Yes, you may deny paying VAT to the supplier of taxable goods or services.

We especially the people involved in auditing work travel a lot.  And yes, I too am involved in the auditing work of different organizations and travel to almost every corner of the country. We live in hotels and eat in restaurants during our travel. Once by the grace of god, I got an opportunity to visit Itahari, Province 1. My team and I were living in a hotel named "Hotel Verandah". It was a stay of around 7-8 days. After completion of the auditing work, it was time to check out. We ask for the final bill. The person at the counter printed the invoice and handed it over to us. Yes, it was a tax invoice.

         My first question to the person was "is the hotel registered in VAT?". Obviously, his answer was yes otherwise the hotel would not have a right to issue tax invoices and collect VAT. You must be thinking about the turnover of the hotel must have exceeded the threshold limit of 2 million. Yes, I do agree that the turnover must have exceeded the threshold limit of 2 million and the hotel must have obtained the VAT registration. But yes, I do have to ask such a silly question. Why? Because of the Tax plate hanging behind that person. Rule 14ka of the Value Added Tax Rules, 2053 requires the person registered in VAT to keep the "Tax Plate" in the place of the transaction in a manner conspicuous to all in the format prescribed by the department. And the department has prescribed the format of the "Tax Plate" in Value-Added Tax Directives, 2069. Value Added Tax Directives, 2069 prescribed that the "Tax Plate" shall be 30x10 centimeter, and the color of the "Tax Plate" of a registered person shall be green, of a person dealing in the taxable transaction but not registered in VAT due to not exceeding the threshold shall be yellow and of a person dealing only in exempted supplies shall be white. The color of the "Tax Plate" hanging behind that person was yellow. This means the hotel in spite of dealing in taxable supplies, turnover has not yet exceeded the threshold limit to get registration in VAT. And section 15(1) of the Value Added Tax Act, 2052 clearly says that the unregistered person shall not collect VAT except in the situation mentioned in section 15(3). 

                My 2nd question to the person was, why he is adding an amount of 10% to the menu price and calculating VAT on the aggregate amount of the menu price and 10% of such menu price?  He was not only adding VAT to the menu amount instead what he was doing is adding a 10% service charge on the menu price and then VAT was calculated on the amount inclusive of such service charge. This means he was collecting Rs. 24.30/- extra for my purchase of Rs.100/-.

First, I never heard about the kind of Act which gives right the hotel to collect service charges from the customer, and second, Rule 14kha of the Value Added Tax Rules, 2053, requires that a registered person shall mention the selling price i.e. tag price, menu price, and shelf price inclusive of tax for the taxable goods and services kept in the industrial exhibition center, selling center, hotel, restaurant, bar, transaction place or place of supply. That means they are clearly cheating on the customer their menu price shall be inclusive of VAT. Try to understand what is happing here. Assume you visited a hotel and they served you a meal of Rs.100/-. when you reached the counter for the payment of the bill what you have to pay is Rs.124.30/- i.e. Rs.100/- which must be inclusive of VAT of Rs.11.50/- you also have to pay 10% of Rs.100/- i.e. Rs.10/- as a service charge and further VAT at the rate of 13% i.e. Rs.14.30/- on Rs.110/-. Can you see you are paying tax on tax? Hotels are collecting VAT at 29.15% instead of 13%.

After, returning from there and with some research work I came to know that there is no such Act that gives a right to hotels to collect service charges. The hotels are collecting service charges since 1st January 2007 after the resolution of a long dispute between the Hotel Association of Nepal and hotel workers. And out of this amount of Rs. 10/- at present 72% i.e. Rs.7.20/- goes to employees, 23% i.e. Rs. 2.30/- goes to hotel management, 2% i.e. Rs.0.20/- goes to Hotel Association of Nepal and 1% i.e. Rs.0.10/- goes to each of the three trade union affiliated to Nepali Congress, UML and CPN. 

        Now, to the conclusion recently Kathmandu district court in the case of Madan Dhungana Vs. Green Valley Gateway has given a decision that hotels do not have the right to collect service charges and their menu price shall be inclusive of VAT. Though we do know that the district court's decision can be considered a reference only but cannot be considered as an interpretation of the statute. If we analyze the statute’s requirement, you have a right to deny paying the tax amount mentioned in the invoice issued by the person with the yellow "Tax Plate" and/or on the menu price of hotels. Further, customers are not bound to pay a service charge because it is a matter of the discretion of the customer to pay or not to pay a tip to the person serving him. So, next time when you go to a hotel and they collect VAT on the menu price or with a "Tax Plate" of yellow color you should deny paying and ask the person to read rule 14ka and/or 14kha of Value Added Tax Rules, 2053 and inform concern person that contravention of rule 14ka will attract a penalty of Rs.2,000/- each time and rule 14kha attract a penalty of Rs.1,000/- each time with other consequences.

 

 


Thanks

Meet you soon with another article.


 

Krishna P Bhusal 

(Member of ICAI)

 

Source:- Value Added Tax Act, 2052

                Value Added Tax Rules, 2053

                 Value Added Tax Directives, 2069; and 

                 Website of Inland Revenue Department         

 

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