| 1. Introduction
In Nepal, Value Added Tax (VAT) was introduced on 16 Nov. 1997. This tax was levied in place of the Sales Tax, Hotel Tax, Contract Tax and Entertainment Tax. However, it could not be implemented fully until the FY 1998/99 due to political instability and strong opposition from the business community.
VAT replaces the old Sales Tax, Contract Tax, Hotel Tax and Entertainment Tax. It has been designed to collect the same revenue as the four taxes it replaced. Since the collection of both customs duties and income tax depends, to a great extent, upon the effectiveness of VAT, it is expected to help enhance revenue collection.
(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 to improve the collection of taxes, to increase efficiency and to lessen tax evasion. It is also regarded as the backbone of income tax system in Nepal.
The current threshold for VAT registration is Rs. 2 million. Those vendors whose annual turnover is below the threshold can, however, register voluntarily.
There is a persistent increase in the number of VAT registrants. IT has crossed the 40,000 mark. At the time of conversion from the then existing sales tax to VAT, a total of 2045 taxpayers were converted as VAT registrants. As the taxpayers are increasing, the amount of revenue collection and the level of tax compliance is improving today.
2. How Does it Work?
VAT is a tax imposed on the value added to goods and services consumed in Nepal or exported outside. The tax is based on the principle that each producer or distributor adds value, in some way, to the materials they have purchased and it is this added value that is taxed at each stage of the production and distribution chain. There is the presumption that VAT is shifted forward completely to the Consumer.
In the VAT system, producers, distributors and people providing services raise VAT on the products or services sold or provided. The difference between the VAT collected on sales and the VAT charged on purchases determines the amount a registrant must remit or the amount that may be claimed as a refund.
In other words, if the tax on sales is more than the tax on purchases, the dealer / businessman remits the difference.
If the tax on sales is less than the tax on purchases, the dealer may carry forward this credit to the next month.
3. What is an input tax credit ?
Registered businessmen are obliged to collect and remit VAT on their taxable transactions. These registrants are entitled to recover the tax paid on their purchases. This recovery or refund is known as input tax credit.
The Input Tax Credit (ITC) is the total of the tax paid or payable on taxable goods and services purchased in Nepal, and the tax paid on taxable goods imported into Nepal.
Where VAT is paid or payable by a registrant on a purchase or on imports, the registrant is allowed to claim input tax credit for those purchases made by the registrant in his commercial activities.
However, even though the purchase of goods or services may relate in part to a commercial activity, in certain circumstances the purchase may not generate input tax credit entitlement when he sells goods or services which are tax-exempt.
Most registrants are entitled to claim input tax credits for the tax paid on acquisitions of capital goods for use primarily in commercial activities. Unlike the income tax deduction rules, the input tax credit for any VAT paid on capital goods is not amortized over the life of the asset. It can be claimed in full in the period in which it is acquired. If the capital goods are later put to a non-commercial use, special change-of-use rules will apply. Taxpayers whose export is more than 50% of total sales or those who are continuously on 6 months credit may claim for refund. Refund shall be made within 30 days from the receipt of refund claim.
4. What is taxed and what is not?
VAT divides all goods and services into two basic categories, taxable and tax-exempt.
Goods and services are either taxed at the standard rate of 13 percent or they are taxed at 0%. Those taxed at the standard rate include all goods and services except those which are specified as taxed at 0% or tax-exempt.
5. What Is Tax-Exempt ?
The purchaser will NOT pay VAT on tax-exempt goods and services and the supplier is not allowed input tax credits on purchases related to the following goods and services:
(a) Goods and services of basic needs which include rice, pulses flour, fresh fish, meat, eggs, fruits, flowers, edible oil, piped water, wood fuel.
(b)Basic agricultural products are also tax-exempt, for example, paddy, wheat, maize, millet, cereals and vegetables.
(c) The expense of buying goods and services required to grow basic agricultural products are tax-exempt. This includes live animals, agricultural inputs including machinery, manure, fertilizer, seeds, and pesticides.
(d) Social welfare services including medicine, medical services, veterinary services and educational services.
(e) Goods made for the use of disabled persons.
(f) Air Transport.
(g) Educational and cultural goods and services such as books and other printed materials, radio and television transmissions, artistic goods, cultural programmes, non-professional sporting events and admissions to educational and cultural facilities.
(h) Personal services are also tax-exempt. These are services provided, for example, by actors and other entertainers, sportsmen, writers, translators and manpower supplies agents.
(i) Exemption from VAT is also extended to the purchase and renting of land and buildings
(j) Financial and insurance services.
(k) Postage and revenue stamps, bank notes, cheque books.
6. Are Imported Goods Taxed?
The VAT Act, Schedule I lists imports which are tax-exempt. Some of these include prescription drugs, basic groceries, medical devices and agricultural products.
Most imports, however, are fully taxable at customs point. Thereafter these are treated on the same basis as domestically produced goods.
