In a latest fake VAT bill scandal, the revenue investigation department has uncovered a major case that showed that bills estimated to be worth Rs 15 billion were sold to different firms, causing huge losses to the national revenue.

“About 200 firms have been found to have sold fake VAT bills worth around Rs15 billion to different 1,100 firms,” said Dirgha Raj Mainali, director general at the department of Revenue Investigation, which has been investigating the latest fake VAT bill scandal nearly a decade after the first such case was exposed.

The modus operandi of those who sold such bills is that they produced such bills in large scale and sold to various firms by charging a certain percentage as commission, according to the value of the bills.

The purchasers of such bills, in turn submitted tax details claiming that they paid VAT for procuring goods. But, in fact, the purchasers of fake VAT bills didn’t purchase any goods. It means, the VAT supposed to go to the state coffer never reached the government’s account.

The racketeers who sold the fake VAT bills have been found to have registered the firms in the name of poor and ignorant people from the rural areas, so that they could legally come out from any legal obligation if indicted, according to the department officials.

Many poor farmers and illiterate people are defendants in the case filed by the department at district courts and high courts.

“Racketeers have used around 150 such people to register the firms and opened the accounts in their names in the banks but the racketeers have got the responsibility of signing the cheques,” said Mainali.

After amendment to Revenue Leakage Control Act last year, it can file cases at the high court, from initially the district courts.

Unlike in the past fake VAT bill scandals, many large business houses have so far not been exposed to be involved in the scandal so far except a few ones.

One of the big companies that has been accused of evading tax by using fake VAT bills is Varun Beverages, a multinational company, which is the bottler of Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon and Mountain Dew.

In December last year, the department had filed the case against the company at the Kathmandu District Court on charge of evading tax amounting to Rs 649.60 million.

Mainali had told the Post at the time that the company had issued cheques in the name of firms that had sold the fake VAT bills to the company. These firms returned the amount after deducting eight percent commission on those bills.

According to the department, it has so far filed over 100 cases against sellers and purchasers of fake VAT bills worth around Rs7.5 billion. The department has filed cases against both sellers and purchasers of the fake VAT bills.

On July 15, the department filed a case against 19 individuals involved in nine firms including Ma Baishno Trade Concern at the High Court, Lalitpur, for selling fake VAT bills amounting to Rs2.16 billion and contributing to tax evasion. On the same day, three people involved in another four firms faced charge of tax evasion for purchasing fake VAT bills worth Rs615.42 million.

In March last year, the department had filed a case at the Kathmandu District Court against 24 individuals on the charge of evading taxes amounting to Rs1.75 billion by producing and issuing fake VAT bills.

Even though the last fake VAT bill scandal was exposed in 2010, people have been found to have engaged in such practice as early as 2014.

“This shows that measures taken to control such practice were not sufficient,” said Bidyadhar Mallik, former minister and finance secretary. “This also shows that the thief is one step ahead of the government.”

According to him, even after the scandal was exposed a decade ago, the software system that could track such transactions could not be up to the mark.

In December 2017, the tax authority installed a cloud-based software system that tracks transactions in real time. But, this system has not connected all the points of sales.

“Sometimes, personal interest of the tax officials and the intervention of the politicians above them also help to promote such anomalies,” said Mallik.

The tax authority has been strengthening its system to track the practice of evading tax. But, officials at the tax authority admit that the existing software system is not enough to track all the malpractices.

“In fact, the latest fake VAT scandal was identified by studying the practices of some firms in our system,” said Mukti Pandey, deputy director general at the Inland Revenue Department. “But, this system cannot identify all the malpractices that happen in the market and we also track such activities manually.”

In fact, during its investigation, the Department of Revenue Investigation had found weaknesses in both the Inland Revenue Offices and banks for failing to notice ‘suspicious transactions’ in the names of the firms that were selling the fake VAT bills.

“These firms were found to have done transactions worth millions of rupees within a month of their establishment while there was none in another month. The Inland Revenue Offices failed to notice such unusual behaviour,” Mainali said.

He said the tax authority has not been able to take prompt action even after finding unusual behaviours of taxpayers which allowed such malpractices to flourish.

“In the case of the new fake VAT bill scandal, some chartered accountants and auditors who know the loopholes in the tax system, have aided the racketeers,” he said.

In June last year, the department had filed tax assistants—Lalitraj Kandangwa and Gauri Mainali and auditors—Jagannath Gurung, Sharan Bahadur Khadka and Tanka Nath Nepal for aiding and abetting the racketeers.

The business community says that there has been massive improvement in the software system adopted by the tax authority which can trace malpractices. “Those involved in malpractices can be traced either from sellers or purchasers. But, the problem here is that the malpractices are flourishing due to collusion between the officials and the people involved in such practices,” said Kush Kumar Joshi, former the president of Federation of Nepalese Chambers of Commerce and Industry.

Joshi, who is also president of National Business Initiatives, a non-profit organisation which works to promote responsible business practices, said that the government’s effort to introduce electronic billing systems starting from department stores and dealers of vehicles, would help control tax evasion.

The government, implemented since December 2017, connects the point of sale to the computer of the Inland Revenue Department over the internet.

Each time sale is made and sale receipt is issued, the transaction is recorded in real time by the taxman. The system is expected to to reduce the possibility of tax evasion and under invoicing. But experts say that it is not possible to enforce the system on all the traders.

“It is because small retailers don’t have knowledge and resources to use such a system,” said Mallik.

He said that as the malpractices happen from customs points to the retails, he stressed that a comprehensive software system accommodating all the government entities responsible for collecting revenue, should be introduced to properly track malpractices.