to realization that a fundamental change was

necessary in revenue policy for stability, self-enforcing

and buoyant tax. The business community was in opposition

of the VAT in the beginning but gradually adapted the

positive aspects of the VAT system for its transparency and

simplicity. Government went through many negotiations with

business communities before implementing VAT system.

Taxpayers were opposed to VAT not because of any defect in

VAT as a system but due to the notorious behavior of

administration staff towards the taxpayers.

According to him VAT system is

Self-enforcing, transparent and simple to administer.

Buoyant tax system.

Mass participation of taxpayer

With Catch-up effect.

In his opinion there are two main issues that are

obstructing the proper implementation of the VAT system:

Lack of invoicing or invoicing with the

incorrect value.

Effective administration to enforce VAT threshold on

an effective way

VAT: being a buoyant tax, the VAT may allow for some

relief in income taxes; and if the VAT introduction

54

accompanies a reduction in income taxes, the whole tax

system tends to be more politically acceptable and hence

more stable.

55

2.3.2 Review of Thesis

Shrestha (2008), in her thesis entitled “A study on VAT:

Implementation, Problems & its Effectiveness in the

Nepalese Economy”, mentioned that Nepal introduces VAT

system to introduce a tax system to develop a stable

source of revenue, to broaden the tax base, to promote

economic growth, to generate revenue required for

improving its deteriorating macro-economic performance,

to establish modern, scientific and transparent tax

system in the country.

Objectives:

To examine the historical background of VAT in

general.

To examine the implementation of the VAT in Nepal.

To analyze the problems faced by the governments to

collect VAT.

To conduct an empirical investigation regarding to

effectiveness and problems of VAT in Nepal.

To provide suggestions on the basis of this study to

the concern authorities.

Recommendation:

Billing system should be maintained more clear and

transparent.

The manpower of the IRD and VAT office should be

trained.

Make the market monitoring system effective, immediate

56

legal action for fraudulent activities.

Publicity and taxpayer related education.

The government should apply suitable VAT policies

and strategies considering globalization,

liberalization, WTO and modern net of VAT.

Adhikari (2009), in his thesis entitled “The Role of

Value Added Tax in Nepal”, prepared with the main

objective of examining the trend of VAT in Nepal. He also

described the share of VAT to total tax revenue and its

ratio to gross domestic product. His study focused on the

role of VAT, structure of VAT, projection of VAT, legal

aspect of VAT act, and problems of VAT in Nepal.

The major problems of VAT identified by him are evasion

of VAT at high level, delay in assessment, normal role of

VAT, lack of public information, complicated acts and

other defects of existing VAT Act.

Objectives:

Highlight role of VAT in context of Nepal, and its

legal aspect. Examining the trend of VAT in Nepal.

Ratio share contribution of VAT in Government

Revenue Collection and GDP.

Explain the need of VAT for country development

process.

Major Findings:

To increase the revenue of government that VAT law

should be clear and practical

Scientific method for accounting assessment and

57

collection of VAT

Widening tax coverage, easy and simple procedure of

tax payment

Knowledge and awareness about VAT should be carried

to all VAT payer

Evasion of VAT must be checked to contribute taxes

to the economic growth of Nepal.

Rawal (2010), in his thesis “Value Added Tax (VAT) in

NEPAL: A Study of Achievement & Challenges”, described

VAT as a self-policing and transparent system of taxation

reducing the scope for tax evasion wherein the tax

administration is highly automated illegal trading

through the open boarder.

Objectives:

To find out the reasons for non-issue of invoices.

To find out the major loopholes and to suggest

recovery package.

To assess the impact of VAT on Government Revenue in

Nepal.

To analyze the trend of registration, refund and

collection of VAT.

To recommend a package of suggestions for effective

implementation of VAT.

Major Findings:

A collection strategy needs to be developed and

implemented effectively in order to collect the

58

increasing amounts of arrear.

Tax administration should be fully computerized and

ensure faster, simpler and reliable procedures for

the taxpayers.

Conducting link audit at all levels of business

chain with emphasis on tax audit.

Fully and up-to-date update of price index of goods

and services is necessary.

Sharma (2011) in his thesis, “Contribution of VAT on

government revenue in Nepal”, he tried to analyze the

composition of VAT in different sectors of economy and

its contribution to the total revenue mobilizations. He

stated that the study was undertaken to observe how VAT

was contributing to the total revenue of the country.

Objectives:

To review theoretical aspects of VAT and

analyze its contribution to government revenue,

To examine the VAT as an instrument for internal

resource mobilization,

To identify the major problems with VAT collection

in Nepal and finally

Major Findings:

The government of Nepal has been facing the

resource gap in Revenue Expenditure because of

the increased government’s expenditure surpassing

the increased government’s revenue.

59

Leakage is one of the serious problems inflicting

the tax system.

It is better to broaden the tax net than to put

additional taxes on existing customers.

Due to falling revenues from exports, VAT has become

more important.

Kumar (2011), in his thesis ,“A Study on Productivity and

Implementation of Value Added Tax in Nepal”, he had

tried to assess the post- implementation period of VAT

as compared to the period before the implementation

in connection with generating revenue, to examine whether

VAT is superior to Sales tax. Key issues is administrative

capability and situation which definitely are of

great importance for the effective implementation of

VAT in Nepal. Actually VAT was introduced in Nepal in an

ambitious hope to increase the revenue and particularly

stop the leakage made through other forms of taxes. He

had tried to explain the various loopholes existing in

the current tax system and answer to how to nullify it.

Objectives:

To examine the administration system of VAT especially

in the valley.

To find out the change in revenue structure after

and before the implementation of VAT.

To explore the practice scenario of VAT in Nepal.

To find out the contribution of VAT in GDP, total

revenue and tax revenue. 60

To identify the major problems of the effective

implementation and suggest possible correction

measures.

Major Findings:

The government has already tried many reforms in the

field of taxation but no alternative have

effectively materialized because it lacked proper

planning and in other words leading to

administrative failure.

Proper co-ordination between IRD and MOF, training

to staff is highly essential.

The efficiency of the Nepalese VAT

administration is not satisfactory and not up

to the expectation of the general people.

More revenue can be generated through VAT by

widening its coverage. Taxpayers should be

encouraged to register their business voluntarily.

The revenue can increase by discouraging tax

evasion. There is wide range of practice of evading

tax. Tax administration should be very watchful to

prevent any kind of malpractice, fraud and tax

evasion, tax refund facility.

Tamrakar (2013), in his thesis “Value Added Tax in Nepal:

Legal Provisions, Practices and Contribution to

Government Revenue”, mentioned important factors for the

effectiveness of VAT in revenue collection are proper

implementation, clear VAT law, rules and regulation,

61

broad coverage, tax education and effective and efficient

administration etc.

Objectives:

To examine the legal provisions of VAT

To examine the revenue structure in Nepal

To assess the performance and contribution of VAT to

the revenue collection.

To analyze the implementation and practices of VAT.

Major findings:

The administrative cost and threshold has inverse

relation. Thus, the threshold limit should be

gradually decreased to gain efficiency of

administrative power. Similarly, the coverage of VAT

should be extended into service based sectors.

The authorize administration should supervise the

market in in direct way so that the businessmen

could not realize that they are being supervised.

The government should know the culture of tax

evasion and fraud and should take complete necessary

action.

The accounting should be transparent and VAT

officers should control auditing as far as possible.

The important sections of VAT offices like tax

refund, tax audit, tax payers’ services,

Investigation return, processing and registration

should be separately established for successful

operation of VAT.

62

2.4 Research GapDue to the non-practical appliance, lack of availability

and absence of seriousness in the research work, the

targeted output could not be addressed. The researcher

takes the research work as only a part of the curriculum

and for formal completion of final year project. Most of

the previous research are based on secondary data only,

few of them had tried to make the research more practical

but not able to achieve the target because of the

availability of resources and time constraints. This

makes the research more erroneous and the repetition of

the same findings with repeated data available and no

more contribution for the part of the research work.

This research work is based on the secondary and the

primary data collected through the three types of

questionnaires to their major stakeholder of the VAT

arena i.e. Businesspersons, Administrators/experts and

consumer. This research helps the reviewer to find the

updated and changed situations in the economy and the

behaviors or the consumer and businessperson towards the

VAT system. The guidance of the CA’s has been taken in

preparations of this research project. This research in

cooperation with the various related person and in

guidance of the seniors tries to answer the various

unanswered questions of the related parties through

analysis of the secondary data available from the IRD

department.

63

This research will be equally beneficial to the policy

maker, planners, tax administration researchers, students

and the persons interested in income tax of Nepal. This

study has focused about the impact of VAT on Government

Revenue and GDP and tries to find out various problems

associated with VAT collection system that need to be

addressed by the revenue department for the fruitfulness

of the VAT system towards the revenue mobilizations and

economic development of the country.

64

CHAPTER - IIIRESEARCH METHODOLOGY

3.1 Research Methodology Research Methodology refers the various steps that are

generally adopted by researcher in studying his/her

research problem along with the logic behind it. Thus,

research methodology is a systematic and organized effort

to investigate a specific problem that needs a solution

(Wolf and Pant, 1999:203). Every research should be out

lined in the systematic manner and for that reason

research methodology is one of the most important parts.

For the proper evaluation of the research problem,

research methodology is very important to any researcher.

Research methodology generalizes the way of solving the

research problem thoroughly and systematically.

Therefore, research methodology is used for the

achievement of the objectives of the study.

This chapter explains not only the research method, but

also considers the logic behind the methods, which are

used in the context of research study. In this regard,

the chapter Research Methodology consists of research

65

design, nature and sources of data, population and

sample, methods and tools of data analysis.

3.2 Research Design Research design is the plan, structure and strategy of

investigation conceived so as to obtain answers to

research questions and control variance. The research

design refers to the conceptual structure within which

the research is conducted. Research design describes the

general plan for collecting, analyzing and evaluating

data after identifying, what the researcher wants to know

and what has to be dealt with in order to obtain the

required information.

The research design of this study is designed as to

fulfill its objectives. Both analytical and descriptive

methods are used as needed for mainly primary or

secondary data. Statistical tools like percentage,

average, etc. are used to analyze the VAT collection and

to test consumers, businessman and expert aspects. So, in

one sentence the research design of this study is the

combination of analytical and descriptive methods with

primary and secondary data.

This study is both descriptive and analytical. Most of

the data and information of the study were concerned with

their opinion, experience and performance of the

respondents. The study of VAT Act, VAT Rules and

Regulations, government’s plans etc. are done as a part

of descriptive research. It includes the evolution and66

development of VAT. The study of literatures concerning

the VAT system and the classification of concepts

allocate with VAT are also conducted during the mean time

of research. Analytical research is conducted to analyze

the trend and contribution of VAT in government revenue.

