By: Prakriti Nepal
It is known that VAT registration is indicated/denoted in the PAN certificate itself. Yet having said that, it is necessary to understand what VAT is and what PAN is in order to find out the perspective of PAN vs VAT in Nepal and how businesses can benefit by going into VAT.
What is VAT in Nepal?
VAT was implemented in Nepal on November 16, 1997. This tax was imposed in place of sales tax, hotel tax, contract tax, and entertainment tax at the manufacturing level. However, due to political instability, it could not be fully implemented until the fiscal year 1998/99.
There is a lot of pushback from the business community regarding VAT. The former sales tax, the contract tax, hotel tax, and an entertainment tax, and the service tax have all been replaced by the VAT as it was intended to collect revenue like the four earlier taxes. It was created to collect the same amount of money as the four taxes it replaced because the collection of both customs fees and income taxes is heavily reliant on the VAT’s effectiveness intended to improve revenue collection. The VAT is broad-based.
VAT is an indirect tax that is levied on the creation of value. It is being administered by the Inland Revenue Department (IRD) of Nepal.
Usually, 13% VAT is levied in Nepal, though some goods and services are exempted from VAT.
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Goods and Services that are Exempted from VAT:
In these goods and services, the suppliers are usually not allowed to facilitate to input the tax credits on their purchases: (source: The Official Portal of the Nepal Government under the Topic Taxation Details)
- Necessity goods and services such as rice, pulses, flour, fresh fish, meat, eggs, fruits, flowers, edible oil, piped water, wood fuel.
- Basic agricultural products are also tax-exempt, for example, paddy, wheat, maize, millet, cereals, and vegetables.
- The expense of buying goods and services required to grow basic agricultural products is tax-exempt. This includes live animals, agricultural inputs including machinery, manure, fertilizer, seeds, and pesticides.
- Social welfare services include medicine, medical services, veterinary services, and educational services.
- Goods made for the use of disabled persons.
- Air Transport.
- Educational and cultural goods and services such as books and other printed materials, radio and television transmissions, artistic goods, cultural programs, non-professional sporting events, and admissions to educational and cultural facilities.
- Personal services are also tax-exempt. These are services provided, for example, by actors and other entertainers, sportsmen, writers, translators, and manpower supplies agents.
- Exemption from VAT is also extended to the purchase and renting of land and buildings
- Financial and insurance services.
- Postage and revenue stamps, banknotes, checkbooks.
Benefits of Going into VAT:
VAT is an international system. Hence, Globally four main importance of VAT can be seen. There are others too, but these are some of the main benefits:
A VAT Registration Number
A VAT registration number is a number or your business’s identification number which might not seem to be fascinating. Though, it does add credibility to your business and makes you seem trustworthy, and creates a professional aura for your business.
Claim your VAT Refunds
When your business is registered in VAT, then it will be easy for you to reclaim VAT in all your goods and services that you buy. Though, there should be a balance in terms of charging and receiving VAT payments over an entire year.
Just Reclaim the VAT From the Past
Once you are registered for VAT, you can reclaim the VAT from the past four years for goods that you are still utilizing/using. For this purpose, your business should have sustained since this long period and must have VAT invoices and records for the period.
What does Nepal Government Say about VAT?
As per Nepal Government, The tax is based on the principle that each producer or distributor adds value, in some way, to the materials, they have purchased and it is this added value that is taxed at each stage of the production and distribution chain. There is the presumption that VAT is shifted forward completely to the Consumer. In the VAT system, producers, distributors, and people providing services raise VAT on the products or services sold or provided. The difference between the VAT collected on sales and the VAT charged on purchases determines the amount a registrant must remit or the amount that may be claimed as a refund. In other words, if the tax on sales is more than the tax on purchases, the dealer/businessman remits the difference. If the tax on sales is less than the tax on purchases, the dealer may carry forward this credit to the next month. (Source, Official Taxation website of Nepal Government)
Henceforth, the value added by a firm is the difference between the receipts from the sales of the firm’s product and the sum to the amounts paid by the firm for goods and services purchased during the period from other firms. VAT is shifted forward completely to the consumer (Dahal 2003).
