IMF working paper on ‘VAT Fraud and Evasion: What Do We Know and What Can be Done?’ says: Like any tax, the VAT is vulnerable to evasion and fraud. But its credit and refund mechanism does offer unique opportunities for abuse… After introduction of Value Added Tax (VAT) revenue in 1997, Nepal’s tax administration has been facing many challenges to effectively implement it. Multi-million VAT fraud scam was one of the serious threats faced by Nepal’s tax administration. The scam has once again come to limelight after Nepal’s tax administration — Inland Revenue Department — has moved to the Supreme Court challenging the decision taken by National Information Commission which had directed the government to reveal the detail of VAT fraud.
VAT Fraud in Nepal
In fact, 518 firms were not taxpayer but fraudsters. They had not tried to evade or avoid their tax compliances. The case was more complicated in nature since the fraud, according to officials involved in investigation, could ruin the entire economic system of the country if tax administration had failed to identify the problem on time.
These firms had made false claims for credit and refund by presenting forged invoices for non-existent or exaggerated purchases and succeeded to take rebate from state coffer to the transactions which were never happened in reality.
Inland Revenue Department – had completed the investigation of 518 firms involved in Value Added Tax (VAT) scam that had tarnished the image of the private sector in April 2012. The department had assessed a total of Rs 6.59 billion revenue — Rs 3.06 billion VAT, Rs 3.32 billion income tax and Rs 205.27 million excise — from the investigation.
Concluding the investigation director general at IRD Tanka Mani Sharma had said: “the trend of under-invoicing, attempt to avoid VAT and producing fake VAT invoices by creating fictitious transactions have been found during investigations.” He had also said that traders, contractors and firms across the country were involved in robbing national coffers by producing fake VAT bills.
Debate: Revenue a Public Information or Not
From the very beginning, there was tussle between civil society members and tax administration regarding information of VAT fraud. On the one hand, civil society members advocated for the reveal of entire information claiming that getting tax information is peoples’ right to know. However, tax administration constantly denied the name of firms and businessmen to reveal citing Nepal’s Income Tax Act.
Later the dispute reached to the National Information Commission (NIC) which directed Finance Ministry to provide the detail information of VAT fraud in July, 2011.
Giving its final verdict in October 2011 to the complaint lodged by Freedom Forum, National Information Commission has directed the Finance Ministry to reveal the names of VAT evaders. Concluding that the people have the right to know about their tax amount, the commission directed the government to reveal the name of firms involved in VAT fraud.
A New Twist
Quite paradoxical that Nepal’s tax administration is trying to protect them under Income Tax Act and Value Added Tax (VAT) Act. Civil society members claim that this is a direct protection of VAT defaulters by Nepal’s tax administration.
Nearly two years after the decision of NIC, Nepal’s tax administration approached the Supreme Court on February 20 asking it to annul the decision taken by NIC regarding public disclosure of VAT scam.
Tax can never be an issue of public interest in Nepal and businessmen and officials at tax administration, from their attitude, are trying to prove that tax is collected due to their effort, opines Kathmandu-based revenue analyst Anirudra Neupane.
The question whether tax issue should be public or not has been raised after the move of the tax administration. Chairperson at Freedom Forum Tara Nath Dahal says: “It was not simply a scam of tax evasion or tax avoidance. Some big and reputed companies, traders and business firms had involved in Value Added Tax (VAT) fraud producing counterfeit invoice. They produced fake invoice and claim refund to the transaction which were never happened in reality.”
General public are real taxpayers and they have right to know the status of their tax money, adds Dahal. But, tax administration in Nepal is trying to establish the notion that tax is not an issue of public disclosure by challenging the decision by NIC.
In spite of criticism from different quarters to prosecute criminal charge against businessmen and firms involved in the biggest robbery of state coffer, Nepal’s tax administration has been constantly protecting VAT defaulter invoking Income Tax Act which is not natural, says Dahal.
Gravity of the Issue
“Using fake VAT bill is a serious crime that equals to using fake currency notes,” former Finance Minister Bharat Mohan Adhikari had said during interrogation by then parliamentary Public Accounts Committee in March 2011.
The government should respect taxpayers but not fraudsters, according to Krishna Sapkota who has been closely observing VAT scam. The move of Inland Revenue Department has raised the question of role of Nepal’s tax administration.
In principle, the government should spend tax money in transparent manner but the latest move of IRD will be a stumbling block to civil society’s campaign of making tax issues transparent, says Sapkota.
Even poorest of poor people contribute taxes to government’s treasury, adds Sapkota. How the tax administration can protect the persons involved in cases which, according to responsible minister, is equal to produce fake currency.
If revoked from the Supreme Court, it will be serious setback to Nepal’s Right to Information movement, according to him.
Solution: Reform in System
Transparency and accountability should be at the core within the tax system in democratic country. The government should respect and protect taxpayers but not fraudsters. For that, national tax law and policy should be transparent. Public disclosure of tax will help reduce tax related fraud and maintain transparency in tax regime. Greater tax disclosure will create a fair and sensible approach in tax system. Transparency in tax should be in center of debate in Nepal’s tax policy and governance. The government should take the discourse created by VAT scam to bring about reform in VAT regime in the country. However, the government should not forget that it should be responsible to the real taxpayers. Accountable government should treat all taxpayers equally and tax administration should not act in a manner where public can feel discrimination between rich and hardcore general public. In fact, tax money is public money and all citizens has right to know on its spending.