It is done mainly through the secondary source of data

from various publications. Therefore to achieve the

specific objectives of the study, descriptive and

analytical research has been carried out. This study

therefore, follows descriptive, analytical and field

study, research design in order to obtain the required

information, data and opinion. Research design, thus is

the overall frame work for the achievement of the goals

and objectives of the research.

3.3 Nature and Source of DataMainly the source of data can be classified into two

categories-

i. Primary source

ii. Secondary source

Both primary as well as secondary data were collected in

order to achieve the real and factual result out of this

research. Primary source of data are based on

questionnaire survey, 2013, on Consumer,

Administration/expert, and Business person aspect. Three

set of questionnaire have been developed to collect

different information regarding Consumer and Business

67

person aspect so that some difficulties and problems

faced by Consumer and Business person could be found out.

Secondary source of data are based on published and

unpublished documents. It is collected mainly from

records available at various tax related websites and

annual reports of IRD.

Primary Sources:

The primary data were collected through following

techniques:

Interview

Questionnaire

Discussion with resource persons

Field Survey

Secondary Sources:

The secondary data of this research were collected from the

following sources:

Published and unpublished reports, articles and

dissertations.

Published documents of National Planning Commission

Publication and annual report of Inland Revenue

Department (IRD)

Publication of Central Bureau of Statistics.

Publications, Budget Speeches and Economic Survey of

various fiscal year of Ministry of Finance, the

Government of Nepal.

68

Websites

3.4 Population and SampleThe population for this study was comprised of the entire

person belonging to or associated with Value Added Tax in

Nepal. They were Tax administrators, Experts, Business

persons and Customers. In order to fulfill the

objectives of the study, 60 samples from the

population in the Kathmandu Valley were carefully selected

by consultation with lecturers and best judgment of the

researcher. The respondents could be divided into three

groups. The following Table shows the groups of respondents

and the size of samples.

Table 3.1Population and sample

S.No. Group of Respondents Sample size

1 Administrators/ Experts 152 Businesspersons 153 Customers 30

Total 60

3.5 Methods and tools of data analysisIn the process of presentation and analysis of the data,

various statistical tools were used in order to get the

meaningful result. Collected data from primary and

secondary sources were first processed for tabulation and

analysis. For the purpose of analysis, following simple

statistical tools were used:

69

Simple average

Simple percentage

Graph, charts and diagram

Trend analysis

Correlation

The result of each and every question out of the

questionnaire was submitted respectively. The views of the

respondents about the questions were presented in

respective order so that the analysis was fully based on

the respondents. The supports of the respondents were

collected in the numerical form as well as in the language

form. Finally, the conclusion and suggestions of the study

were presented in the summary.

70

CHAPTER - IV DATA ANALYSIS AND PRESENTATION

Data collected from primary and secondary sources are

analyzed in this chapter to achieve the objectives stated

in chapter I, in accordance to the research methodology

described in chapter III.

4.1 Collection and Reporting Procedure

4.1.1 Collection of VATThere are two sources of VAT collection one is from

Import and other is from internal sources. While

importing the goods from outside country VAT is charged

on the goods imported. This VAT is input tax credit for

the company. The source of VAT is shown in the below

diagram:

Figure 4.1Collection of VAT

71

In the given figure, it is shown that collection of VAT

is from internal source and Import source. When the goods

are reached on the Nepal border, there is a custom office

where the goods are valued and accordingly VAT is

charged. This import VAT is input tax credit for the

company. The other is from Internal source which includes

local purchases of goods and services from the VAT

registered shop which is also input tax credit for the

company and sales of goods and services which is Output

tax credit of the company. The note should be made that

only the company who are registered in VAT can deduct the

output tax credit from input tax credit. If the company

is not registered they cannot claim their input tax

credit which they collect from purchase of goods and

services.

4.1.2 Reporting of VAT Once the company collects VAT from the sources and adjust

their input tax credit with output tax credit they have

to pay the adjusted amount. If the output tax credit is

greater than input tax credit they pay the difference and

72

Collection of VAT

Import Internal Source

if the input tax credit is greater than output tax credit

then it can be carried forward for the next month an

adjusted in the next month.

A VAT registrant must complete a VAT return and submit it

to the concerned VAT office within 25 days of the month

following the end of the accounting period. In the case of

compulsory registrants, it is necessary to submit VAT

return every month but the voluntary registrants have to

submit returns on a trimester basis. Even if there is no

transaction, it is necessary to submit a zero return.

Returns could be debit returns, credit returns or zero-

returns. There is no need to attach purchase and sales

invoices or any other documents relating to the tax with

the returns.

VAT is a self-assessed tax. Taxpayers determine their tax

liability themselves and pay tax. Under this system, a

taxpayer determines his tax liability and files his

return to the VAT office. Through self-e-assessment all

the taxpayer return their file on the VAT office. The VAT

office while registering gives the username and password

through which they have to return the file.

4.2 Role of VAT in Revenue Collection

4.2.1 Inland Revenue Structure in Nepal Revenue generation at optimum level is always desired and

various measures have been taken to encourage taxpayers

for voluntary compliance. It is expected that the tax

73

compliance rate increases based on various factors

including the satisfaction of taxpayers with the tax

policies, their implementation and the end uses of the

tax collected.

Tax is the compulsory levy made to government treasury by

public. Tax is levied either directly on income of

indirectly on consumption of goods and services. The heavy

reliance on indirect taxation in Nepal is justified on

the administrative ground. The composition and the

patterns of revenue mobilization in Nepal for the last

three decades reveal a slow growth in the overall revenue

due mainly to low tax base and income level, inefficient

tax administration, weak enforcement of laws, tax evasions

and exemptions, corruption, etc. Nepal is not in a

condition to generate adequate revenue from direct

taxation. Indirect taxes are booming, as governments

continue to struggle with the financial crisis, they are

increasingly turning to increases in VAT, excises and other

indirect taxes as the most straightforward ways of raising

additional revenues.

Table 4.1Inland Revenue Collection for F/Y 2068/69

(Rs. in Crores)

Target Achievement

Increment%

Income Tax 4,475.35

4,543.04

102

Rent Tax 135.00

152.76

113

Interest Tax

74

471.00 537.61 114

Total Income Tax 5,081.35

5,233.41

103

VAT(Internal) 2,467.52

2,565.08

104

Excise(Internal) 1,924.51

1,991.40

103

Education Service Fee

25.00

22.37

89

Total 9,498.38

9,812.26

103

Import VAT 4,806.78

4,653.73

96.82

Excise(Import) 1,100.89

1,049.63

95.34

Source: IRD, Annual Report F/Y 2068/69

Figure 4.2Inland Revenue Collection

Income Tax29%

Rent Tax1%

Interest Tax3%

VAT(Internal)17%

Excise(Internal)13%

Education Service Fee0%

Import VAT30%

Excise(Import)7%

In F/Y 2068/69, Rs.15493.25 crores tax revenue (Income

Tax, VAT, and Excise Duty) collected which is 100.73% of

target achievement and grew 19.29% than last year. Inland

Revenue Department contribution to the total revenue of

Government of Nepal is gradually increasing i.e. 18.64%,

39%, 36%, 15% and 19.29% increment than the previous F/Y

starting from 2064/65 to 2068/69

75

Among three types of tax, VAT contributes the highest

value and followed by Income Tax, and Excise. All the

three types of taxes are increasing trend and been the

main revenue source for the government. It can be

expected that the future collection trend will

drastically improve with the stability and peace in the

country. This can be seen from the increment of tax

collections by IRD i.e. Rs. 6008.31crores in F/Y 2064/65

to Rs. 15493.25 crores in F/Y 2068/69.

Table 4.2Internal revenue collection

(Rs. in Crores)Budgeted

FY 2064/65 2065/66 2066/67 2067/68 2068/69

Tax revenue 5704.43 8216.00 10649.99 13722.53 15381.05VAT 2965.19 4100.00 5156.00 6737.16 7274.30Income tax 1686.92 2708.70 3629.80 4024.23 5081.35Excise 1052.32 1407.30 1864.19 2961.14 3025.40

ActualTax revenue 6008.31 8318.57 11304.83 12987.70 15493.25VAT 2981.57 3970.09 5492.09 6169.28 7218.81Income tax 1907.78 2724.74 3382.13 4172.57 5233.41Excise 1118.96 1623.74 2430.61 2645.84 3041.03

Increment % 18.64 39.00 36.00 15.00 19.29Source: IRD, Annual Report F/Y 2068/69

The data presented in the above table is presented

separately in the following trend analysis graph.

76

Figure 4.3Internal revenue collection

2064/65 2065/66 2066/67 2067/68 2068/690.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

7000.00

8000.00

VAT; 7218.81

Income tax; 5233.41

Excise; 3041.03

The table and graph shows the structure of public revenue

of Nepal by different sources such as income tax, VAT,

and excise. From the fiscal year 2064/65 to 2068/69,

trend of internal tax revenue collection is in increasing

trend.

4.2.2 VAT information Filer detailsTax Return is a return furnished by a taxpayer in regard to

the tax payable for transactions carried for specific

period. Taxpayers are required to submit VAT return and pay

the collected VAT amount within the 25th day of the

following month. Tax Return facilitates the forecasting of

the amount of potential tax collection.

In general, the tax return includes debit, credit and nil

tax return. Debit return implies the return which the tax

payer furnishes declaring to pay tax (i.e. output tax

exceeding input tax credit). Credit return is just opposite77

of debit return. If input tax is greater than output tax,

the possibility of credit return is realized. As the credit

return increases the liability to refund also increases.

So, debit return is in favor for the government. If there

is no transaction during the particular tax period, then it

is nil or zero return.

