Tax Credit and Tax Refund Process
Adapted from content excerpted from the Inland Revenue Department, Nepal
Among those engaged in business transactions of taxable goods and services, apart from small businesses (those undertaking taxable transactions of less than NRs 2 million a year), all others have to be registered for the purpose of VAT. Such enterprises have to deduct the tax incurred while purchasing/importing goods in relation to their taxable transaction from the tax collected on sales and submit the remaining amount to the Government. This manual attempts to explain how a registrant for VAT can deduct the tax incurred while purchasing/importing goods or services for the purpose of his/her taxable business. Similarly, the process of tax refund has also been highlighted.
- What is meant by tax paid on purchase or ‘input tax’?
- What is meant by tax deduction on purchases?
- Can the tax paid on imports also be deducted?
- What are the conditions that have to be fulfilled in order to be able to deduct tax incurred in relation to goods and services purchased for one’s business?
- Can anybody deduct tax paid on purchases or imports?
- Can such businessmen deduct tax on their purchases even if they do not wish to be registered for VAT?
- Is it beneficial for small businesses to be registered for VAT?
- If a small businessman has registered for VAT, is it necessary for him/her to keep on being registered?
- If a registered businessman purchases goods or services from an unregistered businessman can he/she deduct VAT?
- Are there any rules under which one cannot get tax deduction?
- Can the entire input tax incurred be claimed all at once or does it have to be claimed in installments over several months?
- How does one calculate the tax incurred on purchases (input tax)?
- How does one calculate the tax amount that has to be submitted to the Government and the tax amount to be claimed by the businessman?
- When selling both taxable and tax-exempt goods and services, how does one deduct tax incurred on purchases?
- Can a person dealing only in tax-exempt goods and services get tax refund?
- Can tax incurred while purchasing cars be deducted?
- How does one get tax refund?
- Is there a special provision for businessmen who have a regular situation of tax refund?
- Are there other situations under which one can get tax refund?
What is meant by tax paid on purchase or ‘input tax’?
The tax paid by a registrant on purchases/imports of goods or services for the purpose of his/her taxable business is called an ‘input tax’. This comprises of tax paid on raw materials, machinery, equipment, services, etc. used for the purpose of taxable businesses.
What is meant by tax deduction on purchases?
Under VAT, a taxpayer can deduct the tax incurred while purchasing/importing goods for the purpose of taxable transactions from the tax collected on sales and this is called 'tax deduction'. The facility for a registered seller to be able to deduct the tax incurred while making purchases for his/her business from the tax collected on sales is the main feature of VAT.
Can the tax paid on imports also be deducted?
While importing any item or service that is not exempt from tax, VAT has to be paid. If such services or goods have been used for the purpose of taxable transactions then tax deductions can be made.
What are the conditions that have to be fulfilled in order to be able to deduct tax incurred in relation to goods and services purchased for one’s business?
- The goods or services have to have been bought or imported by the registered person.
- The person who buys or imports the goods or services has to have been registered during the tax-accounting period.
- Tax has to have been levied while purchasing or importing those goods or services.
- The good or
service has to have been exclusively used only for purpose of
taxable transactions.
(For example, a registrant can deduct or claim refund for the amount paid as tax while buying a cash register for his/her business but if he/she buys a television for the family he/she cannot deduct the tax paid nor claim refund.) - In order to claim refund of tax incurred on purchases, the concerned registered person has to submit relevant documents for proof.
- The claim has to be made within a year after the tax invoice of the purchase was received.
- Only 40 % tax can be deducted from tax paid while purchasing aeroplanes and automobiles.
- The tax paid in the purchase of alcohol, beer, and other beverages and goods or services for entertainment, can be deducted or claimed only by those who are engaged in the purchase and sales business of such goods or services.
Can anybody deduct tax paid on purchases or imports?
Only those engaged in taxable transactions and are registered for VAT can deduct tax incurred in purchases or imports.
