For VAT it's worth

For VAT it's worth
eKantipur, 12-Nov-08
AMRIT P. SHRESTHA

Globally, “money minting machine” is a familiar name given to VAT (value-added tax) by its experts. It brings the entire value addition chain down to distribution under its ambit, and is known as an offsetting non-cascading levy. This taxation system has been accepted universally because of its popularity, catch-up effect and self-polishing nature. It is also free from cascading and pyramiding and is a broad-based tax. The industrialization of Japan, Hong Kong and South Korea was made possible by their tax policies based on the VAT concept.

In Nepal, among the chief reasons for introducing VAT was providing incentives for increased productivity, industrialisation and creating an investment climate through the policy of refund and zero rate on export.

Unfortunately, VAT has not been enhancing the economic process as envisaged in Nov. 1997. In the present scenario, the system is at a crossroads because of professional ignorance, tax dodging tendencies, embezzlement and political turmoil. The system has not gone away completely, but it has merely been pushed to the sidelines.

The following mechanisms adopted by Nepal are fully contradictory to VAT concepts, and these barriers have to come down.

1) The government is generating revenue through coercion. This is state terrorism. Nepal has slipped several notches in Transparency International's ranking of the most corrupt nations on earth. However, no revenue or enforcement agency of the government has bothered to unearth the facts.

2) Refunds are an integral part of VAT. Nepal adopted the refund system to help big exporters on whom the economy relies. It was intended to boost capital flow into the country through the mechanism of zero rate which can influence investment prospects. Turning Nepal into a zone of good taxation could give a big impetus to economic growth. Unfortunately, the procedures are ambiguous and torturous. Tax officers have been auditing without basic knowledge and academic background. The answer to a particular query differs from one tax officer to another because of professional ignorance.

3) Operating manuals are most important for maintaining transparency. And both tax officials and taxpayers need to consult them. But the available guidebooks are incomplete and do not provide the required detailed information on the obligations of taxpayers.

l The compliance rate is very low compared to the number of registered taxpayers. The poor compliance rate is directly linked to procedural hassles during tax collection, poor surveillance and unofficial trade. We must do everything necessary to make tax paying convenient and achieve the highest degree of voluntary compliance.

4) The tax rate has been increased time and again for nothing. The government should weigh its action thoroughly before increasing the tax rate. International experience tells us that gradually lowering taxes is a more effective way to achieve the desired goals than increasing them.

5) Sham transactions are one of the invisible parasites robbing VAT blind. Sham transactions are intended to create the appearance that one transaction took place, whereas in fact more than one transaction or no transaction took place. The pathology of this crisis is that unless you get ahead of it and deal with it from a position of strength, it devours the weakest link in the chain and then moves on to devour the next weakest link. VAT may be thought of as a series of processes making up a chain. Each process is a link in the chain, and it is the strength of the weakest link that determines the strength of the whole chain.

6) A multiple-rate tax structure is a prime concern for the business community. Traders have been pushing for a four-tier taxation system. It has been seen globally that a multiple-rate structure distorts the choices of both consumers and producers and favours certain big business houses. The rate should be maintained for a long time for the sake of transparency and it must be incorporated in the VAT Act itself. Constant policy changes have also been an obstacle to enforcement of VAT and hurt revenue generation.

We are in transition to a new economic model. For a nation like ours, which is weighed down by solvable problems, economics only becomes meaningful when it results in a better quality of life for the masses. Immediate miracles are not possible, but pragmatic and sustainable efforts should be made to bring prosperity to the country. Sweeping and radical reform is needed in VAT to push the economy forward. Let's see how our responsible leaders translate their promises into action.

(The writer is a former director of VAT and a financial management expert for UNDP in Tanzania.