It’s your duty to collect and deposit VAT on the importation of services

             We in Nepal import goods or services from different parts of the world.  Import can be goods or services. Import or export of goods is taken care of by the department of Customs, but the import of services that are not declared in the customs office is out of the preview of the department of customs.

           Services can be of two types one is the service that can be declared in the customs office and the other is not declared in the customs office. On services declared in the customs office, the customs officer collects the tax. On the other hand, services not declared in the customs office come under the preview of the reverse charge mechanism.

              In VAT, the duty of assessing and collecting tax is normally on the supplier of goods or services.  Opposite of that reverse charge mechanism is a system of collection of tax in which the receiver of the goods or services is liable to assess and collect tax from himself and deposit it with the taxation authorities. Reverse charge mechanism work on the fundamental principle of taxation i.e. destination principle.

             Indirect taxes are consumption-based taxes. That means the tax is levied by the authority of the territory where such goods or services are consumed, opposite of origin principle in which tax is levied by the authority where such goods or services are produced/manufactured. The indirect taxes of Nepal including VAT based on the destination principle. Further, the world trade organization (WTO) also favors the destination principle for the indirect taxation system.

           On importation of services, VAT is levied on a reverse charge basis due to mainly two reasons. First because of the destination principle and second to treat imported and local goods or services equally. If we do not levy tax on the import of goods or services those goods or services will be cheaper in comparison to local goods or services. Due to this people of that county will prefer imported goods or services over locally produced goods or services and local businessmen will not be in a position to sell their goods or services because their goods or services will be costly in comparison to imported goods or services.

           Section 8(2) of the "Value Added Tax Act, 2052" talks about the assessment and collection of VAT on imported services. Which says "A registered or unregistered person receiving service from any person outside Nepal shall assess and collect the tax on the taxable value at the time of payment or receiving service, whichever is earlier".

If we analyze this provision of the Act we can draw the following conclusions

 1) VAT shall be collected by all the persons irrespective of whether registered in VAT or not,

 2) The supplier of services shall be located outside Nepal i.e. such person shall not be a person who is registered in Nepal for VAT purposes.

  3) VAT shall be collected at the time of payment or receiving services, whichever is earlier.

            Thus, the receiver of the services irrespective of whether he is a registered person or not shall collect VAT on the taxable value from himself at the time of payment or receiving services, whichever is earlier, and shall deposit the same on or before the 25th of the following month with taxation authority. Further, we should note that the facility of the threshold limit of 50/20 lakhs is not available if we receive any services from outside Nepal. That means even if the turnover of your business does not exceed the basic exemption limit in the previous 12 months you are liable to assess, collect and pay VAT on the taxable value of such services. 

            Further, we face two confusions at the time of calculation of the VAT liability. One is at what amount we shall calculate VAT? and the second confusion is, the supplier must have billed you in their domestic currency, then to convert the invoice value into Nepali currency exchange rate of which date we should consider. The answer to the first confusion is you have to see who is bearing the burden of income tax(TDS). If you are bearing the burden of income tax then you should calculate VAT liability by grossing up the invoice value otherwise, you should calculate the VAT liability on the invoice value itself. The answer to the second confusion is that the VAT Act does not say anything about the date e should consider the exchange rate. But if we analyze the provision of the Act itself and section 28 of the Income Tax Act, 2058 we find the answer and the answer is the selling rate of that currency prescribed by the Nepal Rastra Bank of the date of transaction i.e. earlier of the payment date or receiving services.

            Furthermore, at the time of calculation of net VAT payable after setting off output tax from the input tax credit, we face one more confusion and that is since the provision of section 17 of the Act facilitates the input tax of the tax so collected and paid, should we claim input credit of the same and net off the tax liability? The answer is no for two reasons first is VAT so collected is an input tax and input tax can’t be set off with input tax itself instead input tax and output tax can be set off, second reason is if we do so this will result in a mismatch of input credit claimed by the person and the input credit that can be availed by the person as per the tax authority because if instead of paying in cash and then claim the input credit we netted off the VAT liability such transaction does not come into the knowledge of taxation authority. So, you should first pay the VAT so collected in cash and then should claim the input credit of the same ether in the same month or in the following months.

 

 

Thank you,

Meet you with the new article very soon !!

Krishna P Bhusal

(Member of ICAI)

cakrishnabhusal@gmail.com

Source:- Value Added Tax Act, 2052

              Value Added Tax Rules, 2053

           Value Added Tax Directives and website of Inland Revenue Department.