Tax compliance cost higher for small businesses

The cost of tax compliance is more than tax itself for small businesses, according to a report. “The companies with less than Rs 2 million turnover pay Rs 3,500 in municipalities, otherwise Rs 1,250 annually in lieu of their entire tax liability which indicates that administrative cost of small taxpayers is lot more than the revenue generated from them,” the latest report 'Tax Compliance Cost Survey' by the International Finance Corporation (IFC) under the World Bank Group revealed.
Tax compliance cost is considered to be one of the key bottlenecks for the Small and Medium Enterprises (SMEs) to become formalised. The SMEs perceive VAT and withholding as being complex and requires outside support. The compliance cost for small businesses is highest for the VAT, it said, adding that some 35.4 per cent of taxpayers with Rs 2 million to 10 million turnover do not pay VAT due to either businesses are non-compliant or they are engaged in VAT exempt businesses. “However it is highly unlikely that such a high percentage of respondents were from exempt category,” the report added.
Moreover, there is widespread use of outsourcing — partial, which is 51.3 per cent as well as complete, which is 19.7 per cent — for VAT related accounting that has also increased the cost. There is also a significant increase in compliance cost like tax accounting from below the VAT threshold to the initial VAT applicable slab. Some 90.4 per cent and 62.75 per cent of taxpayers with less than Rs 2 million turnover and Rs 2 to 10 million turnover respectively said that they do not pay withholding tax meaning that small businesses are either not aware of the requirements of withholding taxes or they are not complying with withholding requirement. However, tax compliance costs of an average of Rs 46,298 or $ 574 — for those paying Corporate Income Tax, VAT, and withholding — does not seem too bad in comparison with OECD countries due to Nepal’s lower per capita gross domestic product (GDP) that is roughly 100 times lower than many OECD countries and the average salary of bookkeepers and accountants,” it said. Similarly, the report also revealed that some 83.5 per cent and 54.5 per cent of taxpayers with less than Rs 2 million turnover and between Rs 2 million and Rs 10 million turnover respectively do not use computers and laptops for their businesses. “It is therefore time consuming for their tax accounting and compliance including e-filing, it said, adding that for a medium sized business in the country, it takes 508 hours per year for tax compliance. “The IRD has made e-filing mandatory that has to be outsourced, which is also expensive for small businesses.”
The study was conducted for a representative sample of 990 businesses in the country across a representative sample of taxpayer size by turnover and geographical spread. A business with turnover between about $125,000 and $3 million has been identified as medium sized business in Nepal. Though, inspection is thought good, it is alarming that 17.4 per cent respondents feel that inspection offices are looking for informal payments.
Once the recommendations in the report are endorsed and implemented by the government with support from all stakeholders, it is expected to improve the business tax regime, enhance transparency and predictability, reduce burdensome tax compliance costs for private firms encouraging them greater compliance and broaden the tax base.
The report that is the first one in the series of outputs produced on the basis of partnership between the government and the International Finance Corporation (IFC) of the World Bank Group aims at improving the investment climate in Nepal.