The VAT on imported goods is collected by Customs. It is calculated on the dutiable value of the goods, in other words, on the value of the goods including transportation, insurance, freight and commissions PLUS any duty or other taxes (other than VAT) payable on the goods.
The value for the duty of the goods is determined in accordance with the valuation provisions contained in the Customs Act.
Registrants may claim input tax credit for the VAT paid on imported goods used in their commercial activities.
7. Are Exports Taxed ?
VAT is applicable only to the consumption of goods and services in Nepal. However, supplies made in Nepal that are exported are taxable at 0%.
Exporters are allowed to claim input tax credits for VAT paid or payable on purchase of goods and services relating to their commercial activities.
Exports taxed at 0% include exports of both goods and services.
8. Who must register ?
Registration is required for any business:
(a) With an annual taxable turnover of more than 2 million rupees.
(b) Belonging to a conglomerate which has an aggregate annual taxable turnover exceeding 2 million rupees.
9. Who is affected by VAT?
In addition to consumers, persons involved in commercial activities are affected by VAT.
A person means an individual, firm, company, association, cooperative, institution, joint business, partnership, trust, government body or religious organization.
There are categories of persons and organizations which are not required to collect VAT nor allowed to claim a refund of the VAT they have paid in producing their goods and services for sale. These would include unregistered small suppliers, that is, persons with annual sales of taxable goods and services of Rs. 2 million or less. But even such people con voluntarily register for VAT purposes.
10. What factors are taken into account when determining annual sales of taxable goods and services ?
In assessing the value of taxable supplies a vendor must include the value of the supplies taxed at the standard VAT rate and his sales of supplies sold at 0% (the zero rated supplies). Sales of exempt supplies will not be included. If he has had or expects an abnormally large sale he should contact his IRO to determine if this sale should be taken into account when calculating his need to register.
11. CAN SMALL BUSINESSES REGISTER ?
Businesses with taxable annual sales of under 2 million rupees may apply to register.
If a business chooses to register, it must remain registered for a full fiscal year.
12. Who May Apply to Cancel Their Registration?
A VAT registration may be cancelled by anyone whose total taxable sales for four consecutive calendar quarters is not more than 2 million rupees and who has been registered for a full fiscal year or by persons who no longer has a commercial activity because of bankruptcy, receivership, or cessation of the business.
13. What are the obligations of VAT registrants ?
VAT registrants are required to:
(a) Submit VAT return and pay tax within the 25th day of the following month.
(b) Provide their customers with a tax invoice
(c) Maintain Purchase Book, Sales Book, VAT Account.
(d) Keep their VAT records for a period of 6 years
(e) Inform the IRO of changes to the business including new address, telephone number or a reorganization of a partnership within 15 days.
(f) Put their Certificate of Registration in the premises where customers may easily see and read it,
(g) Allow tax officers to enter the business to examine the business records and the stock on hand.
14. What is a taxpayer required to put on his tax invoice ?
The tax invoice will require the name and address of the seller and the purchaser, the seller`s PAN number and invoice number, the date of the transaction and a description of the sale including the number of items purchased, the unit cost of each item and a mention of any discounts given.
The tax invoice must be prepared in three copies and the first copy should be clearly identified as a tax invoice. The original copy is to be given to the purchaser, the second copy is to be retained for audit purposes while the bottom copy is for use by the seller in preparing a record of the transaction.
15. What is an abbreviated invoice ?
Tax Officers may grant permission for a VAT registrant to issue an abbreviated invoice for retail sales below the value of Rs. 5000.
The chief difference between the two tax invoices is that an abbreviated invoice does not require the name and address of the purchaser.
The registrants have the right to request a detailed tax invoice as they will not be able to claim input tax credits with abbreviated invoices.
IRD may order taxpayer to issue invoices by using cash machine or computer. The procedure in such case shall be as prescribed by the DG of IRD.
IRD will have anytime access to the database of the taxpayer.
16. Is it necessary to maintain A special accounting system ?
Most businesses will require only minor modifications to their record keeping. In order to complete his VAT return a taxpayer will need to ensure that his books and records provide:
(a) The amount of VAT paid on purchases
(b) The amount of VAT collected on sales
(c) A method of distinguishing between taxable and exempt sales
(d) The time the goods and services were supplied, and
(e) Evidences that goods were exported, if any.
17. What books and records must be kept ?
A taxpayer must keep the following books and records :
(a) A purchase book,
(b) A sales book, and
(c) A VAT accounts.
18. What is to be included in the purchase and sales book ?
Purchase and sales books include:
(a) The invoice number
(b) The invoice date
(c) The supplier`s name and PAN number in the purchase book
(d) The customer`s name and PAN number in the sales book
(e) The taxable value, and
(f) The amount of VAT.
Businesses which sell both taxable and exempt goods will need to complete additional columns of information to separate exempt sales and the purchases related to them.
IROs will be pleased to provide taxpayers with a sample Purchase Book (Schedule 8) and a sample Sales Book (Schedule 9) format.
PAN number refers to the Taxpayer Identification Number which will be allocated to each registrant after completion of the registration process.