The no. of VAT registrant has been continuously increased

from the implementation of the VAT system. There were 82658

registrant in F/Y 2066/67 which increased to 97467 in F/Y

2067/68 and reached to 113905 in F/Y 2068/69. The table and

chart below illustrate the information of filer in each

fiscal year from 2066/67 to 2068/69:

Table 4.3VAT information Filers

VAT Information Filers 2066/67 2067/68 2068/69Total no. of VAT registrant 82658 97467 113905VAT information filer 60340 76755 87000VAT information non filer 22318 20712 26905% of Debit VAT Returns 17.30% 18% 17.42%% of Credit VAT Returns 49.90% 49% 49.32%% of Zero VAT Returns 32.80% 33% 33.27%Total debit amount (in billion)

Rs.14.72 Rs.19.03 Rs.22.7

Total credit amount (in billion)

Rs.63.46

Rs.106.96 Rs. 145.32

Ratio of credit amt. to debit amt.(in times)

4.31times

5.62times 6.4 times

Source: Inland Revenue Department, Annual Report 2068/69

The above table shows the percentage of filers in respect

of debit, credit and zero VAT returns. In F/Y 2065/66,

78

18.80% of total filer, which decrease to 17.30% in F/Y

2066/67 and increased to 18% in F/Y 2067/68 and decreased

to 17.42% in F/Y 2068/69 files the Debit VAT return. The

composition of filers is similar in the following fiscal

years with little ups and downs i.e. % of credit filer in

F/Y 2066/67 was 49.90% which decrease to 49% and in F/Y

2067/68 and it was 49.32% in the F/Y 2068/69.The case is

opposite with the Zero return filer, it was 32.80% in F/Y

2066/67 which increased to 33% in F/Y 2067/68 and again

increased to 33.27% in F/Y 2068/69. The amount payable by

taxpayer to government in F/Y 2068/69 was Rs. 22.7 billion

and return from government amounts to Rs.145.32billion. In

F/Y 2068/69, the credit amount is 6.4 times more than the

debit return amount. This situation is not good for the Tax

administration. The government should analysis the

situation and administers the case with the best possible

means.

4.2.3 Collection: Internal and Import VAT VAT is mainly collected from two sources, internal trade

and import of goods and services. Due to destination

principles of VAT, exported goods are exempt from VAT.

Between the two sources of tax, import VAT occupies the

significant place. It is more than 150% in compare to VAT

from internal trade and services from past to the date.

Both sources of VAT play the significant role in the

revenue collection.

Table 4.4

79

VAT Collection: Internal and Import(Rs. in Crores)

FY

2064/65

2065/66

2066/67

2067/68

2068/69

VAT collection

2,981.57

3,970.09

5,492.09

6,169.28

 7218.81

Internal

1,080.82

1,391.85

2,037.98

2,238.63

 2565.08

Import

1,900.75

2,578.24

3,454.10

3,930.66

 4653.73

Internal: Import Ratio 36:64 35:65 37:63 36:64  36:64

Increment % 14.26

33.15

38.00

12.33  17.03

Source: Inland Revenue Department

Figure 4.4Ratio of Internal and Import VAT for 2068/69

36%

64%

Internal VATImport VAT

The above figure of Ratio of VAT collection from Internal

and Import shows that Import VAT contributes more than

internal VAT as the proportion of Import VAT is greater

80

than Internal VAT i.e. 36:64.The ratio of collection from

internal sources and import is almost constant from the

beginning.

From the implementation of VAT system in the country in

2054 B.S., there is gradual increase in VAT collection till

now. In F/Y 2064/65, the collection is Rs.2981.57 crores

which is increased by 33.15 % in F/Y 2065/66 and reached to

Rs.3970.09 crores. There is an increment of 38% in 2066/67,

12.33% in 2067/68, and 17.03% in 2068/69 and reached to

Rs.7218.81 crores in 2068/69.There is the gradual increment

in the collection of VAT from internal and import from the

beginning The VAT collections trend is in optimistic. VAT

is in increasing trend from beginning as the burden tax

base and the numbers of increase of taxpayer’s registration

in VAT system.

4.2.4 Sources of internal VAT In the fiscal year 2068/69, total VAT collected from

internal source was Rs.2565.08 crores. It has increased by

15% from the previous year. It shows that there is

continuous increment in VAT from internal source. But the

growth rate is less than the previous year. The

classification of various source of Internal VAT is given

below:

Table 4.5Sources of Internal VAT

(Rs. in Crores)S. NO. Particulars

2067/68

2068/69

Increment (%)

81

1 Production 676.83 840.36 24.20

2Goods, Sales & Distribution 425.17 556.31 30.80

3 Services & Contracts 311.52 480.1 54.104 Tourism 111.68 105.15 -5.805 Other 713.4 583.14 -18.30

Total 2238.62565.0

6 14.60Source: Inland Revenue Department

Figure 4.5Sources of Internal VAT

Production Goods, Sales &

Distribution

Services & Contracts

Tourism Other

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Increment (%)

From the analysis of above figure, internal VAT in 2068/69

from Production, Sales, Tender, Tourism and others has been

increased by: 24, 31. 54, (6) and (18) percent respectively

from previous year 2067/68. The increment from the tender

is maximum as compared to the other sources. Even though

there has been increment in tourism and others sector but

the tax collection is decreasing i.e. in tourism sector it

has decreased from 111.68 crores to 105.15 crores and in

other sector it has decreased from 713.4 crores to 583.14

crores. In spite of the increment in business sector there

is not sufficient increment in VAT collection as expected.

82

4.2.5 Impact of VAT on collection of Total

Revenue

4.2.5.1 Contribution of VAT to GDP Gross Domestic Product is the total final output

of goods and services produced by the country‘s

territory by residents and non-residents, regardless of

its collection between domestic and foreign claims. The

VAT/GDP ratio measures the consistency of the growth of

VAT revenue with the corresponding growth in Gross

Domestic Product (GDP). Normally, the growth of VAT

revenue mobilization in line with the growth in GDP

is desirable for the rapid economic development of

a country. The contribution of VAT revenue in GDP is

shown below:

Table 4.6Contribution of VAT to GDP

(Rs. in Crores)Fiscal Year GDP * VAT Revenue % of GDP

2064/65 81,565.80

2,981.57 3.66

2065/66 98,827.20

3,970.09 4.02

2066/67 119,367.90 5,492.09 4.60

2067/68R 136,943.00 6,169.28 4.50

2068/69P 155,817.40 7,218.81 4.63

Source: National Estimate April 2012

* Gross Domestic Product at current price ** R indicates Revised and P indicates Preliminary

Figure 4.6

83

Contribution of VAT to GDP

2064/65 2065/66 2066/67 2067/68R 2068/69P0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

3.664.02

4.60 4.50 4.63

% of VAT to GDP

From the above analysis the contribution of VAT to GDP

were in fluctuating trend. In fiscal year 2064/65, total

amount Rs. 2981.57 crores was collected as VAT which was

only 3.66% of GDP. However, though insignificantly, the

percentage shows the increasing trend, but very low

percentage of GDP throughout all the years of analysis.

The highest percentage i.e. 4.63% was recorded in the

fiscal year 2068/69 with VAT revenue amounting to

Rs.7218.81 crores. .So it can be said that the trend does

show an increasing trend although in a snail pace which

can be better seen in the graph. So in conclusion, the

contribution made through VAT in GDP is very low.

4.2.5.2 Contribution of VAT to Total Revenue and

Total Tax RevenueTotal Revenue includes Tax revenue and non-tax revenue.

VAT is the main source of Total Revenue. The contribution

of VAT on Total Revenue and Total Tax revenue has been

shown below:

84

Table 4.7Ratio of VAT to Tax Revenue and Total Revenue

(Rs. in Crores)

FiscalYear

TotalRevenue

Total TaxRevenue

VAT Revenue

Total% ofTR

% ofTXR

2064/65 10,762.23 8,515.542,981.5

7 27.70 35.01

2065/66 14,347.44 11,705.193,970.0

9 27.67 33.92

2066/67 17,799.18 15,978.535,492.0

9 30.86 34.37

2067/68 19,837.63 17,722.716,169.2

8 31.10 34.81

2068/69 24,437.40 21,172.267,218.8

1 29.54 34.10Source: MOF, Budget Speech of various fiscal years

Figure 4.7Contribution of VAT to Tax Revenue and Total Revenue

2064/65 2065/66 2066/67 2067/68 2068/69

27.7 27.6730.86 31.1 29.54

35.01 33.9234.37 34.81 34.1

% of TR % of TXR

Above table reveals that in the year 2011//12 the

contribution of Vat on Total Revenue is 29.54% which has

decreased from the previous year i.e. 31.10%. And similarly

the contribution of VAT on Total Tax revenue in the year

2011/12 is 34.10 %. Though in total revenue it seems the

85

percentage has decreased but if we see in total tax revenue

it’s almost same as previous year. The contribution of VAT

on total revenue and total tax revenue seems to be

fluctuating in previous fiscal years. This can be seen from

the chart as shown above.

4.3 Analysis of the Data with Various Statistical

Tools

4.3.1 Time Series AnalysisA time series is an arrangement of statistical data in a

chronological order. It reflects the dynamic pace of

movements of a phenomenon over a period of time. Most of

the series relating to Economics, Business and Commerce,

e.g., the series relating to prices, production, and

consumption of various commodities; agricultural and

industrial production, national income and foreign

exchange reserves; investments, sales and profits of

business houses; bank deposits and bank clearings, prices

and dividends of shares in a stock exchange market,

etc., are all times series spread over a long

period of time. (Gupta, 1996: 754)

One of the most commonly used method is the Least Square

Method (Y= a + bx) which is employed here to measure the

trend for further prediction of the GDP and VAT revenue

for the next five years from the fiscal years 2012/2013

to 2016/2017 to estimate whether there may be increase in

the VAT/GDP ratio from the current average of 3.49%,

86

given the same trend. Future amount of GDP and VAT are

predicted on the basis of the data of the last fiscal

years.

The parameter of time series analysis for the further

prediction of GDP and VAT revenue, a and b, where a is

the Y interception or the computed trend figure of y

variable when X = 0 and b represent the slop of the trend

line or the amount of change in Y variable that is

associated with a changeable of one unit in x variable.

The x variable in time series represents time and Y

represents GDP and VAT revenue.

For predicting the amount of GDP, the parameter of the

analysis, computed in the Appendix II are as follows:

a =118504.26 and b =18661.9

Thus the trend line of dependent variable GDP and

independent variable time (i.e. year) is:

GDP (YG) = 118504.26 + 18661.90x

Similarly, for predicting the VAT revenue, the parameters

of the analysis, computed in the Appendix II are as

follows:

a = 5166.37 and b = 1067.37

Where the trend line of dependent variable VAT revenue

and independent variable time (i.e. year) is:

VAT Revenue (YV) = 5166.37+ 1067.37x

87

Table 4.8Percentage of VAT on GDP

(Rs. in Crores)Fiscal year 2069/70 2070/71 2071/72 2072/73 2073/74

GDP

174,489.96

193,151.86

211,813.76

230,475.66

249,137.56

VAT 8,368.47

9,435.84

10,503.20

11,570.57

12,637.94

VAT/GDP 4.80

4.89

4.96

5.02

5.07

Figure 4.8Percentage of VAT on GDP

2069/70 2070/71 2071/72 2072/73 2073/744.65

4.7

4.75

4.8

4.85

4.9

4.95

5

5.05

5.1

4.8

4.89

4.96

5.02

5.07

VAT/GDP

4.3.2 Correlation AnalysisCorrelation is defined as the association of two or more

random variables or is the degree of relationship between

variables, which seeks to determine how well a linear or

other equation describes or explains the relationship

between variables. The significance of correlation

coefficient can be tested through t-test with certain level88

of significance at certain number of degree of freedom. One

very convenient and useful way of interpreting the value of

coefficient of correlation between two variables is to use

square of coefficient of correlation, which is called

coefficient of determination.