Four Primary Reasons to Introduce VAT in Nepal:
- To develop VAT as a primary, main and stable, a strong source of revenue for the government by broadening the base of the tax.
- To address the issue related and to smuggling or understating the taxable value, because the former sales tax was collected only at source, and value-added below this particular point wasn’t included.
- To reduce the dependence/subservience on customs duty of Nepal because Nepal needed gradual reduction in imports tariff as Nepal’s commitment to WTO, BIMSTEC, and SAFTA.
- For the modernization of the tax system by accounting practice’s enhancement and creating transparency in businesses.
As per Nepal Government, VAT Affects:
Consumers, persons involved in commercial activities are affected by VAT. Here, a person means an individual, firm, company, association, cooperative, institution, joint business, partnership, trust, government body, or religious organization. (Source: Nepal Government Officiation Taxation website)
Unregistered small suppliers, that is, persons with annual sales of taxable goods and services of Rs. 2 million or less are not required to collect VAT nor allowed to claim a refund of the VAT they have paid in producing their goods and services for sale. Though, even such people can register for VAT purposes voluntarily.
Measures Required to Enhance VAT System in Nepal
Taxpayer education enhancement programs need to be introduced and marketed more by the government on a niche level as well as a broad level.
- Good accounting habits are a must for proper VAT imposing in businesses. Hence, Government needs to apply measures for checking and cross-checking accounting practices in organizations.
- Reliable policies that are strict should be facilitated and custom’s and Inland Revenue Department’s networking must be strong.
- Get as many possible taxpayers into the VAT net
- To avoid erosion in the tax base, VAT exempted goods and services can be reduced.
Hence, for doing business in Nepal it is of utmost necessity to understand that Value Added Tax (VAT)
– is levied on the supply of all goods and services within Nepal except exempted and zero-rated items as listed under schedule 1 or 2 of the Act respectively.
– Also, WHT and VAT returns need to be filed on a periodic basis.
– VAT returns filling can be done
– VAT liability computation can be done
– VAT records for 6 years need to be kept
– Purchase Book, Sales Book, and VAT Account need to be maintained
– Submissions of VAT return and pay tax need to be done within the 25th day of the following month (month/trimester based on the type of registration has to be carried out.
– Need to hang the Certificate of VAT registration on the premises of business so that customers can easily read and see.
– Tax officers need to be allowed to enter the premises of business to examine the records of business and the stock on hand.
– Need to be in constant touch with the IRO so that any changes regarding new address, telephone number, or a reorganization of a partnership is shared and recorded.
What must be done?
Any individual engaged in any taxable transaction must submit an application for registration within the prescribed form before IRO. However, there are a few thresholds, not exceeding which, don’t require VAT registration.
- Person completing transaction with a turnover no more than fifty lakh Rupees and just in case of products and services a turnover less than ten lakh Rupees within the last twelve months. Anyone who imports the amount of the products to the export price of ten thousand Rupees or more once a year for business purposes into Nepal must get his transaction registered.
- In cases where an entrepreneur carrying on small transactions desires to induce his transaction registered at his own will, he can make an application. In such cases, the tax officer completes an examination procedure and registers the transaction.
- Whereas for the subsequent businesses even below the brink, VAT registration is mandatory especially for Hardware, sanitary, furniture, fixtures, furnishings, automobiles, motor parts, electronics, marbles, education consultancy, health spa, catering service, park place, discothèque, color lab, parking services, restaurant with bar, dry cleaners with machinery.
- Having following conditions for the transaction of taxable goods and services:
More stock of products at the time of inspection.
Expenditure relatively1 Lakh on telephone and house rent.
Business premises within the prescribed market or road area.
What is PAN?
PAN on the other hand whose full form is Personal Account Number is a unique denoter/identifier (numeric) for all the taxpayers. It has been made mandatory by the government since the current Fiscal Year 2019/20 for all salaried workers.