19. What is the VAT account ?
The VAT account is a monthly summary showing the source of the figures used in the VAT return. This account contains purchases and sales and the VAT spent and collected. A sample VAT Account (Schedule 7) may be obtained from the concerned IRO.
Fines will be imposed if the taxpayer fails to file his return within the specified time
A registrant will make his VAT payment at a bank where he will receive a bank voucher as proof of payment. This number is to be entered on his VAT return to be submitted within 25 days after the end of the month of business transaction.
The VAT Act imposes fines for failing to register. Similarly, if a registrant fails to use his registration number or clearly display his registration certificate in the business premises, he is liable to fine.
Other penalties may be imposed if, for example, a registrant fails to file a return, issue invoices, keep an up-to-date account of transactions, obstructs visits by a tax officer in investigation, prepares false accounts and invoices or attempts to evade tax. Similarly, IRO/IRD may purchase or cause to purchase under invoiced goods.
21. Administrative Review
A taxpayer who is not satisfied with the Tax Assessment of a Tax Officer may submit an application to the DG of IRD for administrative review within 30 days from the time of receiving such decision.
22. Tax Plate
In order to make public the status of the registered taxpayer automatically, each registered taxpayer is required to display the tax plate which is visible from outside in the premises of the taxpayer. The size and the colour of the tax plate should be as follows :-
A. Size: The size of the tax plate should be 30 cm long and 10 cm width.
B. Information to be shown on the tax plate:-
(i) Permanent Account Number (PAN)
(ii) Taxpayer`s Name.
C. Colour : The tax status of the taxpayer will be identified on the basis of the following background and the colour of the tax plate:-
(i) Bush green background and letters in white colour : VAT registered tax payers.
(ii) Lemon yellow background and letters in black colour : Tax payers dealing in VATable goods and services but whose transaction is the below threshold i.e. Rs. 2 million per year.
(iii) Signal red background and letters in red colour: Tax payers dealing in non - VATable goods and services.
23. Conscious Consumer Lottery Programme.
In order to encourage billing system and thereby improve the tax system and motivate the consumers to take bills on the purchase of goods and services and motivate the sellers to issue bills on the sale of goods and services, a conscious consumer lottery programme has been introduced since Magh, 2060.
Types of bills to be included in lottery programme.
Â· Purchase bill issued by VAT registered taxpayers to consumers who are not registered in VAT.
Â· Tax invoice or abbreviated tax invoice in the name of natural person among individual purchasers who are unregistered.
Â· All types of bills except the purchase of vehicle ( excluding bicycle) and star hotel will be allowed to participate in the program.
However, bills issued in the name of government authority, public enterprises, local level authorities and diplomatic missions and the bills issued by the public enterprises will not be entertained in the programme.
Provision of Cash Prizes to Consumers Total Prize amount
First winner - 1 Person. Rs. 1,00,000
Second winner- 5 Persons (Rs.20,000 each) Rs. 1,00,000
Third winner- 10 Persons (Rs.10,000 each) Rs. 1,00,000
Consolation Prize - 20 Persons (Rs.5,000 each) Rs. 1,00,000
Total Rs. 4,00,000
The prize will be declared once a month on the basis of coupons distributed in that month.
Procedures of conducting lottery programme:
- IRD will print lottery coupons with serial numbers of two copies.
- A separate number will be marked in each coupon.
- One coupon will be issued to the purchaser after receiving the purchase bill of Rs. 1,000 and a copy will be retained by the contractor conducting the program. For instance, if a consumer submits 3 bills containing the purchase of Rs. 400 each, he will receive one coupon and will be eligible to get another coupon in each additional amount of Rs. 1,000. However, surplus amount will not be entertained for the purpose of competition once coupons are issued after submission of the bills.
- The bills worth less than Rs. 250 will not be entertained in the programme.
Provision of Cash Prizes to sellers:
In order to motivate the sellers to give bills to the buyers, those sellers whose invoices have enabled the cash prizes to the consumers will also get the following cash prizes:- Total Prize Amount
- First winner - 1 Seller Rs. 25,000
- Second winner- 5 Sellers (Rs.5,000 each) Rs. 25,000
- Third winner- 10 Sellers (Rs.3,000 each) Rs. 30,000
- Consolation Prize - 20 Sellers (Rs.2,000 each) Rs. 40,000
Total Rs. 1,20,000
24. Proxy Criteria
Taxpayers whose annual turnover is more than Rs.2 million are required to register in VAT compulsorily. Taxpayers who fall below this limit will be required to register in VAT within 30 days of their anuual transaction reaching or crossing Rs.2 million. However, if the tax payer falls under any one of the following proxy criteria, he is required to register in VAT compulsorily :-
a) If the stock of the tax payer exceeds the specified amount when the tax officer inspects the stock or if the monthly sale exceeds Rs. 2 lakh or more during a month;
b) If the annual expenses of the tax payer on the telephone and the rent exceeds Rs. 1 lakh; or
c) If the premises of the taxpayer lies within the specified area of the market or the street as specified by the Department (IRD).