‘We are going to develop smart tax administration through use of technology’

The government has expected to meet revenue growth of 29 per cent in the current fiscal to Rs 730.05 billion. However, collection in the first two months has disappointed the government as only 90 per cent of the target was met in the review period. Shortfall in the target since the beginning of this fiscal is due to slackness in collection of Value Added Tax. As the government missed revenue collection target for the first two months of this fiscal, market monitoring for proper billing enforcement on sales and distribution to make up the VAT shortfall has been intensified. Pushpa Raj Acharya of The Himalayan Times caught up with Shishir Dhungana, revenue secretary at the Ministry of Finance, to learn what the government is doing to meet the revenue collection target, its plan to reform the tax administration and control leakage. Excerpts:

The government has collected only 90.47 per cent of the revenue collection target worth Rs 97.47 billion in the first two months of the fiscal. What are the major reasons behind this shortfall?

The government has set the revenue collection target based on the collection base of the previous fiscal. We are close to achieving the revenue collection target under almost all revenue headings. We were unable to collect expected revenue amount as imports from India were affected for some time since the government of India enforced the goods and services tax (GST) on July 1 and exporters in India took some time to export goods under the new system. Simultaneously, the Nepal government made bill of export from India mandatory for customs declaration purpose. Likewise, import was halted for long through Birgunj and Biratnagar as the recent floods had severely affected the road and railway tracks that link Nepal to India and these customs points remained shut for almost a week. Later, elections in Province 2 affected import along with border closure in Birgunj, the gateway to India. Shortfall in revenue collection in the first two months is due to the aforesaid unforeseen circumstances, however, collection in the third month is encouraging and we are confident that we will achieve the annual revenue collection target.

Collection under Value Added Tax (VAT) and income tax is below the target. Incidents of rampant under invoicing were recently exposed in outlets of branded products in Durbarmarg. What is the revenue administration doing to control this problem?

We have emphasised on scientific valuation at the customs points to control under invoicing in imports. We are sensitive towards this issue that was seen in the market and have intensified market monitoring for billing enforcement to control the practice to evade VAT. We have faced VAT shortfall in sales and distribution and also in tourism sector. This is why the Inland Revenue Department (IRD) has intensified market monitoring. The government is going to introduce a centralised server system to properly enforce the billing mechanism. For example, VAT bill issued by traders and service providers registered under VAT will be connected to the server of the IRD. When the traders issue a bill, the bill will also be captured (saved) in the server of the tax administration and the traders and service providers will not be able to delete the VAT bill. Likewise, we have already introduced a system whereby the customs will transfer the details of import the very next day to the IRD based on the permanent account number of the taxpayer. Through this mechanism, the IRD can easily track the transaction of the concerned taxpayer if it has any doubts of tax evasion. For instance, if a trader tries to file VAT of less transaction compared to import value, the system that we have developed will easily track the mismatch. Thus, we are going to develop smart tax administration through use of technology. Secondly, we are also

going to make consumers aware about billing enforcement in the market. We will introduce a campaign to educate the consumers about VAT so that the traders and service providers will be obliged to submit the VAT collected from the consumers to the tax offices.

The private sector has long been emphasising on contextual adjustment in customs tariff to end the practice of under invoicing in imports. Why has the government not been considering lowering customs tariff, which will encourage traders to make actual declarations?

Except for automobiles, the highest tariff rate at the customs is around 30 per cent. The government believes that the customs tariff is a cost for the traders. Traders will pass on that cost to the consumers.  The High-Level Tax System Review Commission has also advised the government to rationalise the customs tariff. However, we could not work on it as we faced devastating earthquakes in April, 2015 and trade disruptions the following year, which caused revenue shortfall. We did not pay attention to it in the last fiscal and we have not been able to do so in the current fiscal too as the government’s expenditure liability has increased due to the elections. We may be able to look into rationalising customs tariff in the next fiscal year as per the South Asian Free Trade Area agreement. While revising the tariff structure we will also pay due attention to protecting the domestic industries. We will not be able to bring down the tariff heavily. This will adversely affect our economy as the domestic production base will further weaken when the market is flooded with cheap imports.

You have talked about safeguarding domestic industries by keeping customs tariff high on similar products produced by our industries. However, industrialists often complain about the high tariff on raw materials compared to finished products. What is your take on this?

Sometimes it is difficult to classify whether a product is a raw material or a finished product. For example, we have fixed 30 per cent tariff for biscuits and it is similar for sugar too. Sugar is also used as a raw material for the biscuit industry. However, sugar is a finished product in itself. There are several such examples. Plastic wares manufacturers have also been seeking tariff concession on plastic granules. Plastic granules and calcium carbonate have similar tariff. The government is committed to provide tariff concession for industrialists but they have to ensure that the product imported as raw material is not misused. If the product is misused, the government will lose revenue and it also distorts the level playing field in the market. We are open to discussions with the private sector to provide tariff concession to promote the production sector in the country.

What is the Ministry of Finance doing to reduce the tax collection costs?

We are going to expand the tax collection wings and provide facilities to the taxpayers to submit tax. Taxpayers should not have to pay additional costs while submitting tax. A committee has been formed comprising of officials from the Ministry of Finance, Inland Revenue Department, Financial Comptroller General Office and the Department of Customs to introduce e-payment system for taxpayers. There is a legal constraint regarding payment gateway to introduce e-payment service for taxpayers, which we will sort out in the near future as the team has been working on amending the laws and Nepal Rastra Bank is also working on payment gateway. Optimum use of technology will help build a smart tax administration, which will be friendly to the taxpayers.

The government introduced a provision through fiscal budget of last year to cross-check statement of taxpayers submitted to the banks to avail loans and the statement submitted to the tax office. Why has this provision not come into force?

It is a critical issue and an important one to know the real business efficiency of the taxpayers. We have held discussions with the Institute of Chartered Accountants of Nepal and the Auditors’ Association of Nepal on this issue. Tax auditors can cross-check the statements submitted to the bank and tax office during investigation audit. In this respect, the auditors who have signed the report can be penalised and they will not be able to continue their profession, which

is why we have urged them not to produce different reports. Such cases also could be an issue of investigation for the Anti Money Laundering Department. The taxpayers should be conscious about it.

Local bodies have started collecting taxes that the central government collects. For example, the central government collects rent tax on rent income which the municipalities and rural bodies are also collecting. How will such issues be sorted out?

The constitution has clearly mentioned the local level, provincial level and central level tax. There has been dispute on rent tax and trekking entry fees at the local level. These issues will be sorted out after they have been properly interpreted. The constitution has ensured that there will not be dual taxation. The Intergovernmental Fiscal Transfer Act that was recently enacted by parliament has a provision regarding revenue sharing modality. This will help us to resolve the issue based on the interpretation of existing laws.

The Office of the Auditor General has expressed concern on tax exemption through a provision of the fiscal budget as revenue amount under tax exemption provision is increasing every year. How will the Finance Ministry address this issue?

Currently, we are providing tax exemption on import of construction materials of foreign-aid funded projects, structures and facilities going to be built under grant from foreign countries and for some industries to support the industrialisation process and also to control unauthorised trade. If such facilities are found to be misused the concerned people will be slapped with 100 per cent penalty and the facility will be withdrawn. Trend of tax exemption will deteriorate the tax potential in the country and we will address the valid concerns of the OAG.