What is VAT?
VAT or Value-added tax is a consumption tax that the government levies on products at every point the product has been sold at different points of transactions, which adds value to the product. VAT is considered to be a consumption tax as it is the tax levied on the purchase of goods and services, it can also refer to a system of taxation in general, where individuals in an economy are taxed based on what and how much they consume. In other words, the individuals are taxed for how much they have added value to the economy. Therefore, VAT is a tax levied based on the value they have added from the consumption of people at different stages the product or service passes through.
How Does VAT Affect My Business?
It is common knowledge that the normal VAT rate in Nepal is 13% on selected goods and services. However, the VAT rate may differ for different cases. For goods and services listed in Schedule 1 of the VAT Act, 2058, the applicable tax rate is 0%. On the other hand, for the goods and services listed on schedule 2 is 13%. When a business registers to VAT, it means the business must charge an additional 13% on the sale of its goods and services. However, this does not mean the business is the one bearing the 13% charges additionally on its products, as VAT is ultimately born by consumers. When the business makes a sale, the VAT charged is deducted from the invoice paid. But this is not all, a producer or a manufacturer pays VAT when they purchase raw materials. Likewise, a distributor pays 13% VAT when purchasing goods from the manufacturer, which is then purchased by retailers and they too bear the 13%. Finally, the consumer purchases the product from the retailers and bears the 13%. A notable fact to mention is that the consumers are the people in the economy that produce raw material that also make sales with VAT added. Hence, VAT enters the general and day-to-day transactions in an economy that when represented graphically, tends to be a cycle. This means the government is able to generate revenue via tax through the essential transactions in the economy.
You May Be Interested In:
How Does VAT Travel to the Government’s Revenue Fund?
VAT is a type of indirect tax, which means the bearers of that type of tax need not submit the 13% they have incurred on all their consumption purchases to the tax collecting authority such as the Inland Revenue Department by themselves. Instead, a registered person or entity does it for them. The registered person is able to transfer the 13% VAT they have incurred from purchases to the sales they make of the same product.
In cases when a business pays more VAT to their suppliers but then receives an amount less than what they have paid, they are able to settle via the tax authorities, by making claims. By registering to VAT, a business will never suffer loss when transactions are related to VAT. On the other hand, for businesses not registered to VAT, are not able to claim the VAT that they have incurred from their consumption as they are not entitled to make claims from the tax authorities nor can they pass on the 13% they have incurred to the ultimate or final consumers.
As for the businesses and individuals registered to VAT, there are certain obligations they must fulfill. The registered businesses and individuals must submit VAT return documentation and pay the tax by the 25th of the following month. They must also provide a tax invoice to their customers. They are also obliged to maintain purchase books, sales books, and VAT account and keep their VAT records for a time period of 6 years. This is so that they can produce written and documented proof to show to the tax authorities. They must also display their Certificate of Registration at their workplace where it is visible and must allow tax officers to enter the business premises to examine records of the stocks in their possession. The business must also update its details and inform the Inland Revenue Department (IRD) if the business ever changes its address, contact number, reorganized the partnership, among other things within 15 days of the change.
Should I Register My Business to VAT?
In Nepal, registering to VAT is not a compulsory process. For those businesses and entities conducting business not listed in Schedule 1 of the VAT Act, 2058. The schedule 1 consist of goods and services that fall under the category of basic agricultural products, goods of basic needs, live animals and animal products, agricultural inputs, medicine, medical and similar health services, education; in addition to books, newspapers, and printed materials; artistic and cultural goods and services, carving services; passengers and goods transportation services; personal or professional services and some other few miscellaneous good and services, are exempted from the requirement to register to VAT. In addition to this, those people with an annual turnover above the threshold limit of Rs 50 lakhs dealing with goods must register to VAT. For those making a turnover less than that amount, they can voluntarily register to VAT, however, it is not compulsory. As for the people rendering services that make an annual turnover that exceeds the threshold limit of Rs. 20 lakh must compulsorily register to VAT.
It is also compulsory for entities and businesses to register to VAT when their commercial loans exceed Rs 1 million. Likewise, if their stock holdings are worth more than the limit prescribed by the Inland Revenue Department, they must register to VAT. Also, if the business imports taxable goods worth more than Rs 10,000, then they must register to VAT as per law, however, if the import of taxable goods is for personal consumption, they are exempted from this requirement.
How to Register a Business in VAT?
In order to register to VAT, the business must be registered to PAN (Permanent Account Number). They can register to both PAN and VAT via the Inland Revenue Office (IRO) and the Inland Revenue Department (IRD).
In the age of the internet, businesses can access the form to register for VAT online. For this, businesses can follow the process presented here:
- Visit the IRD website and go to the ‘Taxpayers Portal’ and enter a username, password, and details.
- Then select ‘VAT’ in the options, then click on OK, then a screen with the submission number will appear.
- Then you must enter your PAN number and then click “Next”.
- Then you must enter the details of the contact person for sales tax (including address) if this is different from the contact person for income tax. You can save the data or request it using the “Save” or “Send” button.
- Then you can click the Print button to receive a copy of the submitted application form. You need to visit the IRD office and send the printed application to the officer in charge. All applications submitted by the taxpayer will be displayed in the list submitted to the IRO official portal.
The documents that are required to be submitted at Inland Revenue Office (IRO) includes:
- Copy of your citizenship certificate. For foreigners, every other real identity document.
- Copy of the business enterprise registration certificate (if applicable).
- Two identical passport size photographs of the individual that signs the application form. For Partnership Firms, identical size photographs of every partner.
- Proof of deposit, if asked, with the aid of using your Inland Revenue Office (foreigners only).
- Sketched map of the location of your primary workplace or head workplace.
- Rental settlement that includes receipt of TDS on rental payment for three (3) months
- Application documents requiring business enterprise’s seal.
From The Author:
(Liked this article??? If you are also interested in publishing your articles related to business, finance, and economics, then mail us your article at Investopaper@gmail.com.)