General Introduction to VAT

Adapted from content excerpted from the Inland Revenue Department, Nepal

• Introduction
• Tax Deduction
• Tax Refund
• Zero Rate
• The Difference between Zero Rate Tax and Tax Exemption
• Threshold

Introduction

Value Added Tax (VAT) is tax based on goods and services. This tax is levied on the sale, exchange, transfer, import etc. of all goods and services apart from those specified by the law as tax-exempt. This means that this tax encompasses all types of goods and services produced in or imported into the country apart from those listed as tax-exempt by the law.

VAT is considered as an improvised form of sales tax. This tax is imposed on different levels of value addition in the production and distribution process of goods and services. In short, the difference between the purchase price and the sales price of any firm is the value added. For example, any furniture manufacturer in the process of making furniture has to purchase woods, nails, paints etc. from the market. Furnitures are prepared from such purchased goods by using the assistance of carpenters, labourers, and machines. It is but natural for the sales price of the furniture thus produced to be higher than the total purchase price from different firms of the goods required to make the furniture. The difference in price between the manufacturer’s ‘input’ in buying the items required to make the furniture from other firms and the sales price of the finished furniture is value addition and VAT is levied on this.

In practice, the tax-payer does not have to calculate his value addition for the purpose of VAT. But he/she has to collect VAT on the sales price at the rate specified by the VAT Act and after deducting the tax incurred on purchases made from the amount thus collected he/she has to pay the balance amount as VAT.

Under VAT each registered manufacturer and distributor must collect tax on the sales of their goods and services. For example, one wood seller sold one cubic feet of wood to a furniture industry at NRs. 1,000/-. The industry made furniture from the purchased wood and sold the furniture to a furniture dealer at NRs 1,300/- who sold the furniture to a consumer at NRs 1,500/-. In this case the VAT levied will be as given below.

This way the wood seller must collect Rs 130/- as VAT on his sales and must pay this to the Government. The furniture manufacturer must collect Rs 169/- as VAT and after deducting Rs 130/- paid as tax on purchase must deposit the balance Rs 39/- to the Government. Similarly, the furniture dealer must collect Rs 195/- as tax on sales and deduct Rs 169/- paid on purchase and deposit the balance Rs 26/- to the Government.

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Tax Deduction

Under VAT, the taxpayer can deduct the tax paid on purchases/import from the tax collected from sales and this is known as tax deduction. This system where the registered seller can deduct the tax paid on purchases/imports in relation to his/her transaction from the tax collected through sales is the main feature of VAT. The tax that can be deducted thus is the tax incurred on the purchase/import of raw materials, machineries, equipments, services etc used for the purpose of one’s taxable business.

If the tax collected from sales exceeds the tax incurred on purchase/import, then only the balance amount has to be paid to the Government. But if the tax paid on purchase exceeds the amount collected on sales then one can credit the amount and deduct this from the amount to be paid in the following month. For example:

(a) If the tax paid on purchase less than the tax collected on sales.

(b) If the tax paid on purchases is more than the tax collected from sales

* In case the goods are not sold or the price goes down because of the market
# Rs. 1300/- can be deducted in the following month. If the account cannot be settled even after six consecutive months of deductions, the total difference amount has to be refunded by the Government.

If the tax paid on purchase exceeds the tax collected from sales then the excess amount can be adjusted with the amount payable in the following month. But if the amount cannot be adjusted for six consecutive months then, according to section 24 (3) of the VAT Act 2052, there is provision for that amount to be refunded to the tax-payer in a single transaction by the Government.

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Tax Refund

If the tax paid on purchases exceeds the tax collected from sales then the situation of tax refund arises. Generally, such a situation arises in the cases of export of goods and services on which a zero-rated tax or no tax is levied. To encourage exports, the tax incurred on the input of export goods is totally refunded through the medium of zero-rated tax. In the same way if the tax amount paid on purchases exceeds the amount collected as tax from sales and cannot be adjusted up to six months then there is a provision in the VAT Act 2052 to refund the balance amount to the tax payer at one go. But if the amount is not refunded within sixty days after the application has been received then there is provision under the VAT Act 2052, section 21(5) for the amount to be refunded with interest.

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Zero Rate

Under VAT, if any goods or services are intended to be totally tax free then a zero-rated tax is fixed for such goods and services. These goods and services that are levied a zero-rated tax are treated the same as the goods or services that are levied taxes. In other words, a tax rate of zero percent is levied on the sale of such goods and services.

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The Difference Between Zero Rated Tax and Tax Exemption

It is not necessary to collect taxes on the sales of tax-exempt goods and services. The tax paid on the inputs of such goods and services also cannot be deducted. But, on the other hand, the goods and services that are levied a zero-rated tax are treated like the goods and services that are levied taxes and on the sales of such goods and services a tax at the rate of zero percent is levied. In fact, although no tax is collected on their sales, the tax paid on the purchase of such goods and services are refunded by the Government to the taxpayer.

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Threshold

For businessmen, who undertake businesses up to the annual amount specified to keep small industrialists and businessmen outside the purview of VAT, it is not compulsory for them to register for the purpose of VAT. This specified amount is known as the threshold. The threshold amount is established by taking into consideration the condition to maintain accounts in areas of industry and commerce of the country, the capability of tax administration, the need for revenue generation, etc. In Nepal, currently, registration threshold is fixed at NRs 20 lakhs (2 million) and the limit for similar imposition on imports for business purpose is fixed at Rs 10,000/- at one transaction.

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Attachments:
	VATinaNutShell.pdf