Problems Faced In Implementing Income Tax Law

Anirudra Neupane

We live in an era when independence and sovereignty of any nation are determined by its status of economic development. To have even a minimum level of development, Nepal must have high rate of economic growth. This requires huge investment from state as well as the private sector. The government should be capable of mobilizing resources i.e. generating sufficient internal revenue for this propose while private sector needs a good investment environment. Former is in need of efficient tax administration and good governance while latter needs at least a transparent, simple and convenient tax system.

  

Discouraging Tax Evasion 

A simple, efficient, transparent and effective tax administration and the transparent and accountable government are the basic requirements for encouraging good taxpayers and discouraging the tax evaders. The parliament, government, tax administration, auditors, media, civil society and taxpayers have to fulfill their roles and responsibilities to get tax laws implemented that will result in better mobilization of internal revenue. The government should work efficiently, taking support from all other major facets of society to achieve the objective self dependence on the financial resources. Some problems on the part the Nepal government which have resulted in poor implementation of tax laws especially the income tax law are highlighted in this article.

The government being the most powerful and the most responsible institution, it is the main agent whose functions determine whether laws including the tax law get effectively implemented. Ministers are said to be involved in corruptions, something that is frequently reported in the media. The involvement of politicians in corrupt practice uplifts the morale of corrupt administrators while officials sympathetic to people are discouraged. This types of characteristics of politicians and administrators losses the credibility of state machinery resulting in lawlessness. Corruption, misallocation and misuse of public fund by key actors of government stimulate tax payers to evade tax.

In developing countries like ours, it is hard to realize the expectation of fully transparent government but people cannot let politicians do whatever they like. They must be forced to better management of public fund or limit the tax evasion. Where the government is not accountable to its people, it is futile to expect the tax payers to be accountable. This is one of the main causes of tax evasion in Nepal resulting in poor implementation of income tax law. 

One the other hand we have very weak social security system. People want to save anyway they can for future security and they may perceive tax evasion to be  one of the the social security tools. In the case of Nepal, Income Tax Act 2002 has provision of 15% tax on retirement payment in case of individuals other than government employees. In the case of government employees it is more or less tax exempted. This shows how government is creating discrimination among citizens. This is small example only that government is not serious about social security of senior citizens. Feeling of inequitable treatment creates frustration among taxpayers while that of insecurity stimulates them to save by whatever method they can. As a result, they might choose evading taxes.

Provisions of law should be so simple to understand. Not only experts, tax officers or lawyers but also general people should be able to understand them. Also, through public discourse and campaign against tax evasion or tax crime, people should know whether liable persons are paying their tax liability. For social review and audit, civil society should understand provisions of income tax law. Since the government thinks that its only responsibility is to make lawmaking law and parliament thinks approving them is its only responsibility, problems arise. Some provisions which are translated version of foreign laws are not only difficult but also odd making it difficult to understand. This provides room for tax evasion.   

There is no fixed transfer policy for government employees in Nepal. Employees working in the tax administration always stay at risk of getting transferred. Media sometimes makes an issue that the best officers are getting transferred only because their performance is becoming the challenge to the nexus between politicians and businesspersons. Similar is the case for promotion. This is the hindrance in implementing the income tax law better.

The ministry of finance conducts periodical review meetings of its heads of departments to share experience of previous period and to make action plan for the following one. Access to Pro Tax (software with IRD to see firms' record) has been provided to Department of Revenue Investigation (DRI) to avoid duplication of activities of Investigation units of Inland Revenue Department (IRD) and DRI. But distinct inter-department coordination mechanism has not been developed to build harmony of efforts mainly among IRD, Department of Custom (DOC) and DRI.

For example, if a businessperson becomes able to evade custom duty, evasion of income tax starts at the very point because when an item gets custom clearance without paying custom duty, invoice is not issued on sale of such item in the wholesale or the retail market. As transaction is hidden, VAT and income tax cannot be collected. This calls for strong custom administration for the purpose for effectively enforcing income tax law too.

The custom administration also needs help of DRI to make post clearance audit effective  effective so that evaded custom duty, VAT and income tax can be collected. Investigation unit of IRD can also play role in the effort to make each of departments meaningful. But, it is unfortunate that these units are functioning in ad- hoc basis. The government has not played required role to mitigate these problems.

Different committees have been formed to seek recommendation for reform of prevailing revenue administration. International community including IMF and World Bank has suggested government to invest for administrative reforms.  This means additional benefit for employees, capacity enhancement for better performance, development of required infrastructure to create better working environment and ultimately to guarantee better service delivery.

But, due to lack of confidence that additional expenditure required for reform can easily be generated, government is not implementing major agendas of reform. The decision to pay performance based incentive up to 200% on the basic salary to the employees of revenue administration has now been revoked and reduced to 100%. Non-monitory rewards are also lacking. This only stimulates employees to involve in corrupt practices.

Security Matters

To take action against the defaulters, government should provide security personnel required to the IRD. Nepal Police with general responsibility are deployed in the request of IRD but no additional allowances are provided. This situation creates chances of corruption and ineffectiveness of effort of IRD to make tax payers abide by Income Tax Law. Case of Chitwan of some month back is the good example that shows how sensitive the security issue of IRD personnel is to get law enforced. 

Tax officers are recruited form students of any background. It is beyond the capacity of the employees so recruited to  review the financial statements signed by FCAs. Training of a month or two cannot supplement the deficiency of their academic qualification. Recruitment of employees from no academic background of accounts and taxation has resulted in overall weakness of revenue administration.

The government should take these issues seriously to discourage tax evaders and reduce tax crime. Unless the government takes initiatives to solve these problems, IRD alone cannot control income tax evasion. 

Published in The Rising Nepal: 17 August 2012