Fake VAT bill scam, which is under probe, estimated to be worth over Rs7 billionThe modus operandi of a recently busted racket was: making fake VAT bills and selling them to the interested firms, without selling any goods. For this, the firms issuing such bills would get commission up to five percent of the bill amount, according to officials at the department.
The practice of issuing fake Value Added Tax bills has continued unabated, largely due to the failure of authorities to take timely measures, and non-implementation of laws, experts and officials say.
According to the Department of Revenue Investigation, which is investigating a new fake VAT bill issue, transactions of such fake bills could be worth over Rs7 billion, making it a scam as big as an earlier infamous scandal about a decade ago when tax authorities had decided to collect Rs6.59 billion from 518 firms.
“As we have yet to conclude the investigation, we cannot make comparisons now,” said Dirgha Raj Mainali, director general of the department. “But it does look like this new fake VAT bill case is as big as one a decade ago.”
On March 3, the department filed a case at the Kathmandu District Court against 24 individuals associated with 24 firms on the charge of evading taxes amounting to Rs1.75 billion by producing and issuing fake VAT bills. These firms had issued fake VAT bills worth Rs2.5 billion, according to the department.
“During the course of investigation, the numbers of firms issuing such bills and firms purchasing them have gone up,” said Mainali.
According to the department, as many as 60 firms are found to have issued fake VAT bills, which were bought by around 500 firms.
The department said the estimated issuance of fake VAT bills worth Rs7 billion does not cover additional transactions done by people who purchased them.
VAT is a consumer tax placed on goods and services wherever value is added at each stage of the supply chain. After the VAT Act was introduced in 1996 with the aim of bringing transactions of goods and services under the single taxation system, it was implemented in November 1997.
“Investigation into those who bought such bills has also begun. We have found that several firms have done transactions worth over Rs10 million by using such bills,” said Mainali.
Despite a major scandal about a decade ago, the tendency of evading tax using fake VAT bills still continues.
Mukesh Kumar Jha, who is one of the defendants in the current case filed by the department last month, was involved in the past scandal also, which suggests negligence on the part of tax authorities.
Former finance secretary Rameshore Khanal said those involved in issuing fake VAT bills are now working in a more organised way and that it also can make it difficult for the authorities to nab them.
“This is dangerous,” he told the Post. “They are now involved in issuing fake VAT bills by registering firms. But they neither sell goods nor purchase them. They just issue fake VAT bills,” Khanal told the Post.
The modus operandi of a recently busted racket was: making fake VAT bills and selling them to the interested firms, without selling any goods. For this, the firms issuing such bills would get commission up to five percent of the bill amount, according to officials at the department. As they need not open offices for this purpose, they do not have to make capital investment, according to an official.
“There are no expenses as such, and it’s easy money. So there are more people involved in issuing fake VAT bills,” the official, who did not want to be named, told the Post. “Those who purchase such bills can use them for showing the high amount of expenditure by hiding real expenditure and deduct the expenditure to show their income is low, and accordingly they will pay less tax, affecting revenue.”
The latest scandal comes at a time when the government is struggling to meet the revenue target. As of mid-April, Inland Revenue Department and the Department of Customs, the two offices responsible for most of the revenue collections for the federal government, missed the revenue collection target by Rs67 billion.
In the past, business firms themselves were involved in making fake VAT bills in most of the cases, according to Khanal. “Now they are purchasing such bills from the racket,” he added. What is more concerning is, said Khanal, some former bureaucrats are the ones who teach businessmen ways to evade tax.
Experts say concerned authorities largely failed to initiate measures after the last fake VAT bill scandal and that promoting electronic transactions could be one of the major ways to control the malpractice.
“For example, one person registers different firms in different cities. The transactions are done between different firms belonging to the same person,” said Khanal. “Thus tax is evaded. Tax authorities cannot monitor such transactions between such firms electronically due to lack of implementation of the electronic billing system.”
Although VAT Act and Income Tax Act were amended enabling the tax authorities to enforce electronic transactions, the law has hardly been implemented.
Section 14 (A) of the VAT Act says the tax authorities can issue an order in the name of taxpayers to issue electronic bills and adjust it with the central bill monitoring system at the Inland Revenue Department.
Likewise, Section 81 (4) of the Income Tax Act states that the taxpayer can issue electronic bills and submit various documents related to tax compliance electronically.
The Inland Revenue Department, however, said it has started enforcing the provision. Recently, the tax authority issued a notice stating that taxpayers with annual transactions of over Rs350 million must issue electronic bills.
“As many as 50 big firms have made their billing system compatible with our central bill monitoring system,” said Yagya Prasad Dhungel, a spokesperson for the Inland Revenue Department.
But the bill monitoring system was established last year only—the last major fake VAT scandal took place a decade ago.
The government had in the past planned to enforce the use of fiscal printers, a specific type of cash register to be used by taxpayers, where a chip would be installed to ensure that details of transactions are transferred to the tax authorities in real time.
Khanal said when he tried to enforce the system as the finance secretary, he faced protest from businessmen. “And, interestingly, there was non-cooperation from government officials,” said Khana,l who had resigned as the finance secretary in 2011 over differences, mainly on action against VAT evaders, with then finance minister Bharat Mohan Adhikari.
The government had purchased around 30 fiscal printers and some were installed in some Kathmandu Mall-based shops in Sundhara and some duty-free shops at the Tribhuvan International Airport. But the tax authorities had failed to enforce their use. Officials said the fiscal printers were installed in some shops but they remained largely unimplemented.
Dhungel admitted to his failure to enforce the use of fiscal printers saying that even the traders of Kathmandu Mall and the airport were not using fiscal printers, let alone other traders.
“Now we have installed more advanced software at the Inland Revenue Department to monitor electronic bills,” Dhungel told the Post. “We are enforcing the electronic billing system among taxpayers doing transactions over Rs350 million annually, whose number is around 1,600.”