In the digital-economy, some of the services from foreign countries are live in Nepal but beyond the tax net. Their owner, server, management and most part of network is beyond the border, but their activities, at least for VAT purpose, are in Nepal. Currently, they are beyond the Nepal tax scope. To tax them, tax law needs to revise with major amendments in the area of sources of income, procedure for registration and payment of tax, assessment, appeal and refunds. Making easy amendment, a lump sum tax on percentage of turnover having final withholding tax on nature with reverse charging system of VAT to the domestic payer may be alternative.

Coronavirus (COVID-19) severely impacts traditional economic patterns, both in macro-economics and micro-economics. This will affect the traditional tax-base to the nation and liquidate the tax paying capacity of the existing taxpayers. Therefore, if we cannot control the effect of pandemic, we need to restructure the economic module as well as invention of new tax-base.

What will be the effects?

Because of the unpredictable situation of pandemic, we cannot guess the exact effects, however, may estimate to the extent of effect on the basis of situation known to us till date. COVID-19 is not a domestic issue but has affected developed countries severally. In all cases of disruption, there may be unfavorable as well as favorable effects. Yet, it effects Nepal a bit only. We need to manage this to result favorable effects on the national economy.

Following are the unfavorable effects perceived.

• Micro-economic effect

  • Direct loss to individuals –employment (domestic and foreign), business (small and medium),

  •  Loss of trust on the system – loss of investment returns (capital market), reduction of agricultural products.

  • Pressure on establishments – reduction on consumption capacity due to migration back, cities to village or from foreign, on education, health, food etc.

  • Reduction on ability to payment of mandatory payment like loan, interest, taxes.

• Macro-economic effect

  • Loss of supply-chain
  • Loss on trust to the national system of economy, public service, banking
  • Unwanted migration
  • Social disturbances
  • Reduction on collecting taxes, so on the expenditure

It has not only the unfavorable effects, but may lead for much favorable effects, if we manage appropriately.

  • Man-power
    • Availability of skilled or semi-skilled workforce in the rural area due to migration back to villages and in the country due to migration back from foreign.
    • Technology-transfer and availability technology-handlers
  • Modernization of economy
    •  Opportunity to restricting the national economy

    • Opportunity to restricting investment environment and taxation system

    • Opportunity to attract foreign investments (and technology)

  • Development of public infrastructure
    • To create domestic employment

    • To engage technological knowledge from migrant-back

The taxation effects, how to handle them?

Existing taxpayers have four type of effect on taxpayment due to lockdown, not from COVID-19 itself.

• Right now, cash-flow deficiency

Addressing cash-flow deficiency for the payment of tax is deferring time-period for payment of tax. Government of Nepal has addressed this issue for taxpayers, except for tax-arrears, till Jestha 25 2077 (07 June 2020) for the payment accrued till Chaitra or earlier.

• Just after lifting lockdown, probable collection deficiencies from the sales before or during lockdown

Addressing cash-flow deficiency after lifting of lockdown, on the payment of tax is deferring reasonable time-period for payment of tax. Deferring the payment of tax may vary depending upon the nature of business, nature of businessman and size of payment of tax.

• Near future, fails to restate the business due to cut-off of supply-chain

Government need to manage to restate the business, industry and employment after the lockdown in effect. For this strict monitoring to the supply-chain and removal of unnecessary mediator within the supply-chain may create the confidence to the producers and suppliers. The restatement of traditional supply-chain may support to survive the existing taxpayer.

This is the point of intervention to create new model of supply-chain, most likely the online-supply within cities and online distribution-chain as whole-sellers. The taxation method on such digital economy is described below.

• In the future, closure of business and litigation with labors, vendors, customers, taxation authorities.

This is the crucial situation of national economy. Labor law or civil code or banking law assume the continuous going-concern concept of business. In practical sense, the shareholder of company has unlimited liability. Government as well as private sector need to make common strategy to avoid this situation. To manage this, common strategy would be sharing the effects and risks to each of the stakeholders of the economy and using legal right of recovery (of tax, loan, labor, vendor) to the extent of survival of the payer.

Restructuring Economy and Taxation

COVID-19 affects traditional concept of economy. We need to plan restructuring it. The way forward may be best use of migrant-back labor force and technology. Restructuring economy from traditional to new one, both well management of situation as well as addressing the taxation issues need to address properly.

Concession to agriculture and manufacturing-industry

According to existing tax law, industry having capital more than Rs. 1 billion has full tax waiver for first five years. However, an agriculture business or small industry need to pay tax at 20% with few probable reductions. For the smallest agro-firm or cottage industry firm, presumptive tax is applicable.

Due to COVID-19, sizable population has migrated from cities to rural. In addition, most part of rural areas are now in low grade road-network for transportation. School, banking service, telecom-network and electricity is available most part of urbanized rural areas. This means, there is manageable risk of business environment in the most of the rural areas.

