KATHMANDU, NOVEMBER 27
Tax refund is an important element of the value added tax (VAT) system. Under the VAT, taxpayers pay tax on the purchases/ imports of goods and services that are used to run their businesses.
Tax paid by the taxpayers is known as input tax. Taxpayers collect tax on the sale of their taxable goods and services, which is known as output tax. Taxpayers deduct input tax from output tax and remit the difference to the government as net VAT.
It is possible that sometimes input tax may be higher than the output tax.
The difference is known as excess input tax credit.
Such a situation generally arises in the case of exporters.
Since exports are zero-rated, exporters do not have to collect tax on their exports, but they are entitled to claim tax paid on the inputs of exports. This means exporters will have excess input tax credits.
A VAT registrant may have excess input tax credits even if he is not an exporter.
It happens in the case of purchase of large capital assets, an inventory building up, in the initial stage of a new business.
The excess input tax credit needs to be refunded to the taxpayers. This article describes the tax refund system adopted under the VAT in Nepal.
A mixed system of immediate refund to the exporters and carries forward to the following four months (six months initially) for others was designed under the Nepali VAT system.
Since exporters will not have anything to adjust in the future due to the zero rating of the exports, an immediate refund to the exporters was required.
In the case of non-exporters, there was a possibility to adjust their excess input tax credit in the future.
Non-exporters can claim for refund if they remain in credit position for four months or more.
International experience indicates that the VAT refund system has been misused by dishonest taxpayers, resulting in substantial loss of government revenue.
In order to avoid such a situation, the system of verification has been introduced in Nepal.
Under this system, tax refund is granted after verifying the export declaration forms, letter of credit/bills of entry and proof of payment to authenticate the export and the import dec-laration forms and purchase invoices to validate the tax paid on inputs.
In some countries, refunds have been delayed due to lack of budget. In view of this, a system of providing refund directly through the VAT revenue collected on imports before it is deposited to the treasury has been introduced in Nepal.
Refunds may be delayed if several agencies are in-volved in the processing, approving and paying refund.
To avoid such a situation, the tax administration was solely made responsible for processing, approving and paying refunds in Nepal. Since refund does not affect the tax administration's target, it does not hesitate to approve and pay refunds.
Refunds are also delayedif they are not made time bound. In view of this, a legal provision has been made in Nepal under which refund must be provided within 30 days in the case of exporters and within 60 days in the case of non-exporters from the receipt of the refund claim.
The government has to pay an interest of 15 per cent on any amount that is not refunded within the specified time.Initially, taxpayers were required to make a separate refund claim. However, some taxpayers complained that unless and until a negotiation of some sort is reached with the concerned officer, the application for refund was not even registered.
In order to avoid this problem, a system was introduced that does not re-quire the taxpayer to submit a separate application for refund but can apply for refund in the tax return form itself.
Owing to past experiences with the refund of any kind of money from the government, including duty draw back, Nepali exporters did not believe in the VAT refund system. Because of this, none of the taxpayers claimed tax refund in the first year of VAT's implementation.
Following publicity about the tax refund system, the trust of the taxpayers regarding this process, however, gradually increased, and in the fiscal year 1998/99, almost Rs. 70 million VAT was refunded.
The amount of refund increased to Rs. 1,706 million in 2001/02, Rs. 4.63 billion in 2017/18, and Rs. 4.22 billion in 2021/22.
While the system of VAT refund has been established under the Nepali VAT system, the current situation of the refund has not been that satisfactory when compared with international good practices.
For example, VAT refund made in 2021/22 was only 1.29 per cent of the total VAT collection in that year.
This was way below the international standard, where VAT refund is about 11 per cent of total VAT collection in low income countries and as high as 35 per cent of total VAT collection in high income countries.
There are different reasons for the low amount of VAT refund in Nepal.
Nepal's volume of exports is itself low. Besides, as exporters did not believe in the refund system at the time of its design in the mid-1990s, they demanded exemption for major exportable items, including handwoven woolen carpets.
Besides, the tax administrators are not that generous in providing refund to the taxpayers in a simple and prompt manner. So the volume of refund is low, and this situation needs to be changed drastically by bringing all the major exportable items, including woolen carpets and electricity, in the VAT net and providing refunds in a simple, easy and transparent manner. This will help promote exports, reduce the trade imbalance, and earn more foreign currency, which will ultimately accelerate the pace of economic development.
Khadka is a tax expert (rupkhadka@hotmail.com)
There are different reasons for the low amount of VAT refund in Nepal. Nepal's volume of exports is itself low. Besides, as exporters did not believe in the refund system at the time of its design, they demanded exemption for major exportable items, including handwoven woolen carpets
A version of this article appears in the print on November 28, 2022 of The Himalayan Times.