No. Small businessmen who do not opt to register for VAT cannot deduct tax or claim refund on the tax incurred in purchases related to their business.
Is it beneficial for small businesses to be registered for VAT?
The law has not compelled small businessmen undertaking annual transactions of up to NRs 2 million to be registered for VAT. But if they do opt to register it is beneficial to them from three aspects.
First Benefit – The tax incurred while purchasing one’s business related goods or services can be deducted.
Second Benefit – A registered businessman has more clients because when he/she purchases goods or services from an unregistered businessman he/she cannot deduct or claim the input tax and therefore will buy only from registered businessmen. If small businessmen register for VAT they will not lose registered customers. Besides, the Government or any organisation, corporation, or offices having government ownership or any constitutional agency cannot buy goods or services exceeding NRs 25,000 at one transaction from an unregistered businessman. Therefore, small businesses that are registered will not be excluded from supplying goods or services to such organisations.
Third Benefit – Small businessmen do not have to submit a monthly tax statement to the Government. Since they are given the facility of submitting a four-monthly (trimester) tax they can use the tax collected from sales as their working capital for a period of four months.
No. If a registered small businessman feels that he has not benefited by being registered, he/she can give an application for cancellation to the concerned Inland Revenue Office. The Inland Revenue office will cancel the registration after receiving such an application.
No. If a registered businessman buys taxable goods or services for his business from an unregistered businessman, he/she cannot deduct the tax incurred while buying them. To deduct tax it is absolutely necessary to have a tax invoice of the purchase.
Are there any rules under which one cannot get tax deduction?
Yes. Under the following circumstances the input tax cannot be deducted.
- If the registered person uses the goods and services purchased in goods and services that are exempt from tax.
- If the registered person uses the goods and services purchased for his/her personal purpose.
- If the goods and services purchased are used in taxable and tax exempt transactions or in personal work, or in both, then the input tax can be deducted only in the ratio of goods and services used in taxable transactions.
Can the entire input tax incurred be claimed all at once or does it have to be claimed in installments over several months?
The entire input tax incurred in the purchase of goods and services for taxable transactions can be claimed at once. But tax that has been submitted only in the form of deposit cannot be deducted.
How does one calculate the tax incurred on purchases (input tax)?
The tax incurred on purchases during the tax period should be calculated by using the following steps:
First Step:Assess all the items and services that have been bought or imported.
Second Step:Assess the goods and services on which tax deduction can be claimed.
Third Step:If there are purchases on which only partial tax deduction can be claimed, then estimate the tax amount that can be claimed.
Fourth Step:Sum up the entire tax amount to be claimed.
A simple method to calculate tax is as follows:
Tax
collected subtract Tax paid = Tax to be paid
or claimed
(on sales) (on purchases)
The amount that is remaining after deducting the tax incurred on
purchases from the tax collected on sales within a tax period is
the amount that has been submitted at the Inland Revenue Office.
If the amount incurred on purchases is higher than the tax
accumulated from sales, then the balance amount can be adjusted
against the tax due in the following month. If the amount cannot
be adjusted over six consecutive months then a claim can be made
for the balance amount to be refunded.
Two separate examples in relation to tax to be paid to the Government and tax to be claimed from the Government are given below.
Example 1
In a tax accounting period, let us assume that a registered industry has bought raw materials worth NRs 1,00,000 excluding tax and has sold products worth NRs. 2,50,000 (excluding tax). If the tax rate is 13 % then that industry has to pay tax worth NRs 19,500 to the Government as shown below.
|
Tax
collected Tax
paid |
|
NRs 2,50,000 @ 13 % = 32,500 NRs 1,00,000 @ 13 % = 13,000 |
|
Tax to be submitted = 32,500 – 13,000 = 19,500 |
Example 2
A businessman has a shoe store. During the tax period he purchased shoes worth NRs 3,00,000 (excluding tax) and showcases worth another NRs. 3,00,000 (excluding tax) to open a new showroom. During that same period his sales were worth NRs 5,00,000 (excluding tax). At the tax rate of 13 %, as shown below, he can deduct NRs 10,000 from the tax he has to submit in the following month.