All the employers must record the tax deducted at their source (TDS) in the respective accounts of their staff. All the employees thus must have PAN.
There is no validation from the government’s side if any company’s payment of salaries or wages does not have PAN.
When it comes to businesses getting registered in PAN- all the businesses should get a PAN registration certificate which is provided by the Inland Revenue Office (IRO) before the operation initiation.
Let us get into the details of PAN:
You might be thinking how many types of PAN are there? PAN needs to be obtained by
– Business and
– Proprietary Business Taxpayers (source: IRD)
Personal PAN or PPAN is for Individuals and for Businesses and Proprietary Business Taxpayers we can call it PAN itself.
List of “those who” are required to have PAN:
- Proprietary Business Taxpayers
- Companies/ Organizations that might be involved in activities concerning the business or not concerning business
- As mentioned earlier, if the company/business cut TDS from its workers/staff, then that sort of company must have PAN
- Similarly, even workers or employers getting salaried or let us say wages, regardless of any amount of money/payment/amount.
- For the businesses, particularly- if they are issuing an amount starting Rs 1000 and more, a PAN bill becomes mandatory and hence PAN card becomes a necessity.
Issuing Body of PAN
By now we know, that IRD or Inland Revenue Department is the issuing body of PAN. Inland Revenue Department has a total of 59 offices that included 39 Inland Revenue Offices which are known as IROs. There are 19 Tax Service Offices (TSOs), One Medium Level Tax Office (MLTO) and One (LTO) Large Tax Office spread across various parts of our country. (Source: IRD as per the year 2020).
Process of PAN Registration
The process of PAN registration starts with submitting an application form in the concerned IRO or TSO easily available to download from the IRD website. PPAN application can also be registered online. The steps below will help you to register the PAN.
– Visit the IRD website
– Click Application for Registration
– Fill up the details
– Selecting nearby tax office
– Press ‘submit’ button
– Get the submission number/identification number
– PPAN card can be fetched after showcasing the submission/identification number at the tax office even a day after the application is submitted.
– IRD also gives the facility of issuing PPAN collectively if the organizations request an onsite visit. They send a team to perform so.
Document Required for PAN
You need to have the following document to get the PAN:
- Application form
- Applicant’s citizenship certificate or its copy
- Passport size photos (two)
- Foreigners need to submit their citizenship details or any identifier document or cards as asked by the IRD.
Hence, PAN makes financial transactions through banks, payment of bills, or the other documentation work for any industry, trade, profession, business, or employee easier. It makes the tax paid to the govt. transparent and easier/faster. PAN makes financial transactions, imports, and exports, applying for loans from banks, and tax-related works easier as well.
The government had introduced the ‘One Person One PAN’ policy for the FY 2019/20. There has been an allotment of a complete of 1.371 million PAN – 191,000 PPAN and 1,180,000 business PAN (as per the year 2020). All income earners are required to own their PPAN and will have to pay a minimum of 1 percent revenue enhancement. For earnings more than Rs 400,000 a year, individuals should pay a further 10 percent for every additional Rs 100,000. A family earning Rs 450,000 or less a year can jointly pay 1 percent, while they ought to pay a further 10 percent for each additional Rs 100,000. (source: IRD)
Any individual related to and earning through two companies isn’t required to possess two different PAN. However, s/he should report back to the concerned IRO or TSC about the earning if it exceeds Rs 400,000 and will have to pay the tax accordingly.
What is More Important PAN or VAT?
This doesn’t have a proper answer as both are in some or the other way important for individuals and businesses. PAN is necessary to keep a thorough check on financial transactions which can carry a taxable component. Whereas, VAT registration is a sort of mandatory for businesses that are selling goods, services, or products like manufacturers, exporters, shopkeepers, dealers, eCommerce sellers selling goods, etc. Thus, for proper business functioning and for financial transaction PAN and VAT both becomes necessary and important though their nature and function mode might be different.
Note: Most of the source of the content is from the Government website of Nepal Government: The Official Portal of Government of Nepal, NEPAL.GOV.NP and Inland Revenue Department
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