Even though Value Added Tax (VAT) was introduced in Nepal in 1997, it still hasn't caught on. So in an attempt to encourage more people to pay the tax, the government's revenue administrators have successfully tested a one year VAT lottery scheme.

According to the Inland Revenue Department, VAT contributed 31 percent of the country's total tax revenue in 2002-03 and made up a quarter of the total revenue. But officials say there is huge room for improvement with the carrot and stick approach.

The carrot being dangled in front of consumers right now is a VAT lottery system. Ten counters have been set up in strategic locations with heavy business transactions in Kathmandu and six others in Pokhara, Biratnagar and Birganj.

Each counter issues coupons for purchase bills equivalent to Rs 1,000 or more, on which VAT has been paid. The number of coupons issued from the 16 counters grew to nearly 70,000 in the past year.

Still, retailers have found ways to not to pay VAT. One camera shop in New Road keeps two types of bills. For transactions below Rs 10,000, the owner issues an original bill with an invoice number. But for transactions above Rs 10,000, he issues fake bills instead. He justifies this by saying that imported goods are undervalued at customs, and that issuing a real VAT bill for them would mean paying 10 percent of the sales price of the goods to the government. When his purchases are not entered in the purchase invoices at customs, he becomes ineligible for the tax refund, which is collected by deducting the 10 percent VAT he paid on cost price of the purchase from the 10 percent he collected from the sales price of the goods.

Paying VAT is compulsory for businesses with an annual turnover of more than Rs 2 million, which are required to get a VAT registration. In the fiscal year 2001-02 there were 26,000 companies registered and this went up to nearly 30,000 by 2003.

Dr Rup Khadka, national adviser at the Danish-aided Revenue Administration Support Project, says it will take time for people to get used to paying. "VAT is a modern concept based on the practice of maintaining the accounts in the purchase book and sales book. This accounting system helps to estimate the tax payers' tax liability," he says.

But bypassing VAT has become an art form, with vendors using many different ways to cheat. A registered retailer of a clothing store in Bhotahiti gladly explained to us how he under-invoices to evade VAT. He includes the 10 percent VAT in the selling price of the items, but then issues fake bills. If a customer demands an original bill complete with an invoice number, name, date and address, he willingly produces the second bill-but then adds another 10 percent VAT to the already marked up price. The customer and usually the government lose out, but the shopkeeper comes out a winner in either situation.

Although most consumers have heard of VAT they are not familiar with how it works. Many are hoodwinked by shopkeepers who tell them VAT is included in the price of the item they are buying. The revenue office
has used celebrities in television commercials to explain the concept, but Khadka says it is actually the lottery scheme that has put people in the habit of asking for the invoice bill.

VAT was introduced to generate more revenue without raising the rate of import duties, income tax and other duties. VAT is levied on the value added to the commodity, no matter how many stages it passes through in the process of production, distribution and retail. This expands the tax base, bringing a larger number of consumers under tax net. (Mudita Bajracharya)