Our tax law was promulgated in 2002 and was termed as modern compared to the earlier tax law we had and the last decade was a learning experience for the practitioners, the tax payers and the tax officers. Our current practice and issues faced show that the law is inadequate in several aspects, and perhaps its time for us to think on reforms needed for better tax practices.
Non-resident taxation- Individual
How many of the expats working in Nepal pay their employment tax here, especially when they are paid in their home country? How does tax office track the consulting income of expats who are paid abroad but give consulting services on tourist visa in Nepal?
On other hand, provision of Non-resident taxation applies even to Nepali citizens. But the current system does not track residential status of Nepali citizens. As a result, the concept of deemed disposal that applies when a resident person becomes non-resident has remained almost redundant. No wonder, a non-resident Nepali staying abroad (or even after obtaining foreign citizenship) dispose their shares or land and building in Nepal as Nepali citizen and pay tax as resident.
Indirect Transfers- Should we tax?
The #NCelldeal has generated much interest in tax practice of Nepal, more than any tax issue in the recent past. Irrespective of whether Inland Revenue Department is able to tax the transaction or not, the issue has raised debate on reforms needed in our law to address ambiguities and to combat tax avoidance schemes. Multinational companies, operating in Nepal or abroad, try to structure their investment through multiple layers or arrangements to take advantage of any loopholes in the tax provision. This is normal throughout the world. But the countries develop mechanisms to combat tax avoidance schemes.
NCell case was highlighted because the transaction news floated through press release made by the company. Else, it would have never been known to the country. We cannot rule out that such indirect transfers might have been there in cases of other companies too.
Whether Nepal should tax indirect transfer or nor is a policy issue and should be addressed by amendment in our tax law. At the same time we need to have administrative checks to make sure that indirect transfers are disclosed to tax office.
Transfer Pricing- Guidelines awaited, but when?
We have transfer pricing arrangement in the law, but in absence of proper guidelines, tax officers hardly use transfer pricing provision in tax assessment. It has been years since we have been hearing that transfer pricing guidelines are being prepared. But when?
E-commerce- How should we tax?
The current tax law provisions appear inadequate to address tax issues arising in business done through e-commerce.
Capital Gain Tax- Lack of indexation
While assets are regarded disposed at prevailing market price, there is no system of indexation for calculating revised cost of the assets. This means if land is purchased in 2060BS and sold in 2072BS, the cost allowed for deduction is the cost in 2060 BS; thus the tax payer have high taxable profit. To avoid high income tax, tax payers often understate selling price. This indirectly promotes black market
Responsibilities- Why only tax payer?
Tax payers are expected to be fair in self tax assessment and correct in submission of returns. Any errors are penalized, with no option of revising their tax returns even in case of justified circumstances. But on other hand the tax officer can amend their tax return any number of times in four years period. Even the audit issues raised by Office of Auditor General are passed on to tax payers.
Dispute Resolution- Are they resolved
The administrative review mechanism has completely failed, with hardly any tax officer’s assessment overturned in review. Cases are piled up in Revenue Tribunal and Supreme Court and hence government is resorting to tax settlement commission for settlement of outstanding cases. Such commission can only be a short term option and should be discouraged. An independent permanent mechanism for dispute resolution is the need of the hour.
Missing clarity in existing practices
There are several areas where lack of clarity has resulted in disputes and inconsistent practices between companies. Matters such as treatment of gratuity, Sec. 88 and 89 TDS provisions for different payments, bonus deductions, long term contract, correction in depreciation pools, treatment of leasehold assets, carry forward of advance tax etc., should be further clarified. GAAR provisions cannot be used unless we develop practical examples on how its to be implemented.
Small Tax Payers- A broadened definition
The tax law provides presumptive tax payer and turnover tax facility only to individual or proprietorship firms. Private Limited companies and partnership firms are subject to normal tax rate and dividend tax, thus creating economic double taxation.
Books of Accounts- What to maintain?
Small tax payers often face this question. They do not have the technical capability and financial resources to maintain a comprehensive books of accounts. But lack of accounts also means difficulty in defending themselves in case of mismatch.
Tax on Natural Person- No De Minimis
With 1% social security tax levied on basic limit, there is no De Minimis for employment income earner. This also means that small tax payer are always in a position of non-compliance with TDS provision because there are not aware of need of deducting TDS on salary, nor is it possible for them to submit monthly TDS returns. Similarly, there is no De Minimis for service fee TDS, thus requiring TDS even on small petty payments made to natural persons.
Permanent Establishment- Tax on Profit or Income
PE are tax as independent legal entity from its head office. This has been our principle. However, this has challenges in attributing correct profit to Nepal operation. Deduction for Head Office expenses is debatable, and transactions with associated companies should always be subject to transfer pricing and a matter of dispute. Instead, why not look for alternatives, taxing when income arises in Nepal, on income as source, instead of going through the complexity of taxing profit. This would simplify the tax payment and collection, both for business and tax office.
Its time that we work towards improving our tax law, to make it more relevant to the way businesses are done today, to make it more clear thus reducing arbitrary practices by tax payers and tax officers and to ensure transparency in tax practices with improves international taxation rules for attracting foreign investment.