4.3.2.1 Gross Domestic Product with Value Added

Tax RevenueThe relationship of VAT revenue and GDP is examined with

the help of five year data from the fiscal year 2064/65 to

2068/69. Further, the relation of VAT with GDP, coefficient

of determination and value, of t-test, computed in the

Appendix IV are presented below:

Table 4.9Correlation of GDP with VAT revenue

Statistical Tools of AnalysisCorrelation Coefficient ® 0.996P value of Correlation 0.000Coefficient of determination (r2) 0.992Value of t-test 9.108P value of t-test 0.001

From the above analysis of GDP and VAT, the correlation

coefficient is 0.996. It shows that correlation between GDP

and VAT are positively i.e. 0.996, which is greater than 0

and the corresponding P value is 0.000 therefore there is a

significant relationship between them. The coefficient of

determination (r2) is 0.992 which means 99.2% of total

variation in GDP is explained by the VAT revenue.

Accordingly, when t-test is done between GDP and VAT, value

89

of t-test is 9.108. Since the P value is 0.001 which is

less than level of significance (α) i.e. 0.05. So we reject

the null hypothesis i.e., there is no correlation between

VAT and GDP. And therefore we accept the alternative

hypothesis i.e., there is correlation between VAT and GDP.

4.3.2.2 Total Revenue with VAT RevenueThe effect of VAT revenue to total revenue is identified

with the help of five years VAT revenue from the fiscal

year 2007/08 to 2011/12. The association of VAT and total

revenue, coefficient of determination and value of t-

test, computed Appendix IV, are presented below:

Table 4.10Correlation of Total Revenue with VAT Revenue

Statistical Tools of AnalysisCorrelation Coefficient ® 0.992P Value of Correlation 0.001Coefficient of determination (r2) 0.984Value of t-test 7.746P value of t-test 0.001

From the above analysis of Total Revenue and VAT, the

correlation coefficient is 0.992. It shows that correlation

between Total Revenue and VAT are positively correlated

i.e. 0.992, which is greater than 0 and the corresponding P

value is 0.001 therefore there is a significant

relationship between them. The coefficient of determination

(r2) is 0.984 which means 98.4% of total variation in total

90

revenue is explained by the VAT revenue. Accordingly, when

t-test is done between Total Revenue and VAT, value of t-

test is 7.746. Since the P value is 0.001 which is less

than level of significance (α) i.e. 0.05. So we reject the

null hypothesis i.e., there is no correlation between VAT

and Total Revenue. And therefore we accept the alternative

hypothesis i.e., there is correlation between VAT and Total

Revenue.

4.3.2.3 Total Tax Revenue with VAT RevenueThe effect of Total Tax Revenue to VAT Revenue is

identified with the help of five years VAT revenue from

the fiscal year 2007/08 to 2011/12. The association of

VAT and total tax revenue, coefficient of determination

and value of t-test, computed Appendix IV, are presented

below:

91

Table 4.11 Correlation of Total Tax Revenue with VAT RevenueStatistical Tools of AnalysisCorrelation Coefficient ® 0.999P value of Correlation 0.000Coefficient of determination (r2) 0.998Value of t-test 6.7P value of t-test 0.003

From the above analysis of Total Tax Revenue and VAT, the

correlation coefficient is 0.999. It shows that correlation

between Total Revenue and VAT are positively correlated

i.e. 0.999 which greater than 0 and the corresponding P

value is 0.001 therefore there is a significant

relationship between them. The coefficient of determination

(r2) is 0.998 which means 99.8% of total variation in total

tax revenue is explained by the VAT revenue. Accordingly,

when t-test is done between Total Tax Revenue and VAT,

value of t-test is 6.7. Since the P value is 0.003 which is

less than level of significance (α) i.e. 0.05. So we reject

the null hypothesis i.e., there is no correlation between

VAT and Total Tax Revenue. And therefore we accept the

alternative hypothesis i.e., there is correlation between

VAT and Total Tax Revenue.

92

4.4 Analysis & Presentation of Primary Data

In the process of collection of primary data, 3 set of

questionnaires were distributed among consumer, business

person / traders and administrative staffs and experts.

Total responses collected are: Consumer – 30,

Businessperson – 15 and administrative staff and experts

– 15.

1. Do you know about VAT system of tax collection?

Table 4.12Knowledge of VAT

Responses(N=45)

Consumer

Business Person

Total Respondent

% of respondent

Yes 16 6 22 48.89No 3 2 5 11.11Little 11 7 18 40Total 30 15 45 100

Figure 4.9 Knowledge of VAT

Consumer Business Person Total Respondent

16

6

22

3 2

5

11

7

18

Knowledge of VAT

Yes No Little

93

In this question, total respondent were 45. As shown in

above figure and table, 48.89% knows about VAT system of

tax collection. It means nearly half of the respondent

has knowledge about VAT. And 40% knows little about VAT

and only 11.11% don’t know about VAT collection. This

indicates that still VAT awareness is not at a

satisfactory level. So, awareness campaign to the overall

public and potential businessperson is needed.

2. Do you ask for VAT bill while making purchase?

Many of the people are unaware of the importance of the

bill for the goods they purchase. They think VAT bill

increases the price of the goods. They usually don’t ask

for the VAT bill for their purchase except in the expensive

goods which comes with the warranty for the security of

their expensive goods. Following table shows the survey

report:

Table 4.13Percentage of consumer ask for VAT bill

Responses(N=30) Consumer

% of total respondent

Yes 11 36.7No 8 26.7Sometimes 11 36.7Total 30 100

Figure 4.10Percentage of consumer ask for VAT Bill

94

Yes37%

No27%

Sometimes37%

% of customer asking VAT bill while making purchase

Yes No Sometimes

In this question, the consumer was asked about VAT bill

while making purchase. Accordingly, consumer asks for

the VAT bill 36.7% and sometime they ask for VAT bill

36.7%. 8 consumers say they don’t ask for the VAT bill.

With just 37% asking for bill is very low rate. Nearly

63% of the consumers don’t ask for the VAT bills. This

indicates that the consumer is not conscious in taking

bills. The main reason of this is the lack of publicity

and effective monitoring in the implementation of VAT.

The main glitch in terms of public awareness. Until a

time situation is created where the consumer

himself/herself is self-motivated to ask for an

invoice.

3. Does the VAT increase the price of commodity compared to the

previous tax system?

As seen from the above survey analysis, only few

percentage of the consumer ask for the VAT bills and the

reason for this their lack of awareness towards the role95

of VAT system in revenue mobilization. Their belief is

that VAT increases the price of the commodity. If they

ask for bill they have to pay extra money for the bill.

The following table shows the analysis about it.

Table 4.14VAT increases the price of commodity

Responses(N=30) Consumer% of total respondent

Yes 11 36.7No 6 20I don't know 8 26.7Conditional 5 16.7Total 30 100

Figure 4.11VAT increases the price of commodity

Yes37%

No20%

i don't know27%

Conditional17%

From the above figure we can see that 36.7% says that VAT

increases the price of the commodity. And 16.7% says that

it is conditional and it depends on other factor too. And

nearly 27% don’t know whether the VAT increases the price

of the commodity. It is found that consumer do not ask

for invoices while making purchase due to afraid of

increase in the price of goods and services. Everyone

96

wants to pay less which is the nature of consumer

worldwide. By not taking invoice if the goods is found

cheaper then why to take a bill is a common thought.

4. What will be the appropriate rate VAT for its effectiveimplementation of?

Table 4.15Appropriate rate of VAT

Responses(N=60)

Consumer

Businessperson

Experts

TotalResponde

nt

% of total respondent

10% 17 7 4 28 46.6713% 11 6 6 23 38.3315% 2 2 5 9 1518% 0 0 0 0 0

Total 30 15 15 60 100

Figure 4.12Appropriate rate of VAT

VAT 10% VAT 13% VAT15% VAT 18%0

2

4

6

8

10

12

14

16

18

Consumer Businessperson Experts

In this question, when it asked what is the appropriate

rate of VAT, 47% has said that 10%. The reason for

choosing this rate is mostly that higher rate will

97

increase the price of the commodity. And 38% respondents

are in view that 13% that is the present rate of VAT is

effective rate. The rate directly affects the purchasing

power of the consumer. Only 15% says that the rate of the

Vat should be 15%. This represent that the government

should be serious on fixing the rates and it should

address on the need of the market. The above analysis

shows that mostly respondent want tax rates to be 10%

which is better than 13%. For this rate to be effective

the government should increase the public awareness and

should make every trader compulsory on VAT registration.

5. Usually, from where you purchase your necessity goods.

The consumer don’t want to buy from the VAT registered

shop because how much we state the VAT is a tax based on

invoices, there is only one fact - most often invoices

are not available in the market and even if available the

shopkeepers directly state that if you want an invoice

then you have to pay 13% extra. The consumers of course

look at his/her price benefit and there will hardly be

any consumer who wishes to pay 13% extra and get a VAT

invoice. 13% states that they buy from non-registered

shop. The following table shows the analysis about it.

Table 4.16From where you Purchase

Responses(N=30) Consumer% of total respondent

VAT registered Shop 6 20Non VAT registered Shop 4 13.3Anyone 20 66.7

98

Total 30 100

Figure 4.13From where you Purchase

VAT registered Shop20%

Non VAT registered Shop13%

Anyone67%

From the above figure, mostly the consumer buys from

anyone shop that is both with VAT registered shop and Non

VAT registered shop. 67% means that consumer is not much

conscious from where to buy and not to buy. Just 20% buy

from the registered shop which is very low. In our

country , consumer are not aware so they buy from any

shop they will and even in registered shop because of

increase in price of VAT they don’t take the invoice.

There is a need for consumer awareness programme.

6. What do you think necessary for effective implementation of VAT?

Effective implementation of the VAT system depends on the

certain factors like consumer awareness, training

programme, cooperation between consumer, business person

and the government, effective administration, political

commitment and last but not the least effective reward

99

and punishment system. This helps to generate more

revenue for the economic prosperity and development of

the country.

