Value Added Tax in Nepal: Challenges and Opportunities

Abstract

A VAT is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.Tax Credit Method is used for calculation of VAT. Under this method, tax is imposed at each stage of sales on the entire sale value and the tax paid at the earlier stage is allowed as set-off. The most important aspect of this method is that at each stage, tax is to be charged separately in the invoice. In this method, to determine VAT liability, tax paid on purchase is deducted from tax payable on sales. The difference is tax payable to Government or excess refundable to the dealer for the period. This study only covers Value Added Tax .Therefore this study is not a complete study of the whole tax system in Nepal.The general objective of the study is to analyze challenges and opportunities of VAT in Nepal. But the specific objectives of this study are to analyze the challenges being faced by the government and taxpayers in VAT collection,to study the efforts made by the government to collect VAT, to identify the opportunities of VAT collection in Nepal.Un-reported Sales, Under Invoicing , Failure to Register, Mis-classification of Commodities, Omission of Self Deliveries ,Tax Collected but not remitted, Imported Goods not brought into Tax, Credit Facility Claimed for Vat on Purchases that are not allowable are some of the problems of VAT System in Nepal. The main variables that are used in the study are Value Added Tax and Gross Domestic Product. The variable GDP and VAT are associated with each other .The study was focused on the investigation of effect of VAT revenue to total revenue and GDP. Taxation provides the governments with the funds needed to invest in development, relieve poverty and deliver public services. It offers an antidote to aid dependence in developing countries and provides fiscal reliance and sustainability that is needed to promote economic growth. Taxation has played an important role in the economic development of each country.