EXPERTSPEAK: The root of the problem of underinvoicing lies at customs offices

Although the government has announced its decision to increase revenue collection by almost 20 per cent to Rs 354.50 billion this fiscal year, it failed to meet some of the targets in the first month of the current fiscal year, with collection of value added tax, customs duties and excise duties lagging behind. Rupak D Sharma caught up with Finance Secretary Shanta Raj Subedi to know more on the reasons behind these failures and possible ways to correct them. The government failed to meet key revenue targets in the first month of the current fiscal year. What went wrong? In the first month of the current fiscal year, collection of VAT, income tax and excise duties fell short of target. There are two main reasons for this. One is depreciation of the Nepali currency which put a strain on imports of goods. So when the currency’s value fell, many traders collected goods that had arrived at customs office at a later date, as taxes are levied on the basis of US dollar’s exchange rate of the day when goods are released. Since Nepal generates almost 44 per cent of the total revenue from customs points, fluctuation in foreign trade affects revenue collection. But we have announced plans to extend incentives to those who come under tax net, which will come into effect only from mid-October to mid-January. We hope these measures will give boost revenue collection. But what about collection of VAT, which recorded a growth rate of only 8.2 per cent in the first month as against 20.4 per cent in the same period last year. Considering average inflation of past 12 months at 9.6 per cent, real VAT collection actually declined. We collect around two-thirds of VAT from customs offices, which mean sluggish imports affects VAT collection as well. However, the Inland Revenue Department (IRD), which raises the remaining one-third of VAT from domestic sources, also failed to meet our expectation due to laggard industrial activities. At the same time, collection of VAT from services sector like restaurants and hotels also didn’t meet the target. These factors affected VAT collection. But since the government is committed to making VAT the main source of income, we have already instructed the Inland Revenue Department to introduce necessary strategies to curb VAT leakages and make VAT collection effective. We hope these measures will raise contribution of value added tax to the total revenue as it has remained stagnant at around 30 per cent since it was introduced almost one and a half decades ago. What kind of strategies is the IRD planning to introduce? First of all, we have asked IRD to focus on reducing the level of tax arrears, which currently stands at over Rs 15 billion. But since two-thirds of these cases are awaiting verdict of the Revenue Tribunal, we cannot do much. Yet, we have asked the Inland Revenue Department to immediately start collection of other due tax amounts. At the same time we have also asked IRD to ramp up market monitoring. Surprisingly, even after 15 years of the introduction of value added tax, the practice of issuing invoices has not taken off. So we want to inculcate the culture of issuing invoices among sellers, while raising awareness about importance of asking for bills among consumers. Isn’t underinvoicing also a big problem? How are you planning to tackle it? The root of the problem of underinvoicing lies at customs offices, from where goods enter the country. This means when value of goods is not correct at the source, it will definitely not be correct in the retail market. We know this is a major problem faced by customs offices and we have introduced a slew of measures to control such malpractices. This includes fixation of reference prices of goods. But to check whether traders are declaring actual value of goods, we also monitor maximum retail prices (MRPs) of goods in the market. And if the value of goods declared at customs is less than 40 per cent of the MRP, we initiate action against them. The government, through the budget speech, said it would start purchasing goods that are underinvoiced. Have you started doing this? Customs officers hold the right to purchase underinvoiced goods by adding a premium of five per cent. But we purchase underinvoiced goods only to show demonstrative effect of fraudulent activities. This means the government’s real intention is not to purchase all underinvoiced goods and auction them. However, I have asked the Department of Revenue Investigation to prepare a manual on how to purchase, manage and sell such goods. I have also asked the department to come up with a tentative budget to roll out the plan. What types of goods are generally underinvoiced? Automobiles and electronic goods, whose MRPs need to be declared, are generally not underinvoiced these days. But lots of daily consumable goods like apparels and motor and electronic parts, and luxurious goods are undervalued.   Source: THT