Table 4.17Effective Implementation of VAT

Responses(N=60)

Consumer

Businessperson

Experts

Total Respondent

% of total respondent

Consumer awareness programme and effective training 11 5 4 20 33.33Effective administration and Political commitment 6 3 3 12 20.00Cooperation between consumer, taxpayer andgovernment 8 5 5 18 30Effective reward and punishment system 5 2 3 10 16.67If others (specify) 0 0 0 0 0Total 30 15 15 60 100

From the above table, it can be seen that most of the

respondent chooses the consumer awareness and effective

training as the most needed for the effective

implementation of the Vat system in the country. One

100

third of the total respondents are in favor of it (i.e.

33.33%). After this the respondent are in favor of

cooperation between the player of the VAT i.e. consumer,

taxpayer and government, which was followed by effective

administration and political commitment and effective

reward and punishment system.

101

Figure4.14Effective Implementation of VAT

33%

20%

30%

17% Consumer awareness programme and effective trainingEffective administration and Political commitment Cooperation between consumer, taxpayer and governmentEffective reward and punishment system

From the above figure, we can say that consumer awareness

programme and effective training occupies the first

position securing 33% followed by cooperation between

consumer, taxpayer and government securing 30% . And

effective administration and political commitment and

effective reward and punishment system occupies the third

and fourth position securing 20% and 17% respectively.

This shows the need of the proper consumer awareness

programme and cooperation as the major needs for the

effective implementation of the VAT system in the

country. This improvement helps in mobilisation in

revenue mobilisation.

7. Who is responsible for effectiveness of the VAT system in the country?

102

Many of the respondent are of a view that Government and

the tax administration department is the only responsible

for the effectiveness of the VAT system or any other tax

system but that’s not true, there are other players still

in the arena of taxation. They are Consumer and the

business house. They too are responsible for effective

implementation of the VAT system and they should be

addressed to for it. For the effective revenue

mobilization all the player of the VAT system come

together and have the cooperation between them for the

economic prosperity and effective revenue mobilization.

Table 4.18Who is responsible for effectiveness of VAT system

in country?Responses(N=45)

Consumer

Businessperson

TotalRespondent

% of totalrespondent

Government 10 3 13 28.89Administration 7 5 12 26.67Business house 8 3 11 24.44Consumer 5 4 9 20Total 30 15 45 100

Figure 4.16 Responsible for effectiveness of VAT system

103

Government Administration Business house Consumer0

2

4

6

8

10

12

14

Consumer Businessperson

From the above figure, it is clear that government is

responsible for effectiveness of VAT system. 13

respondents think that government is responsible, after

government it’s the administration is responsible for

effective VAT system which is said by 12respondents out

of 45. Nearly 25% out of 45 respondents believes that

it’s the business house that should be responsible for

effectiveness of VAT system. And 20% believes it’s the

customer that should be responsible for effectiveness of

VAT. By surveying it is found that its government and

administration that is most responsible and have to adopt

many rules and regulation and also some programme for

public awareness and try to cover all the trade sector in

VAT system. But when government does the responsible work

it’s the duty of business house to get registered in VAT

and sale and purchase the goods and services from invoice

so there is no evasion of tax and then it’s all on the

hand of consumer who buy the goods who should be

responsible and take the VAT invoice while purchasing and

for all these effective administration is also required.

104

8. Why you registered your business with VAT system?

This question is asked to find out the reason why

businesses should be registered on VAT of among the

various reasons which force the businesspersons to go to

the tax office. This would help the planner to find out

the best and easy way for the businesspersons to register

on VAT. On question asked to businessmen 'why you

register your business on VAT', the following response is

found.

Table 4.19Registration of business with VAT system

Response(N= 15)Businessperson

% of total respondent

Compulsory Govt. provision 7 46.67Expand the market 2 13.33Support Govt. in Revenuecollection 6 40Total 15 100

Registration of VAT is compulsory when the business

exceeds the limit of 2 million and there is some sector

which is required to be registered even if it is not

exceeded 2 million. Business can be registered even if it

is not in the limit; they have option to get registered.

When business is registered in VAT only then business can

set off their input tax credit with output tax credit.

When more business is registered in VAT it helps in

revenue collection. From the above data, 47% businesses

are registered because they were required to be

registered under the VAT compulsory. 40 % registered so

105

that it helps in government revenue which is a good sign

for the country. And only 13% registered to expand the

market. Government should make more rules and programme

to get more business registered in VAT so that VAT system

will be more transparent and efficient and less chance of

evasion.

Figure 4.16Why registered your business with VAT?

47%

13%

40%Compulsory Govt. provisionExpand the marketSupport Govt. in Revenue collection

9. Do you issue and receive VAT invoices in every sales and

purchase?

The main backbone of VAT system is billing system. The

main problem identified by various previous studies is

fall under weak billing system. Most of the sales and

purchases are not billed and in billed that are in low

price- called low invoicing. Therefore this affects the

whole system of taxation. Here also effort is made to

identify the current situation of perfect invoicing.

Even the tendency of tax evasion has not declined after

the implementation of VAT. There is feeling that tax

evasion has increased because VAT and Income tax can both

106

be evaded if a vender is able to issue false invoices

during sales and hence the tendency to issue invoices has

further declined. The inability to get purchase invoices

from the businessmen while purchasing goods from the

market proves this point. On the question asked, "Do

you issue and receive VAT invoices in every sales and

purchase" the following result is found.

Table 4.20Issue and receive VAT invoice

Response(N= 15)Businessperson

% of total respondent

Yes 2 13.33No 2 13.33Partially 11 73.34Total 15 100

Figure 4.17Do you issue and receive VAT invoices?

Yes No Partially0

2

4

6

8

10

12

Businessperson

From the above data, it can be seen that only 13% say

that they issue VAT bills while sales and receive VAT

bill when purchase , which is very low. Many of the

107

businessman told that price is determined by bargaining

and customers do not ask about the bill. So they issue

the VAT bill partially which can be seen from the data

that is 73% only issue VAT bill when the consumer ask for

the bill. Therefore we can easily conclude the weakness

on this part of the VAT's backbone. And thus need a huge

change to develop the trend of issuing invoices.

10.What are the difficulties you face in maintaining the books and

records?

Most of the small businessperson not interested to

register their business with VAT system. Due to lack of

education and training, they feel difficulty to maintain

the books of accounts and they are not in the position to

hire other for their limited transactions. This has been

analyzed in the following table and diagram:

Table4.21Difficulties in maintaining books and records

Response(N= 15)Businessperson

% of total respondent

Expensive to maintain 4 26.67Lack of skilled manpower 2 13.33Consumer unwillingness 5 33.33Higher penalty even for small mistake 4 26.67Total 15 100.00

Figure 4.18 Difficulties in maintaining the books and records

108

27%

13%

33%

27% Expensive to maintain Lack of skilled manpower Consumer unwillingnessHigher penalty even for small mistake

From the above analysis, 33% is for lack of consumer

unwillingness followed by higher penalty even for small

mistake and expensive to maintain with 27% each and then

lack of skilled manpower i.e. 13%. This shows the need

for consumer awareness programme is the essence for the

effective VAT system in the country.

11.Do business person pay their VAT timely and accurately?

This question was asked to the expert about what they

think regarding the business person paying their VAT in

timely manner and accurately, the following responses

arises from it.

Table 4.22Businessperson paying their VAT timely and accurately

Response(N= 15) Expert% of total respondent

Less than 15% 2 13.3315-30% 6 4030-50% 4 26.750% and above 3 20Total 15 100

109

Figure 4.19Business person paying their VAT timely and accurately

13%

40%27%

20%

Less than 15%15-30%30-50%50% and above

From the above table and figure, 6 of the expert said

that 15-30% VAT registered businessperson pays their VAT

timely and accurately that amounts to 40% which is too

low for developing countries like Nepal where revenue

mobilization is the main aim of the Government. The

businessmen should be encouraged to comply with the tax

system of the country. They should pay their VAT timely

and accurately for better revenue collection.

12.Why Nepal has adopted VAT system curtailing previous sales tax,entertainment tax, and hotel tax?

Table 4.23Why Nepal adopted VAT system?

Response(N= 15) Expert% of total respondent

To promote Economic growth 3 20To establish fairer and transparent tax system 5 33.33To avoid double taxation 4 26.67To increase tax revenue. 3 20Total 15 100

Experts view about why Nepal has adopted VAT system of

tax collection is presented here as per their preference.

110

To establish fairer and transparent tax

To avoid double taxation

To increase Tax revenue

To promote economic growth

Even though VAT system is applied to make the tax system

more effective and transparent, the result could not be

achieved as per desired. 33% experts agree that VAT

system is applied to make tax system more

effective and transparent. This also avoids the

cascading effect of taxation. And 40% agree that VAT is

implemented to increase the tax revenue and promote

economic growth. This can be seen from the below figure:

Figure 4.20Why Nepal has adopted VAT system?

20%

33%27%

20%To promote Economic growth To establish fairer and transparent tax systemTo avoid double taxationTo increase tax revenue.

13.What are the loopholes present in the system for tax evasion?

Tax evasion has been the main problem for every existing

tax system. This causes the huge revenue loss in the part

of the Government. The government should be careful

111

enough to cover each and every loophole in the tax system

for maximum revenue collection.

Table 4.24Loopholes present in the system

Response(N= 15) Expert% of total respondent

Zero rating 3 20Threshold limit 2 13.33Tax refund system 3 20VAT exempting goods and services 3 20Low valuation at custom point 4 26.67Total 15 100

From the table, expert thinks Low valuation at custom

points as the major loophole followed by Vat exempting

goods and services, tax refund system and zero rating

then afterwards threshold limit. 27% expert respondent

chooses low valuation at custom point as the main loop

holes in the system. Later it was followed by Vat

exempting goods and services, tax refund system and zero

rating occupying 20% of the respondent and at the last

threshold limit occupies 13% of the responses.

Figure 4.21 Loopholes in the VAT system

112

Zero rating

Threshold limit

Tax refund system

VAT exempting goods and services

Low valuation at custom point

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

As per the expert advice, the government should be

careful enough at the custom point as it is the main

reason of tax evasion. Importer under value their import

goods in consideration with the officer at the check

point and this causes the revenue loss to the government.

Proper amendment should be introduced in the law to cover

all the loopholes mentioned above.

14.What is necessary for the control of tax leakages in the country?

Tax evasion has been the major problem of the country

from the very beginning. There had been a huge revenue

loss due to it. The government should make the effective

policy for the control of tax leakages in the country

through analysis of the drawbacks of the prevailing acts

and rules and formulate effective directives for it. The

control mechanism for tax leakages has been presented in

the table given below:

113

Table 4.25Control of tax leakages

Response(N= 15) Expert% of total respondent

Tax audit to be done each year 5 33.33Control at the entry and exit (custom) point for valuation ofgoods 4 26.67Make every trader compulsory toregister on VAT 3 20.00Effective training to the administrative officers 3 20.00Total 15 100.00

The responses made by the experts according to their

preference are given below:

Tax audit to be done each year.