To attract the domestic migrant in the rural areas, government may facilitate them for agro-forestry or small industries. Start-up facility, creation of trustworthy supply-chain to cities (from for example, cooperatives of same producers), first-layer processing facility to reduce middle-man (bichaulia) and tax waiver will a set of attraction to them. For this, tax waiver for first five years, as similar to large investors, and VAT zero-rate for start-up facility may be allowed for new industries and firms.

In case, migrant from foreign country initiates the manufacturing industry or agro-forestry industry, we may facilitate them as:

  • Tax waiver as similar to industry having huge capital investment
  • VAT zero-rate for capital-inputs and technology transfer, if any
  • Tax waiver on staff equity on using migrant labor.

Concession to service – industry

COVID-19 affects much in hotel and tourism sector. Restatement of this sector is one of the crucial activities after COVID-19. Payment deferrals and tax waiver for the existing taxpayer may be one of the minor supports to them.

Apart from hotel and tourism, we need to attract much of active manpower to engage them on macro-economy in the service sector, mainly on digital economy. For any new type of service industry, which uses the technology transfer, following tax concession may be attractive to them:

• Reduced tax for initial years of start-up

• VAT zero-rate for capital inputs and technology transfer, if any

• Weighted deduction of staff cost on use of migrant labors or employment generation more than specified number of nationals.

Concession for new employment

Many people may lose their job due to COVID-19. In case, the job-loss forces the employee to search new job, we may create new job opportunity attracting the employer. Weighted deduction for the staff cost, if newly-employed from job-looser due to COVID-19 may one of the better attractions. To mitigate the misuse of unorganized sector, it may be limited for new job at new geographical area than earlier place of work.

Concession for employee to self-employee

In case, any individual loose his/her job due to COVID-19 and initiated own business as self-employment, we may waive the tax or allow concession on tax for few years.

Concession of local establishment

Apart from above job-creating events, we should address the situation for the migrant-back also. In case, any migrant-back establishes the local establishment like trading, training, etc. minimum tax waiver may attract them for restatement of their economic life.

Taxation on digital – economy

Digital economy plays a sizable role in the total economy. Due to lapses on the law for the potential digital – economy, involving people could not expose their sources of income nor taxation method is clear. There is huge tax-base on digital-economy beyond the border as well as huge potential market within the border.

Type of digital-economy

Broadly, digital-economy has four types:

  • Underlying supply: goods
    • Local establishment with local targets
    • Foreign establishment with local targets
  • Underlying supply: services
    • Local establishment with local targets
    • Foreign establishment with local targets
    • Foreign establishment linking with local targets
    • Foreign establishment with foreign targets
  • Broadly, digital-economy has four types of tax-contributors
    • The server (normally in multiple locations/countries)
    • The software (normally in multiple interfaces)
    • The network (physical and virtual)
    • The targets i.e. customers and users
Taxing digital transaction having supply of goods

Taxing digital transaction having supply of goods is easy with few legal addresses compatible with the available digital market. We have legal provision of supply (businessman, firm, license, contract, payment, quality control etc.) on the basis of conventional method of supply. As per the electronic transaction law, platform owner is not liable for the business activities of users of the platform. Therefore, they may be regulated for their platform not for the business of users. Amendment on few of them will facilitate both the legality of the e-commerce as well as creates the tax-base on the basis of horizontal tax-base with conventional method of supply. For this:

• For the Local establishment with local targets

In this case, network operator will be domestic taxpayer. Due to ‘ineffective use’ of Electronic Transaction Law, their software and hardware are not monitored or registered. Therefore, the supplier of goods using their network always fearful from potential legal intervention (which is unclear to all of the stakeholders including supplier, buyer and taxation authority too). To regularize this method of e-commerce, following process may be used:

1.Regulating the platform (software, hardware, network, security and privacy) as per electronic transaction law,

2. Registering suppliers using the e-commerce platform:

– simplified easy process of online registration / deregistration for self-employment individuals
– simplified easy process of online registration for registered firms and companies

3. Regulating billings

– compulsory online billing to the buyers
– formalization of deduction of expense and credit for buyers,
– if requires billing interface to the registered firms and companies, if requires, with CBMS too.
– Approval of platform as billing software.

4. Minimum compulsory tax to the individual supplier using e-commerce platform

– Presumptive taxpayer (may be slab for urban-municipals for all at the first phase) and payment at the beginning of the income year from platform-owner.
– No VAT registration till threshold for presumptive taxpayer, i.e. Rs. 2 million now, compulsory registration of sole-proprietorship after that threshold and behave as registered firm. Alternatively, tax on turnover may be levied till the threshold for compulsory registration of VAT i.e. Rs. 5 million now.
– No withholding tax on supply.