|
Tax
collected
Tax paid |
|
NRs 5,00,000 @ 13 % = 65,000 NRs 6,00,000 @ 13 % = 78,000 |
|
Tax to be submitted = 65,000 – 78,000 = -13,000 |
Since the tax paid on purchases is more than the tax accumulated through sales, the tax-payer does not have to pay any tax to the Government in that month. Instead, the person has to get NRs 13,000 from the Government and he can deduct this from the tax he has to pay in the following month.
A tax-payer can supply both taxable and tax-exempt goods and services. In such cases, the raw materials used in the production of both could have used from the same stock and the same telephone and electricity lines could have been for used for both purposes. Similarly, the same machine could have been used for the production of both. From among the total tax incurred in purchases, a person who is registered for both taxable and tax-exempt goods and services can deduct or get refund only the portion of input tax related to the sales of taxable goods.
For example, a businessman produces products made of steel and iron. He produces taxable items such as metal furniture and domestic utensils and tax-exempt items such as agricultural equipment. This producer can deduct or claim tax incurred in purchases of goods or services based on the ratio of taxable sales. The case can be further exemplified by the figures given below.
|
Purchase value
(excluding tax) |
|
Tax amount (@ 13%) NRs.7,800 |
| Sales Agricultural equipment (non taxable) NRs. 1,00,000 Metal furniture (taxable) NRs. 2,00,000 Domestic steel utensils (taxable) NRs. 1,00,000 Total sales NRs. 4,00,000 |
Out of the total sales (NRs 4,00,000), the ratio of taxable sales (NRs 3,00,000) is 3,00,000/4,00,000 = ¾.
Therefore, the person can deduct only ¾ of the total tax (NRs 7,800) incurred on purchases or 7,800 x ¾ = NRs 5,850.
Can a person dealing only in tax-exempt goods and services get tax refund?
No. A person dealing only in tax-exempt goods and services does not have to register for VAT. An unregistered person can neither collect tax while selling nor can he/she deduct tax incurred on purchases made.
Can tax incurred while purchasing cars be deducted?
There are some commodities and services in the case of which it is difficult to distinguish whether it was used for taxable transactions or for personal use. The total tax incurred in purchasing such commodities or services cannot be claimed but a portion of it can be claimed. Items that fall under this category are also mentioned in point no. 4 of this booklet. Only 40 % of the tax incurred while purchasing cars can be deducted.
If in some month, the tax incurred on purchases is more than the tax collected from sales, a registered businessman can adjust the excess amount in the tax to be paid in the following month. If for six consecutive months the same pattern follows and the amount cannot be adjusted then a refund of the excess amount can be claimed by filling in schedule 10.
Is there a special provision for businessmen who have a regular situation of tax refund?
A registered businessman who exports 50% or more of his sales in a tax period can get immediate refund of the tax incurred in purchases. In order to get this refund, the person has to give an application in the prescribed format at the end of the month.
In addition, to certify that the goods were exported to foreign countries authorised proof will be required. Authorised proof would imply documents such as the export declaration form, certificate of payment and letter of credit/bill of entry.
Are there other situations under which one can get tax refund?
There is provision for tax refund in the purchase of goods and services by foreign diplomats, international organisations and those purchased through bilateral and multilateral agreements and also in cases in which tax has been wrongly paid. For this one has to submit the prescribed documents. To obtain tax refund, foreign diplomats and specified organisations can directly submit a claim each month at the Inland Revenue Department.
In order to get tax refund, bilateral and multilateral projects and the person who has wrongly paid tax have to submit their claims within three years.
How long does one have to wait to get tax refund?
Tax refund has to be made within 60 days from the day the application has been received by the Inland Revenue Office. If the tax is not refunded within 60 days, there is provision for the tax to be refunded along with interest at the rate of 15% on the amount that is due.
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