The government is planning to bring the service sector within the purview of Value Added Tax (VAT). It intends to expand the tax net from the upcoming fiscal year. Shishir Kumar Dhungana, a Secretary at the Finance Ministry, said that the new measure is being introduced because turnover taxa­tion (TOT) did not produce expected results in the last three years. The ministry has concluded that TOT has resulted not only in low tax collection but also in tax evasion. The threshold for VAT registration was raised with the expectation that TOT would function properly, but that expectation wasn’t met. (Earlier, businesses with annual transactions worth Rs 2 million and more had to be registered for VAT, but that threshold was recently increased to Rs 5 million.)

 

“Similar to the Goods and Ser­vice Tax (GST) levied in India, VAT will incorporate all goods and ser­vice transactions in Nepal. There is no alternative to this measure also because VAT’s contribution to reve­nue has been going up,” said Dhun­gana. VAT worth Rs 143 billion was collected in the first nine months of the current fiscal year. This is 28.2 percent more than the amount collected in the same period in the last fiscal. Authorities suspected tax evasion when VAT collection in the first six months of the current fiscal sank below target.

 

In the white paper issued on March 30 by Finance Minister Yubaraj Khatiwada, he had stated raising VAT’s threshold to Rs 5 mil­lion had encouraged businesses to divide their units so as to dodge the threshold. Some thought his statement implied that a lower VAT threshold was in the cards. But in the budget he presented on May 29, it has been revealed that all service industries would be brought under the purview of VAT, irrespective of the scale of their transactions.

 

The Inland Revenue Department has issued an instruction to that effect. Among the industries that are going to be brought under the pur­view of VAT are catering, education consultancy, night and health clubs, massage therapy, boutique, etc.

 

The government had introduced VAT on 16 November 1997 with a view to include all indirect taxa­tion. The imposition of a 10 percent VAT had replaced taxation on sales, hotels, construction contracts and entertainment. The last two decades have seen the highest revenue col­lection through VAT, which con­tributes 27 percent of the national revenue. The number of taxpayers with VAT registration has gone up to around 200,000.

BY SHREEDHAR KHANAL | KATHMANDU