Firms make unregistered sales to artificially reduce tax burden, according to a report.
"The businesses are operated on both formal and informal markets fueling rampant practice of under-reporting of sales," the 'Tax Compliance Cost Survey' report by the International Finance Corporation (IFC) under the World Bank Group said.
"The results of the VAT fraud investigations have also revealed that businesses use fake bills and invoices to overstate their expenses," it said, adding that most of the firms — out of 990 surveyed — accepted that the firms not only make sales without sales slips, but also use fictitious firms, and fake invoices to artificially reduce tax burden.
"Most of the firms raise expenses by 40 per cent and lower the sales by 80 per cent to evade tax," said IFC representative Sebastian S James presenting the report here today.
The recent incidents of VAT frauds were also architected by use of numerous fake firms. "Use of ghost employees — to reduce taxes — is also one of the common practices among the small and unregulated businesses to avoid taxes," he said, adding that firms make payments of unofficial salaries to artificially reduce tax burden.
However, the firms are ready to pay more tax, if corruption is not prevalent and the paid tax is ultimately used for the benefit of the general public and business, said the report prepared to help the Inland Revenue Department to bring some policy reforms for better revenue mobilisation.
Tax compliance cost is higher for VAT and is a disincentive for Small and Medium Enterprises (SMEs), according to the report that has suggested to reduce compliance burden for VAT to encourage SMEs to graduate, SMEs tax reform, and strengthen Risk Based Audit to enhance objectivity and effectively as the small tax payers have higher compliance cost than the tax they are required to pay.
Director General of the Inland Revenue Department, addressing the participants concerns opined that the government will not let the businesses run illegally. "The department is working on to simplify the tax system for the small tax payers," he said, adding that some structural reforms are on the cards to create tax-payer friendly environment.
He also vowed to implement the recommendations prescribed by the Tax Cost Compliance Survey report that is a part of tax simplification project under Nepal Investment Climate Reform Programme supported by the IFC.