Recently, the Tax Settlement Commission has been surrounded with controversy regarding the exemption of taxes worth Rs21 billion.

Mukul Humagain spoke with Vidhyadhar Mallik, former finance secretary and former Minister of Federal Affairs and Local Development, about the CIAA’s investigation into the issue, why the TSC has landed in this predicament, and what the overall areas for tax reform in Nepal are. 

How do you look at the recent controversy over tax exemption? 

The TSC functions under the rules and regulations as established by the Tax Settlement Commission Act. But there were also talks of abolishing the law or thoroughly revising it.

The parliamentary committee had also given instruction as to the inadequacy of this document. But the fact that a TSC was formed in 2015 under the same Act despite its obvious shortcomings means that it was courting failure.

So, when huge amounts of tax exemption was given and the government recovered relatively less amount of tax dues, it was natural that the commission landed in controversy. 

Could this controversy perhaps indicate that the TSC was involved in double dealing?

The nature of the work done by the TSC and its possible misdeeds cannot be ascertained without examining the case properly.

The commission operates under a specific process as identified by the law. Whether the appropriate procedures were followed, whether the cases presented to the TSC came via the appropriate channels—all of these issues have to be examined before any accusations are made.

What has to be understood, however, is that the TSC was not formed with the purpose of exempting organisations from paying tax.

The TSC was formed because a number of organisations did not pay taxes owed to the government. Instead they would prefer to go to court and further delay the process.

So the TSC was formed with the aim that settlements would be reached faster, and that the government would receive some (if not all) the taxes owed. 

While the TSC may have the authority to negotiate on tax settlement issues, this does not mean that it should exempt organisations from paying taxes.

Negotiations entail ascertaining the tax payer’s paying capacity and whether the money owed to the government will be paid within a certain time frame.

For example, prior to the TSC, when a tax payer suspected that a tax officer had made a mistake while ascertaining a certain tax amount, the tax payer took the issue to court.

This meant that the tax owed to the government would be paid late. Now, if such instances occur, the TSC will negotiate and settle on a tax amount.

So what should be examined is whether or not the TSC has been fulfilling these functions.    

There are allegations that the TSC exempted some companies from paying up to 90 per cent of their taxes. Can such actions be construed as corruption or collusion between the tax payers and the commission? 

I can’t talk about individual cases. I am not an authority on this issue. However, be it the TSC Act or the Income Tax Act, the acts can only define the duties and responsibility of the tax officials.

But there are other authorities also, having the mandate to examine whether officials rightly followed their duties and whether there was corruption.

As per its constitutional mandate, the CIAA has the authority to function in the case of corruption and bad governance and inform the government where mistakes have been made. 

Given the cases of VAT evasion about six years ago, and with the current controversy, it does not look as though improving the functionality of the TSC is a priority for the government.

These cases show that there is definitely a need for improving the functionality of the TSC. Options to address problems within the commission have been discussed over the past 8 to 10 years.

The very institution under which the commission functions also has to be strengthened. For example, that a revenue board should be formed has been a recurrent and important issue for a number of years now, yet such a board has still not been established.

If such a board had been formed, it would have an appellate function, as is the case in India. This would serve as an alternative dispute settlement mechanism. 

Authorities could have called for the abolishment of or an amendment to the current TSC Act.

However, the consequences of inactivity have become evident this year. It has been shown that the TSC can also be misused; immediate amendment to the TSC Act is necessary.

The current reactions to this crisis are ad hoc as there have been no permanent solutions for reform.  

The TSC was created by the government as an immediate way to deal with the fact that tax payers were tying up tax cases in the court, and the state needed a negotiating body. It is not a long-term solution. 

The private sector often accuses the government, especially the revenue administration, of high handedness. On the other hand, there are also issues within the private sector such as companies not paying tax as per rules and regulations. How can this be circumvented?

New methods and processes have been devised for the collection of tax and revenue to reduce the chances of any double dealing.

There have been initiatives to reduce the meetings between tax payers and tax officers, to establish separate tax payer services, to centralise the auditing office, and to evaluate risks during the auditing process.

A formula has to be devised where in there is either a random selection of audits, or where, if the risk is found to be high for a particular case, a group of tax officers work on it together.

These reform initiatives have already been implemented, but not to the intended effect. The problem is that the Nepali habit of paying taxes has still not improved; there is still an extremely limited tendency to pay taxes.  

People try to find ways to evade paying taxes in any way possible, even to the extent of making fake bills. The tax officials and tax payers have often been found working in collusion. Of course, ideally, they are fully accountable and so they should be extremely careful.

However, this fear is completely absent in our system. The problem is that the tax authorities do not have the facilities or the ability to check the books to this level; they are neither competent enough nor have enough manpower to check audits. 

You’re part of the three-member expert team formed by the tax authorities to give advice on Ncell’s ownership transfer case. Tax authorities have asked the Sweden-based Telia to clear its tax liability on the Ncell buyout deal. Who will have to pay the Capital Gains Tax (CGT) between Ncell and TeliaSonera?

Ncell has paid 15 per cent of the tax on behalf of Telia. But Telia will have to clear its tax liability. Of course, Telia may state that it has no tax liability in Nepal, but it has not defended this position with competent tax authorities in Nepal.

The stance of the government right now is correct. Telia is liable to pay this tax as it had a vital economic interest in a business establishment within Nepal (Ncell). The government sees that Telia is more concerned with tax evasion at this point—they could be charged with a General Anti-Avoidance Rule (GAAR) .

This is within the rights of the government if Telia continue on this path. 

The Inland Revenue Department (IRD) served a 15-day notice to Telia asking it to settle the outstanding tax debt by assessing the amount itself. But this notice period is almost over.

If they do not respond, tax authorities will calculate the tax amount and direct the company to pay. Telia is fully liable to pay the tax debt as well as the fine and the interest on the original amount.

The government has its own system of tax collection, and it will collect the debt owed. 

Ncell did pay 15 per cent of the capital gains tax that the tax authorities demanded of Telia.

How they will settle this with Telia is a separate issue. However, Ncell is bound to pay a corporate tax of 25 per cent based on section 57 of the Income Tax Act. 

POST PHOTO: keshav Thapa