Tax fraud: names, please

Both broke the law to line their pockets. One misused public office to get rich. The others, of the private sector realm, evaded taxes to get richer. The former has been publicly shamed and is in jail, and rightly so. However, the public have been denied their right to know the identities of the latter group of swindlers and it is uncertain whether these offenders will be punished as per the law. Different strokes for different folks? Little wonder. Former Minister Chiranjivi Wagle of Nepali Congress was a political has-been anyway, whereas the tax evaders include top business houses that contribute liberally to political party kitties and may even have representation in the Constituent Assembly.

Finance Ministry mandarins would want us to thank them for spotting the evasion and being supposedly firm on their stance that the evaders pay not just the evaded amount but also fine and interest. It stretches one's imagination to think that evasion occurred on such a scale (bogus VAT transactions of at least Rs 10 billion) without the connivance of high-ranking officials; the stubborn refusal to disclose names only feeds the skepticism. The protection of taxpayers' rights by the Income Tax Act is speciously invoked in defense of the non-disclosure of names. True, Section 74 of the Act, which stipulates taxpayers' rights, provides for "right to secrecy in respect of tax matters and keep it inviolable". Granted, details of taxpayers' assets and income gained through lawful means should not be divulged. However, pointing to this right as an excuse for not disclosing the names of those who have violated the law by cheating the treasury through the submission of fake VAT bills or export documents is unacceptable. Remember, the law protects taxpayers' rights, not tax evaders', as emphasized by the very first provision in Section 74: "Tax payer shall abide by the duties in accordance with this Act." 

Grave offence

The issue is not just about failure to pay taxes fully. An even graver offence has been committed: that of "making false or misleading statements". The Act considers this offence more serious than merely not paying taxes. When false or misleading statements have been furnished "knowingly or recklessly"—as is clearly the case here—the penalty is 100 percent of the underpayment of tax. Moreover, the offence can carry a prison term of six months to two years, higher than that for the offence of failure to pay taxes (Section 124). These punishments are independent of cooperation or non-cooperation by the offenders. The argument that non-disclosure of names is part of the strategy to secure cooperation rings hollow. That the offenders can be jailed makes mincemeat of the claim that the names cannot be disclosed in deference to their right to secrecy.

Then there is this claim that nowhere in the world are tax evaders' names disclosed. This scribe leaves it to dear readers to test the veracity of this claim on their own—a minute of google search suffices. More seriously, the claim begs the question why, even in spanking new Nepal, do policymakers have to agonize over how other countries treat tax evaders, when the national law is pretty clear about it.

If the names of top taxpayers can be made public every year, why can't tax evaders' names be disclosed? Media reports have it that 16 of the firms evading taxes belong to top business houses, with the highest amount evaded by a single business house standing at Rs 650 million. One should not be surprised to find some of the top taxpayers (or their ultimate owners) annually felicitated by the government also on the list of top cheats. The scale of evasion and the deplorable means employed serve to reinforce public cynicism towards corporate social responsibility and philanthropy. If you can swindle the exchequer of hundreds of millions, what's the big deal about shelling out a couple of hundred thousand rupees for, say, disaster relief?

Is Rs 4 billion (the amount of revenue loss at last count) or for that matter Rs 650 million a big amount? No, according to those handling the state's finances. When the scam first hit the vernacular press with very limited details, a top bureaucrat, in an attempt to downplay the significance of the fraud, was quoted as saying that no one can get rich "overnight" in Nepal through tax evasion. The reason offered by the learned official was that Nepal is a “low-tax economy”! What perverse logic or pathetic naivety! Nepal’s tax rates (personal income tax, corporate income tax and VAT) may be among the lowest in South Asia and tax as a percentage of business profits here may be the lowest in the region after the Maldives. But when the authorities are not vigilant enough or deliberately look the other way, people can make a killing through tax evasion, as is now amply clear. This is something a poor country with a tax-to-GDP ratio of less than 13 percent and where revenue surplus (excess of tax and non-tax revenue over recurrent expenditure and principal repayment) finances less than 15 percent of capital expenditure can ill afford. The tax-to-GDP ratio depends upon, inter alia, tax compliance. How can it be high when evasion is rampant?

In perspective

Let’s put the worth of Rs 4 billion in proper perspective. With that amount, 25 megawatts of electricity can be generated. Rs 4 billion is nearly 40 percent of the current fiscal year's budget allocated for the Ministry of Agriculture and Cooperatives, and about 45 percent of the budget allocated for the Ministry of Irrigation. Compare Rs 4 billion with the Rs 980 million allocated for research and development in agriculture, or the Rs 2.75 billion in fertilizer subsidy that was "substantially" increased in the current budget. Rs 4 billion is 6.5 percent of the country's total merchandise exports in 2009/10 and is not an insubstantial amount for addressing some of the supply-side constraints afflicting the export sector, as identified by the Nepal Trade Integration Strategy (NTIS) 2010—for example, setting up laboratories of international standard for testing the quality of export products with high potential, such as honey, medicinal herbs and essential oils, and wool products. Compare Rs 4 billion with Rs 30 million allocated for implementation of NTIS for 2010/11. Or if Rs 4 billion is to be spent on a rural employment guarantee scheme a la India’s, 100 days of employment per year can be provided to some 266,666 people at the minimum agricultural daily wage of Rs 150—that is, to about half the annual new entrants to the labor force. 

The offenders are marshalling their political resources to get a lenient punishment. If the government fails to name and shame the offenders and punish them with the full force of the law, it will have missed a great opportunity to show that new Nepal is positively different from old Nepal in that the law is equally applicable for big shots and small fries. Failure will particularly incriminate the CPN-UML—which heads the government and holds the finance portfolio—belying its professed pragatisheel orientation.

If they really care about Nepal’s development, donor agencies that incessantly press the government to expedite "economic reforms" and reduce the "cost of tax compliance" would do well to spiritedly press for action against the tax evaders, even if their dear private sector happens to be in the dock. The civil society can do its battered credibility some good by rising above partisan interests and pressuring the government for action on a really serious issue—for once.