This zero contribution by such a large percentage of taxpayers is clearly due to low compliance and widespread tax evasion, reads the report of the Tax Compliance Cost Survey. [break]
Given that the total number of registered taxpayers stands just above 600,000, IFC has urged the government to install workable mechanism and procedures for ensuring compliance with tax and preventing leakage of VAT.
The IFC had conducted the survey covering 990 PAN-registered firms, ranging from small to large taxpayers operating in sectors like manufacturing trade and services in all the development regions of the country. And it has dug out interesting findings such as methods used by businesses to evade taxes and perception of entrepreneurs toward general tax behavior of Nepali firms.
On the different methods of tax evasion, a majority of responding taxpayers said that firms in Nepal are largely making unregistered sales (by not issuing sales receipts) and also creating fake invoices to artificially reduce their tax liability, said Sebastian S James, leader of the study team.
They disclosed that firms use fictitious businesses to cook up expenses and also make payments of unofficial salaries to their staff to reduce tax burden.
The entrepreneurs participating in the survey also believe that 40 percent of Nepali firms generally overstate actual expenditures in their tax returns, while 20 percent simply to not declare businesses for tax purpose.
The survey also found that 5 percent of Nepali business firms are not declaring actual total annual wage bill, while 3 percent of firms do not report the number of their employees itself.
Not surprisingly, a significant number of taxpayers believe that officers conduct tax audit mainly to make ´informal income´. Unlike in the past, however, a majority of taxpayers believe Nepal´s tax administration is competent and knowledgeable.
According to the survey, 80 percent of taxpayers still find compliance to VAT difficult, as that increases the number of submissions and payments significantly. Entrepreneurs running larger firms said they need to outsource the VAT compliance task, and that raises cost of doing business.
Most importantly, the survey has for the first time quantified the cost incurred by the businesses to comply with tax system. "Our calculations show that small and medium enterprises (SMEs) are bearing unjustifiably high cost for compliance," said James.
For instance, the report says the businesses are presently incurring an average cost of Rs 9,328 per annum to comply with tax, and this amount in case of small businesses is more than the tax itself, which stands at Rs 5,233.
Cost incurred by the taxpayers having a turnover of more than 250 million stands at Rs 255,1"8. "The compliance cost for small businesses stands well around 3.43 percent of their total revenue. Clearly, this is a huge cost for firms whose turnover remains less than 100,000 per annum," says the report, and suggests to the government to revisit the existing tax arrangement for SMEs.
The survey shows that compliance cost for VAT is still higher as it takes an average of 42 days to comply with VAT and subjects the firm to bear outsourcing cost of Rs 18,220.
To do away with this cost, the report has pushed the government to reduce the frequency of VAT filing from monthly to quarterly or bimonthly. It has also suggested to the government to look into the possibility of raising the VAT threshold in line with the best international practices from the existing Rs 2 million.
Contrary to the IFC´s recommendation, Dinesh Shrestha of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) asked the government to lower the threshold, saying that lack of need for firms having a turnover of less than Rs 2 million to comply with VAT has hit competitiveness of firms registered with VAT.
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