5. In all cases of e-commerce, cash payment should be avoided at all

• For the Foreign establishment with local targets

Foreign establishment selling goods to local market is importation of goods. The importer of goods is solely responsible for all types of taxes and duties.

Taxing digital transaction having supply of services

Taxing digital transaction having supply of service is critical and existing legal provisions are insufficient for taxation. Therefore, before amending the major part of tax law, taxing the services through digital system keep tax-base, comparing with horizontal equity with conventional service providers, beyond the scope of taxation system.

However, few of the digital market of service may be taxed using existing law or with amendments, which is similar to taxing supply of goods on e-commerce. For this:

• For the Local establishment with local targets

In this case, network operator will be domestic taxpayer. All the recommendation for goods (regulating platform, registering/deregistering service providers and billing) will be applicable for services too. In the alternative for taxation for the individual service providers, legal provision should address:

o Option 1: Service-provider’s tax from services as similar to tax on employment and no-VAT on service in all cases of individual service providers.

o Option 2: Compulsory VAT with temporary online registration without threshold (if VAT applicable supply) and withholding tax on service with final in nature.

• For the Foreign establishment with local targets

For the regulating or taxing on the service from the foreign establishment for the local target, especially social media, we need to amend the banking laws, taxation laws, commercial laws and contract laws with major deviation than current practice or jurisprudence.

Digital – economy Vs. digital – payments

There are three different aspect of e-commerce where the foreign establishment involved in Nepal activities:

o Out-bound services beyond Nepal tax-net

In this scenario, Nepali individual derived foreign income from Nepal-activities using digital-payment. According to existing tax law, income derived from activities in Nepal is taxable in Nepal. Many of them ask for payment of tax too, however fails to pay tax because of:

– Taxation authority seeks traditional firm registration for PAN registration. Once PAN registered, authority says for periodic filing of tax return. This will make hassle to them for payment.

– Major point of non-compliance is use of payment-gateway. None of payment gateway accepts Nepali banks as bank for their purpose, nor central bank allows them for opening foreign bank. That means, in fact, their payment gateway is legally questionable in Nepal. Therefore, they cannot expose their payment gateway address to any formal institution. Due to this constrain, many of the potential job-seeker either fails to join to the foreign platform or go to the middleman (hundiwala).

– In the result, those who wish to pay tax cannot pay.

– Regulating such out-bound services is possible only when amendment of banking law, easy permission process for membership on payment gateway, online registration of self-employment and hassle-free tax payment procedures. We are losing the potential digital economy as well as huge amount of tax due to these complex or impracticable digital payment procedure. From the existing legal provision and traditional practices of central bank or taxation authority, billions of rupees is beyond tax-net. Regulating these area for the taxation will ensure not only new tax-base but also sizable amount of foreign currency and foreign job in their table easily.

o Out-bound services having Nepal nexus beyond Nepal tax-net

Few of such individual (a sizable people) sub-contracts the job they acquire from the foreign states. For example, one Nepali individual may collect the job from Fiverr, Online tutor, Social media manager or Udemy. Then s/he may sub-contract it for another individual in other country. In such triangular cases, s/he obtains digital-payment form online platform and need to digitally-pay to the real worker in the third country. According to existing banking and forex law, such transaction is practically impossible from Nepal.

Due to restriction on such activities, many of the potential job-seeker either fails to join to the foreign platform or go to the middleman (hundiwala). In either cases, we are losing the tax-base as well as foreign currency reserve.

o In-bound services beyond Nepal tax-net

In the digital-economy, some of the services from foreign countries are live in Nepal but beyond the tax net. Their owner, server, management and most part of network is beyond the border, but their activities, at least for VAT purpose, are in Nepal. Currently they are beyond the Nepal tax scope.

To tax them, tax law needs to revise with major amendments in the area of sources of income, procedure for registration and payment of tax, assessment, appeal and refunds.

Making easy amendment, a lump sum tax on percentage of turnover having final withholding tax on nature with reverse charging system of VAT to the domestic payer may be an alternative.

Points to be noted

E-commerce or digital economy is not a conventional commerce. Many of the behaviors of conventional commerce are not suitable for it. Therefore, we need to care certain points on e-commerce for successful implementation.

  • In all cases of e-commerce, cash payment should be avoided at all.
  • In all cases of e-commerce, traditional registration or deregistration or similar administrative measures should be avoided at all. Exception of this principle is failure of the system and lead back to unregulated market.
  • Withholding tax or similar mechanism will impair success of the e-commerce. Though, direct highest percentage of withholding tax is successful in the countries having true tax-refund system.
  • Trust on the system and security is most crucial for e-commerce. The information gathered in the platform should not be encroached or used for any other purpose including legal cases except as expressed at the time of registration.
  • There must be stable policy for invented system and dynamic policy for new system.
  • Payment to anyone of the system must be automatic and hassle-free. Any hassle on the payment, even through legal provision leads hundi system of payment.

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