Control at the entry and exit (custom) point for

valuation of goods.

Effective training to the administrative officers.

Make every trader compulsory to register on VAT.

It is found from the study that the major problem of

VAT's leakages is an unofficial trade from the southern

and northern boarders. Under valuation of goods is

rampant which cause problems from the very initial stage

of VAT. Once the problems started in the chain of VAT, it

affects the whole system.

Figure 4.22Control of leakage

114

Tax au

dit to

be do

ne eac

h year

Contro

l at t

he ent

ry and

exit

(custo

m) poi

nt for

valua

tion o

f good

s

Make e

very t

rader

compul

sory t

o regi

ster o

n VAT

Effect

ive tr

aining

to th

e admi

nistra

tive o

fficer

s

0123456

The government should try to control the above mentioned

leakages through effective and well trained

administration including awareness programme in the part

of the business person. They should be encouraged for tax

planning rather than tax evasion or avoidance. The

businessperson should be provided with effective training

for the effective implementation of the VAT system.

15.What should be the role of the ICAN (Institute of Chartered

Accountant of Nepal) for effective implementation of VAT

system?

The Institute of Chartered Accountants of Nepal (ICAN)

was established under a special act, The Nepal Chartered

Accountants Act, 1997 to enhance social recognition and

faith of people at large in the accounting profession by

raising public awareness towards the importance of

115

accounting profession as well as towards economic and

social responsibility of the accountants, and to

contribute towards economic development of the country.

The Institute is an autonomous body and the Council is

fully authorized by the Act to undertake accountancy

profession in Nepal.

The following table shows the roles to be played by the

ICAN for effective revenue mobilization in the country.

Table 4.26Role of ICAN

Response(N= 15) Expert

% of total respondent

Cooperating with the tax officer and the business person 5 33.33Providing training to the administrative officers 2 13.33Formulating effective Acts and rules for the Government and auditors 3 20Issuing guidance to the auditor for implementation of the VAT system 5 33.34Total 15 100

From the data of the survey of experts, 66.67 % chooses

cooperation with the tax officer and the business person

and issuing guidance to the auditor for implementation of

the VAT system as the most important role of the ICAN for

the effective implementation of VAT system followed by

formulation of acts and rules and training to

administrative staffs i.e. 20% and 13.33% respectively.

Figure 4.23Role of ICAN for implementation of VAT

116

Cooperating with the tax officer and the business person

Providing training to the administrative officers

Formulating effective Acts and rules for the Government and auditors

Issuing guidance to the auditor for implementation of the VAT system

0 1 2 3 4 5 6

ICAN should play the vital role in the effective

implementation of the tax system in the country with

the objective of revenue mobilization and for economic

prosperity.

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4.5 Major Findings

4.5.1 Finding from Secondary data The total revenue of Nepal Government in 2068/69

increased by 22.3 percent to Rs. 244.37 billion;

revenue accounts for 101.1 percent of the annual

target of Rs.241.77 billion. Last year, the revenue

had risen by 11.0 percent to Rs.199.82 billion. The

expansion of economic activities as an upshot of

timely budget announcement has mainly contributed to

such growth in the revenue. The growth has also been

attributed to the implementation of “Tax Enforcement

Campaign Year 2068/69”, increase in PAN number

holders, growth in imports, and control in the

revenue leakages and reforms in tax administration.

Among the components of revenue, value added tax

(VAT) increased by 17.1 percent to Rs.72.19 billion

in 2068/69. Last year, revenue had increased by 15.3

percent. The increase in was due to growth in

imports, investigation into taxpayers’ involvement

in fraud VAT bill issuance and reforms in VAT

administration.

The income tax revenue in 2068/69 increased by 25.5

percent to Rs. 52.33 billion. Last year, it had

increased by 23.9 percent to Rs. 41.68 billion. The

increase was due to the effect of “Tax Compliance

Campaign Year” and emphasis on taxpayer education.

Of the total revenue in 2068/69, VAT constituted the

highest, i.e., 29.6 percent followed by income tax

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(21.4 percent), customs duties (17.8 percent) and

excise duties (12.5 percent). Last year, the

respective shares had been 30.9 percent,

20.9percent, 17.8 percent and 13.2 percent.

In F/Y 2068/69, 17.42% files the Debit VAT return,

49.32% files credit VAT returns 33.27% files Zero

return.

The amount payable by taxpayer to government in F/Y

2068/69 was Rs. 22.7 billion and return from

government amounts to Rs.145.32billion. In F/Y

2068/69, the credit amount is 6.4 times more than the

debit return amount. This situation is not good for

the Tax administration. The government should analysis

the situation and administers the case with the best

possible means.

Between the two sources of VAT, import VAT occupies

the significant place. It is more than 150% in compare

to VAT from internal trade and services from past to

the date. VAT i.e. 36:64.The ratio of collection from

internal sources and import is almost constant from

the beginning. In the fiscal year 2068/69, total VAT

collected from internal source was Rs.2565.08 crores.

It has increased by 15% from the previous year.

Internal VAT in 2068/69 from Production, Sales,

Tender, Tourism and others has been increased by: 24,

31. 54, (6) and (18) percent respectively from

previous fiscal year 2067/68. The increment from the

tender is maximum as compared to the other sources.

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Even though there has been increment in tourism and

others sector but the tax collection is decreasing

i.e. in tourism sector it has decreased from Rs.111.68

crores to Rs.105.15 crores and in other sector it has

decreased from Rs.713.4 crores to Rs.583.14 crores. In

spite of the increment in business sector there is not

sufficient increment in VAT collection as expected.

The contribution of VAT to GDP is 4.63% which is low

as compared to the other countries which are

expected to be 5.07% in F/Y 2016/17 from the time

series analysis.

It is very important to understand that VAT which

comprises 29.54% in government revenue and having

highly positive correlation (+0.992) is a backbone

of current revenue collection portfolio. Its

development and improvement will surely be

beneficial for the whole nation, no doubt.

4.5.2 Finding from Primary data Very few people are aware about the VAT system. Only

49% Consumers and businessmen know about VAT whereas

51% don’t know or have little knowledge about VAT.

Those saying they know about VAT system and its

impact could not give satisfactory answer. So

awareness regarding VAT on general public

should be improved.

Most of the consumer doesn’t ask for the VAT bill.

They only ask the VAT bill for the expensive goods

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in which they feel insecure and to get the warranty.

Only 37% ask for the VAT bill as seen from the

research. And the business person also seems to

issue and receive VAT bill on the consumer demand

only.

Most of the consumer feels that VAT system increases

the price of the goods but in reality VAT helps in

more collection of revenue to government but doesn’t

increase the tax burden to the consumer.

The standard VAT tax rate has (unsurprisingly) a

significant impact on revenues, small change in VAT

rates significantly changes increases the tax

revenue. 47% of the respondent chooses 10% VAT rate

as appropriate and 39% chooses the current rate

appropriate to them.

From the survey it was found that many of the

consumers are still not much conscious about

choosing of shop. 67% of the consumer choose anyone

shop they wish to buy. They are unaware about their

role in indirect contribution to government revenue.

Only 20% consumer buy from the VAT registered shop.

Many of the respondents feel the necessity of public

awareness programme and effective training for

effective implementation of VAT.33% chooses for this

option. 30% chooses cooperation between tripartite

i.e. consumer, government and businesspersons.

Many of the respondents from consumer and business

person choose government and administration as the

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responsible party for effectiveness of VAT system in

the country. They recommend the transparency in the

revenue mobilization for the economic development.

Only 14% businessperson issue VAT invoice to

consumer, 73% partially issues invoices as per the

consumer demands. As per them consumer don’t want to

take the invoice as their thought was the increment

of price of the goods with the bills. This shows the

needs of consumer awareness programme at large.

Business person doesn’t seem interested to register

their business with the VAT system as per the survey

47% replies they have registered their business

because of compulsory government provision. The

reasons for their unwillingness are costly to

maintain books and records, lack of qualified person

and higher penalty for incompliance.

From the survey of experts it seems that mostly of

the business person doesn’t file the return timely

and accurately.

Even though VAT system is applied to make the tax

system more effective and transparent, the result

could not be achieved as per desired. About 33%

experts respondent agree that VAT system is

applied to make tax system more effective and

transparent. This also avoids the cascading effect

of taxation. And 40% agree that VAT is implemented

to increase the tax revenue and promote economic

growth.

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It is found from the study that the major problem of

VAT's leakages is an unofficial trade from the

southern and northern boarders. Under valuation of

goods, Zero rating, Threshold limit and VAT

exempting goods and services cause problems from the

very initial stage of the VAT. Once the problems

started in the chain of VAT, it affects the whole

system. Even the expert suggests the custom point

valuation and regular VAT audit for control of tax

leakages.

For effective implementation of VAT system in the

country the role of ICAN is needed for the following

reasons:

i. Cooperating with the tax officer and the

business person

ii. Providing training to the administrative

officers

iii. Formulating effective Acts and rules for the

Government and auditors

iv. Issuing guidance to the auditor for

implementation of the VAT system

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CHAPTER - V

SUMMARY, CONCLUSION AND RECOMMENDATION

This chapter is the final chapter of the research which

briefly deals with the summary of the study. It also

tries to draw the final conclusion of the study while

attempting to offer various recommendations to increase

the effectiveness and efficiency in administration VAT

system in the country.

5.1 SummaryUndoubtedly, taxation and economic development are two

closely interrelated concepts. Taxation has an important

role in country's economic development. Nepal has been

under going through several fiscal crises due to limited

sources of revenue and increasing government expenditure.

The trend of gap between revenue expenditure is conducive

to increase in future leading the country to a debt trap

situation. In the wake of such a crisis Nepal has adopted

a VAT.

Nepal has adopted a destination-based consumption-type

VAT with tax credit mechanism extending right through the

retail level. The rate of tax is 13 per cent combined

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with zero, rate on exports. The exemption list is rather

long and the registration threshold is Rs. 2 million (Rs.

200,000 for imports).

It has been a core component in the broad trend toward

tax reform evident in many developing and transition

countries; while much remains to be done, the VAT has

served to stabilize and bolster revenue mobilization in

many countries while contributing to enhanced economic

efficiency. Moreover, the complexity of the indirect

taxes that the VAT has typically replaced belies the

concern that the VAT is inherently “too complex” for

developing countries. Empirical analysis indicates that

the importance of international trade, high literacy, and

the length of time the VAT has been in place enhance VAT

revenues. While the latter two factors imply that the tax

is “more successful” in the more developed countries,

there is empirical evidence that it has also been

“successful” in many developing countries.

