A high-level Tax System Review Commission has rejected the private sector’s demands for multiple VAT (Value-added Tax) structure.
The commission has suggested the government to continue with the existing rate for at least next five years. The government mposes 13 percent VAT on imported and locally-produced goods.
The commission, formed six months ago, has recommended in its final draft report the implementation of multiple VAT system might not help boost the government revenue.
It is scheduled to submit the final report soon.
Chudamani Sharma, director general of the Inland Revenue Department (IRD), said the government’s tax mechanism might not be able track multiple VAT rates in present condition.
“At a time when there are lots of leakages in the taxation system, it could be more difficult to bring tax evaders under scrutiny if multiple VAT rates are adopted,” said Sharma, speaking at a programme here on Monday.
VAT contributes about one-third to the government tax revenue. The commission has recommended the government increase the contribution to 35-40 percent by increasing VAT bases. “There is a need for accommodating new sectors under the VAT regime to meet the government’s revenue target,” said the Commission’s Chairman Rup Khadka.
Giving an example of New Zealand and Singapore where VAT is waived off on selected 3-4 items, Khadka said the government should adopt a strategy to generate more revenue in the long-run by increasing tax bases.
The commission said VAT is solely for raising the government’s revenue and is not obliged to achieve the targeted social objective.
“As taxes are not progressive in nature, it could only benefit the rich in particular if VAT is exempted in a large number of goods,” said Khadka, adding the government needs to focus on even distribution of the benefits after revenue collection.
VAT is supposed to be paid only on the annual turnover of more than Rs2 million. The commission has sought the government to introduce a system under which all traders registered in VAT will have to maintain “cash register” in the next three years.
According to IRD, there are 141,000 tax payers registered under VAT. Of them, only 30,000 hold annual turnover of more than Rs10 million, who contribute 92 percent of the revenue generated from VAT.
Similarly, 67,000 of them have turnover of up to Rs2 million and contribute 3 percent, while the rest contribute the remaining of 5 percent.
Sharma said they have also recommended the government minimise tax subsidies offered under different headings. He said no proper recording of the subsidies in the past has hit the government revenue. “Besides, it could not yield high productivity from those who got tax waiver.”
The government loses an estimated one-fourth of the possible revenue from the tax. The commission has also recommended the government to increase efficiency of the tax offices and increasing the awareness among the people to reduce the leakages.
It has sought revision in the income tax structure. It has recommended the government increase the exemption limit on income tax. At present, the annual income of up to Rs250,000 for an individual, and Rs300,000 for a married couple, are exempted from income tax.
The commission has also advised the government to increase income tax exemption limit on insurance to Rs50,000 from existing Rs20,000 per annum.