Taxpayers are required to issue invoices of their

supplies and maintain purchase and sales books. The tax

period is trimester for voluntary registrants, and one

month for others. The VAT Act makes provision for the

additional charges as the late payment penalties. The

rate of such penalties is 10 per cent of the VAT payable

in the first month, an additional 10 per cent in the

second month, and then no further action. Late payment

penalties are based on one calendar month from the due

125

date. There is also a provision for interest on non-

payment. The current rate of interest is 15 per cent.

VAT is based on the principle of self-assessment. Tax

officials, however, can assess VAT when a taxpayer does

not submit a return, or submits an incorrect or

fraudulent return; Tax officers are authorized to recover

tax dues by various means, including retention of tax

credit, deduction from debtors, closing the business, and

seizing and selling property of the VAT debtors.

The primary reason for growing popularity of the VAT is

its broad coverage without distorting economic

efficiency. VAT also plays the neutrality role on the

methods of production and distribution as well as

consumer choices, which is the basic need for a good tax

system. Furthermore, the stepwise collection of VAT does

not encourage tax evasion. VAT is considered vertically

neutral because the tax liability cannot be reduced by

changing the method of production and distribution.

However, it is very difficult to define an equitable

distribution of the burden through VAT but exemption and

zero-rating techniques help to reduce the repressiveness.

In this way, VAT has somehow more equity nature as

compared to other kinds of sales taxes. The other major

basic criteria of a good tax i.e. self-policing nature

can be easily found in VAT system. However tax evasion is

a universal phenomenon, thus our goal must be bounded

just to reduce the tax evasion as far as possible.

126

Besides these, VAT is not totally immune from the fault

of regressive nature. Rate structure plays major role in

efficiency and the success and failure of a tax. There is

remaining discussion about single or multiple rate of

VAT. In single rate, administration is simple and easy to

all business entity. A multiple rated VAT is less

regressive than a single rated but single rated VAT is

highly desirable on different grounds. Multiple rated VAT

is administratively more complex, provides loopholes for

tax evasion to the traders and may create economic

distortions. The structure of VAT in Nepal is well

designed but the existing coverage of exemptions is

significantly broad and threshold limit is also high

which are being helpful means for tax evasion for the

business community.

Tax revenue is a major source of public revenue for

government. Tax revenue in Nepal is contributing about 80

percent of total revenue and non-tax revenue which comes

in the form of fines, fees, sales of commodities and

services, dividends, interests etc. contributes about 20

percent. While observing the structure of total tax

revenue, it is dominated by indirect tax, which is

regressive in nature; however, its role is more

significant in the underdeveloped countries like Nepal.

Indirect tax provides higher investment ratio than direct

tax providing equivalent revenue. Indirect tax is helpful

to cut the consumption of luxurious and socially harmful

commodities. However, the replacement of indirect tax by

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direct tax is the passing phase towards development. In

Nepal, the share of indirect tax provided by custom

duties, excise duties and VAT to total revenue is

significantly high however the contribution is decreasing

marginally in the subsequent fiscal years. The

contribution of VAT as percentage of total tax revenue is

increasing. The share of VAT revenue to total tax revenue

is 34.10% in the FY 2011/12 showing better performance.

At present, whatever may be from theoretical point of

view the issues have become the effective implementation

of VAT system in Nepal. It is not matter that VAT should

be modified but the implementation aspect should be

managed. VAT regime is extremely challenging in a

burgeoning economy like Nepal. Resistance from the

business community, ignorance of general people, lack of

full support and commitments from the politicians and

government officials forced the authority responsible for

implementing VAT to make compromises on various aspects

of VAT which has weakened the process of its

implementation right from the beginning. The attitude of

businessmen and tax administration also appear hostile to

the effective implementation of VAT in Nepal. The culture

of doing business without maintaining proper books of

accounts or maintaining multiple sets of books of

accounts have made implementation of VAT difficult. Due

to the lack of experts and skilled manpower in the VAT

administration, the auditing system, one of the most

important aspects of VAT operation, is not effective.

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A key feature of the invoice-credit form of VAT is that

some businesses notably exporters (since their sales are

zero rated), and those businesses with large investment

purchases will pay more tax on their inputs than is due

on their output, and therefore should be entitled to

reclaim the difference from the government. It follows

that an effective refund mechanism is essential to

preserve the VAT as a tax on consumption and to avoid

distorting the allocation of resources. While refunding

excess credits is straightforward in principle,

formidable problems arise in practice, making the refund

process arguably the Achilles heel of the VAT. First, the

payment of refunds can create lucrative opportunities for

fraud (e.g., exporters making false claims by overstating

input taxes paid). Second, the power of tax officials to

make refunds may invite corruption. Third, governments

may be tempted to delaying refunds when their budgets are

under pressure, thereby creating serious cash flow

problems for businesses. Failure to fully refund excess

credits undermines the integrity of the VAT and the

credibility of the tax administration. When tax

authorities deny payment of legitimate refund claims, the

VAT ceases to be a tax only on domestic consumption—it

becomes, in part, a tax on production). Intermediate

goods transactions are distorted; the competitiveness of

the export sector is harmed; and the competitive edge is

tilted against new firms with large start-up costs. In

addition, compliance is seriously jeopardized if

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businesses lose faith in the VAT system and are motivated

to operate outside the law and engage in tax fraud and

evasion.

The existing large amount of unauthorized trade with

India has been posing a great threat for proper

implementation of VAT. The illegal import is helping to

black market channel resulting in a large-scale tax

evasion; the scope for illegal trade and tax evasion has

not been decreased even after the implementation of VAT

because tax administration is not strong and efficient

enough to check this situation. This kind of smuggling is

not only losing of potential revenue but also affecting

genuine traders adversely and hence increasing the

illegal trade.

The success of the VAT system depends upon the proper

account keeping, registration of business, effective

billing system ,an efficient administration, appropriate

accounting system, accurate invoicing and evaluation

system and compulsory invoicing have play important role

in effective implementation of VAT.

5.2 ConclusionThe ultimate objective of the underdeveloped countries is

to achieve the economic development and follow a rapid

rate of economic growth. It demands huge amount of

investment in economic overheads and other development

activities for which taxation is the primary source of

130

revenue for the government. While analyzing the revenue

and expenditure structure of Nepal, there is a trend of

persisting resource gap along with the huge amount of

saving- investment and import - export gap.

Empirically, it is found that VAT has high revenue

potentiality. Nepal introduces VAT system to introduce a

tax system to develop a stable source of revenue, broaden

the tax base, promote economic growth, generate revenue

required for improving its deteriorating macro-economic

performance, establish modern, scientific and transparent

tax system and make tax system more effective. In fact,

VAT is currently well receipted by the consumers as well

as business and industrial communities. VAT is an account

base tax that leads to transparency and accountability

both on taxpayers and tax collectors. The conducted field

survey shows the improvements in revenue collection due

to VAT system.

In Nepalese context, VAT is suitable both theoretically

and empirically but the practical aspect is extremely

weak. According to survey, the main problems in VAT

collection are smuggling and under valuation, tax

unconsciousness of people, tax evasion and improper

billing system. Similarly, the major problem in VAT

collection is registration, collection, tax refund.

The Consumer awareness programme of government has been

taking its pace in creating the awareness in general

people. “PAY-AS-YOU-EARN”, “Residence Principle”, “My

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Mission Is Zero Tolerance Against Corruption”, “Non

Compliance Must Be Costlier Than Compliance”, policies

have been the corrective action taken by the government

for successful VAT implementation. VAT being a self-

assessed, invoice based and account based tax, the role

of business community along-with political leaders and

general consumers are more important for successful

operation of VAT system, including effectiveness in

implementation, clear VAT laws, rules and regulation,

broad coverage, tax education and training, and effective

and efficient administration. The trend of VAT is

improving not only from revenue perspective but also from

number of registration, composition of VAT returns,

general thinking of people including business community.

The tax system is evaluated not from theory but by

practice. Nepalese VAT is not implemented properly.

Revenue potentiality of VAT with the existing structure

is more than 1.5 fold of actual revenue yield. However, a

large proportion of trade takes place in illegal way. VAT

base may be significantly increased by redesigning the

VAT structure when there will be a fair and capable

administration and supported from general public and

business community. This shows higher revenue

potentiality of VAT in future and this is the most

supporting point for the prospects of VAT in Nepal.

One of the best features of VAT is the catch up effect

which makes tax evasion impossible but this effect is not

achieved because of illegal trade, undervalued132

transactions, transactions without invoices and lack of

administrative capabilities to catch and destroy the

illegal channels. Up to now, the revenue generation

through VAT is dominated by the imports. The problems

associated with custom duties are also prevalent in VAT

revenue.

The presence of a VAT has been associated with a higher

ratio of general government revenue and grants to GDP.

This is more likely to be the case the higher is GDP per

capita and the lower is the share of agriculture in GDP—

the latter may simply reflect the typical exemption of

agricultural output from VAT. The positive revenue effect

associated with the presence of a VAT is smaller,

however, where the ratio of imports to GDP is higher,

possibly reflecting the fact that in such economies other

types of taxes, most obviously tariffs—are no less

effective at raising revenue than the VAT.VAT itself is

not more revenue generator, it is only transparent and

scientific system of collecting revenue. It needs more

administrative support and efforts. A bold vision,

evolutionary leadership, efficient bureaucrats, honest

taxpayers plus collectors and graft-free society are the

invisible infrastructures required. So, all must think

from a long- term perspective rather than weighing up

immediate pros and cons. The Inland Revenue Department

must come up with a forward-moving process, concrete

action plan, and policies to cope with the global

challenges in order to accelerate the reform process.

133

More specific conclusions and likely challenges for the

future include:

The choice between a single-rate and a multiple-rate

VAT depends mainly on balancing tax administration

considerations, favoring a single rate, against the

availability of other instruments better targeted to

achieve distributional objectives, the relative

absence of which tends to favor further rate

differentiation. But, in any event, the extent of

redistribution that can be achieved by VAT rate

differentiation is typically very limited. For these

reasons, most experts favor a single rate. The role

of the VAT within broader strategies for alleviating

poverty and achieving fairness is likely to attract

continuing attention in the coming years.

In general, the zero rates should apply only to

exports, using exemptions instead where it is deemed

essential to reduce the tax burden on a given good

or service. This is not the best approach from the

policy stand point: exemptions seriously compromise

the logic of the VAT. In light of the major problems

with refund control in developing and transition

countries, however, exemptions may reflect a logical

second-best solution.

Efforts to eliminate exemptions are likely to figure

prominently in coming years. Exemptions are

fundamentally inconsistent with the economic logic134

of the VAT, creating their own distortions and

difficulties of administration and compliance.

Appreciation of these weaknesses, and the limited

benefits they offer, seems likely to increase.

The case for a relatively high threshold is strong.

In contrast to single-stage taxes, a threshold can

be introduced without a significant revenue loss,

thereby facilitating the implementation of the VAT.

However, even greater support for simple presumptive

taxes below the threshold would help to assuage the

concerns over the equity and allocational

implications of exempting those below the threshold

from having to collect and report the tax. There is

also support for differentiated thresholds (in order

to accommodate systematic variations in value added

across sectors), though this requires further

analysis in light of the administrative

implications.

Inter jurisdictional aspects of the VAT both

internationally, within trading blocs, and inside

federal countries will require increasing attention

in coming years. Issues here include the proper role

of the VAT within federal countries, and determining

the proper form and extent of coordination in design

and implementation.

The lack of success in implementing appropriate

self-assessment procedures means that, in these

cases, the effective implementation of a VAT will

135

take longer than had been envisaged. It remains the

case that it is not possible to have an effective

VAT without self-assessment.

The development of effective audit procedures is a

clearly an area in which developing countries like

Nepal require significant improvement.

There are serious problems, almost everywhere, with

refunding of excess credits. The theoretical need to

issue refunds is one of the most important factors

that differentiate the VAT from the taxes which it

replaced in less developed countries. In addition to

the reluctance of financially weak governments to

pay refunds, it has become increasingly apparent

that many tax administrations are incapable of

policing the issuance of cash refunds to taxpayers

without inviting abuse. This can be addressed

through a combination of compromise measures to

improve the operation of refunds (e.g., focusing on

relief for exporters), and, on a transitional basis

only, the adoption of measures designed to work

around the need for refunds (in the case of

investment, in particular).

An overarching strategic approach to VAT losses,

based on sound measurement of those losses is

needed, to help governments establish effective and

targeted countermeasures and the ability to monitor

tax administration performance in this area.

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The introduction of a VAT is the start of a process,

not the end. More generally, the implementation of a

VAT should be seen as a continuing process of

improvement in both design and implementation.

The range of challenges ahead improving the structure and

implementation of the tax, dealing with the new

challenges posed by international services, electronic

commerce, regional integration and trade liberalization

mean that the VAT will remain on the reform agenda for

many years to come.

5.3 RecommendationsOn the basis of major findings and conclusion, the

following measures are recommended for successful

implementation of VAT and to achieve the desired result.

The real issue is whether at lower levels of

development, the VAT fares worse than other taxes

for similar amounts of revenue. This will depend on

the costs involved in its operation. These resource

costs can be decomposed into the administrative

costs incurred by the tax authorities and the

compliance costs incurred by taxpayers. It is widely

agreed that collection costs are significantly lower

where the VAT is simple, with a single rate and high

threshold are conducive to relatively low collection

costs.

137

The age of the VAT has a significantly positive

effect. One interpretation is that administration of

the VAT, and compliance with it, improves with

experience; another, that unobserved attributes of

VAT design improve over time.

VAT has some difficulties in the administrative

aspect. It is the most advance and scientific system

of tax. Transparency is the most feature of VAT that

will help to control the tax evasion. For the

successful implementation of VAT system, it needs

well trained personnel, proper account keeping,

proper billing system etc. and of course, the

registration is also an important factor.

Standard advice is also for a short list of

exemptions, limited to basic health, education, and

financial services. The consequences of exemptions

are complex and generally adverse. Exemptions

violate the basic logic of the VAT, being part way

between levying a positive VAT rate in the usual way

(by taxing output and crediting input tax) and zero

rating (removing all VAT embodied in the price of a

product by crediting input tax, while not taxing

output). As a result, exemptions:

i. may reintroduce cascading,

ii. compromise the destination principle for

internationally traded items,

iii. can create a competitive advantage for imports

over domestically- produced exempt items (since

138

zero-rating abroad means that input tax is

recovered on the former, but not the latter);

iv. in the case of exempt traders, create incentives

for the avoidance of tax liability by vertical

integration; and

v. On the administration side too, exemptions can

be problematic: allocation rules for taxed

inputs are needed for traders selling both taxed

and exempt output, and further problems arise

from voucher and other schemes used to exempt

foreign-financed assistance projects.

The level of the threshold at which registration for

the VAT becomes compulsory is a critical choice in

the design and implementation of the VAT. Experience

suggests that many countries have tended to set the

threshold too low, putting themselves in

considerable difficulty when their tax

administration is found to be insufficiently

developed to administer a large VAT population. The

appeal of a high threshold stems from the empirical

regularity that a relatively small proportion of

firms typically account for a very large proportion

of potential VAT revenue. The appeal of a high

threshold stems from the empirical regularity that a

relatively small proportion of firms typically

accounts for a very large proportion of potential

VAT revenue. The trade-off between revenue and

collection costs is key, with the appropriate

139

threshold being higher the more costly are

administration and compliance, the less urgent is

the government’s need for funds, and the lower is

the ratio of value added to sales.

Modern tax systems and their administration are

built on the principle of “voluntary compliance,”

meaning that taxpayers are expected to comply with

their basic tax obligations with only limited

intervention by revenue officials. The arguments

against self-assessment sometimes encountered are

unpersuasive. “Small traders are too illiterate to

complete their returns”, “taxpayers cannot be

trusted” “the preconditions for self-assessment have

not been met i.e. complete absence of a taxpaying

culture and where proper accounting standards”. The

answer to this lies in developing effective taxpayer

service and enforcement programs, and good

understanding by tax officials of basic risk

management principles.

In many countries, especially developing and in

transition like Nepal, audit performance is reported

to be a particularly poor aspect of VAT

administration. Without effective audits, VAT

compliance deteriorates and the credibility of tax

administration suffers. Strengthening audit is thus

a key challenge, particularly in developing

countries.

140

Countries with well-designed VAT's that have been

properly implemented are likely to face fewer

compliance problems in the longer-term. Key to

success is a sound policy design (a single rate, few

exemptions, and high threshold), simple laws and

procedures, an appropriately structured and

resourced administration, and compliance strategies

based a balanced mix of education and assistance

programs, and risk-based audit programs. Well-

managed implementation of these critical components

has been shown to lead to quicker establishment of

the registration base, better understanding by

taxpayers of their obligations, lower levels of non-

compliance, lower administration costs, and greater

revenue mobilization.

The most common types of VAT evasion parallel those

associated with traditional sales taxes—non-

registration of businesses, underreporting of gross

receipts, abuse of multiple rates, and non-

remittance of tax collected to the tax authorities—

but there are additional types of evasions arising

from the nature of the VAT. These include the use of

fake invoices and the claiming of VAT credits for

non-creditable purchases. Well-designed audit

program and effective administration are critical to

reducing the extent of VAT fraud and evasion, simply

because potential fraudsters are deterred by the

141

belief that they stand a reasonable chance of

detection and punishment.

A key feature of the invoice-credit form of VAT is

that some businesses—notably exporters (since their

sales are zero rated), and those businesses with

large investment purchases—will pay more tax on

their inputs than is due on their output, and

therefore should be entitled to reclaim the

difference from the government. It follows that an

effective refund mechanism is essential to preserve

the VAT as a tax on consumption and to avoid

distorting the allocation of resources. Failure to

fully refund excess credits undermines the integrity

of the VAT and the credibility of the tax

administration. In addition, compliance is seriously

jeopardized if businesses lose faith in the VAT

system and are motivated to operate outside the law

and engage in tax fraud and evasion.

A strategic approach, incorporating all aspects of

VAT losses and countermeasures, would provide

governments, with significant tools for measuring

tax administration performance.

No billing, Lack of invoicing, incorrect value in

billing is the main problems observed in invoicing

system, which leads to weak VAT implementation. So

importers should be asked to declare their sales and

distribution channels and the estimated sales prices

at all stage sales.

142

Consumer should be made aware of taking invoices,

which is their fundamental right and responsibility

to the state. Consumer awareness program should be

launched through media, journals, magazines,

newspapers, pamphlets, seminar, discussion, lottery

program etc. effectively which encourages people for

invoices after buying goods and services.

There should be a close tripartite co-operation

between the consumers, business persons and the

government. The various issues pertinent to VAT

should be resolved through broad discussion and

consultations with the related sectors and on

guidance of ICAN.

Taxpayer should be provided better services in

efficient and effective manner. Tax officials should

have the politeness in their behavior and

administrative procedure should be simplified so

that even the non-tax background will understand it.

Another issue to be considered is the potential for

rate differentiation to accommodate equity

considerations. It will be desirable, all else

equal, to tax most heavily those goods that account

for a greater share of the expenditure of the

better-off members of society. There should be well-

functioning income taxes and/or targeted expenditure

programs to facilitate attainment of equity

objectives.

143

To increase the capability of administration,

training of tax personnel should be kept on the top

most priority. Training should be designed for

various level and purpose. General training for all

and specialized training for particular persons and

foreign training should be designed and provided.

To foster internal revenue policy, professional and

corruption less administration should be developed.

Reliable and predictable revenue policy is also

required. Result oriented administration, healthy

co-ordination; regular market monitoring mechanism

should be developed.

Strengthening the organizational capability, reform

in revenue administration, with the co-operation of

private sector, enlarging tax base, reform in tax

system by applying e-Governance, developing fair and

integrity tax administration are components to make

VAT effectiveness.

Taxpayer friendly tax administration is essential to

increase tax compliance. There is high level of

corruption and tax evasion by the means of illegal

alliance between Taxpayer and tax administration. It

is say that 50 % tax is leakage due to above reason.

Our effort should be concentrate to minimize tax

leakage and evasion. For this purpose illegal

alliance between Taxpayer and tax officials should

be destroy.

144

The periodic reports, annual reports and Economic

surveys are available to general through the website

but they are not updated timely. This should be

considered by the respective departments which in

return helps the researcher with first-hand

information and finally benefits the government with

solutions to the problems.

Looking forward, the VAT is likely to have a key role to

play, in dealing with the revenue consequences of

continued trade liberalization. If liberalization is to

proceed, this revenue may need to be recovered from

domestic sources, and here both theory and practice

suggest that indirect taxes - excises as well as the VAT

have a key role to play. Theory, because a switch from

trade to consumption taxation implies a widening of the

tax base, with the reduction in prices implied by tariff

cuts being transformed into gains in the form of both

lower final prices and higher government revenue.

Practice, because, as with customs duties, much of the

revenue from a VAT-often half or more, in many developing

countries is collected at the border.

BIBLIOGRAPHY145

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150

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