VDIS: Gift of Republic or Tax Terrorism?

By Siddhi B. Ranjitkar

The Government of Nepal headed by the Maoists has recently introduced the Voluntary Disclosure of Incomes Scheme (VDIS) for collecting the taxes on the amounts that had not be disclosed for paying income taxes in the past. The income tax is 25%; however, the government has made 10% tax payable on the disclosed amount under the VDIS. So, the government calls it the gift of republic. The government also made mandatory to disclose the source of incomes for purchasing anything above certain limit of amounts and for making investment above certain limit in anything. For example, if you want to buy a car of above Rs 1.5 million then you have to show the source of incomes of such amount.

Members of the business and industrial community have been saying that the government introducing the VDIS has been terrorizing the community. They said that they were afraid of disclosing their assets, as they might face the onslaught of the donation collectors after the disclosure of their assets. While collecting donations from the businesspersons and industrialists, the political cadres and criminal gangs have been terrorizing the businesspersons and industrialists threatening them to destroy their factories and industries and even harming them physically taking the advantage of the weak administration of the transitional period if they refuse to give the donations demanded by the political cadres and gangs.

The Nepalese media and the government officials called the amount on which income taxes were not paid as illegally earned. However, not all amounts were illegally earned. Some of these amounts were legally earned; others are certainly illegally earned. For example, the professionals such as doctors, engineers, lawyers, consultants, businesspersons and industrialists have earned their incomes legally but they did not pay the incomes taxes on such incomes for some reasons in the past. Others such as politicians, judges, army officials and policemen, custom officials, tax officials, revenue officials, state-employed foresters, and road engineers have certainly earned huge sums of incomes through bribes or irregular means. In addition, smugglers and people doing illegal businesses have earned incomes illegally. Those amounts are certainly illegal.

You see some doctors, engineers, businesspersons, importers and exporters, businesspersons engaged in information technology, artists, and so on living in large houses and riding costly cars and their spouses wearing expensive jewelry but they have not showed up at the tax offices to pay any income tax. For example, Former Chairman of the Federation of Nepal Chambers of Commerce and Industry Chandi Raj Dhakal had to go underground when the Ministry of Finance issued a warrant to arrest him for defaulting in tax payments.

Similarly, tax officers, custom officers, state-employed foresters and road engineers, judges, army officials, policemen and so on enjoyed living in luxurious houses and having luxurious cars but they could not pay income taxes on their incomes as their incomes were either from taking bribes or irregularly taking money from the state budget entrusted to them for the welfare of the citizens. The Supreme Court bench had once barred the President of Nepal Bar Association Biswokanta Mainali from practicing his profession of law for saying the appointment to judges is the license for corruption.

You see the high-ranking police officers and army men enjoying highly luxurious lives that are far beyond their regular salaries and allowances could support. Often, we used to read on the newspaper that low-ranking policemen and army officers complaining against their bosses for corruption and even there were a few mutinies in the recent past.

Politicians topped everyone for illegally amassing huge assets. You see the politicians running on flip-flops; however, after becoming ministers or becoming the members of the parliament they ride on the highly expensive and luxurious cars and live in houses they have never thought of living. For example, the Special Court has convicted former Minister and Nepali Congress Leader Chiranjivi Wagle of corruption. The Commission on Investigation into Abuse of Authority (CIAA) had filed corruption cases against the former ministers such as Govinda Raj Joshi, and Khum Bahadur Khadka of the Nepali Congress and Rabindra Nath Sharma of the Rastriya Prajatantra Party. The court had acquitted them on the technical ground. When the CIAA filed a corruption case against former Governor of the Central Bank of Nepal called Nepal Rastra Bank Bijayanath Bhattarai, Former Finance Minister and Nepali Congress Leader Dr. Ram Sharan Mahat said that it would demoralized him and all staffs in the bank hampering the regular business of the bank. The Court has convicted Mr. Bhattarai of corruption. Similarly, the CIAA has served a subpoena to Former Prime Minister and current Nepali Congress President Girija Prasad Koirala for explaining about his assets. However, Koirala went to the Supreme Court of Nepali instead of going to the CIAA and discussing his assets with the officials of the CIAA but the Court ruled that he needed to comply with the subpoena. Then. The CIAA took back the subpoena from Koirala after he became a Prime Minister again after the people’s movement in 2006.

According to the media report, a renowned industrialist and businessman and member of the legislature-parliament representing the Communist Party of Nepal-Marxist and Leninist (CPN-ML) Rajendra Khetan said that the VDIS was illegal, as it violated the privacy of the people. However, the officials of the Ministry of Finance said that the government did not disclose the names of the people who had not paid income taxes and their assets; the government introduced the VDIS through the law passed by the legislature-parliament.

In view of the protection of corrupt politicians by the political parties, corrupt businesspersons and industrialists by the politicians and the lobby of the businesspersons and industrialists, corrupt-state employees such as civil servants, army men and politicians by their respective bosses, most of the political analysts and economists including the author of this article doubted about the success of the VDIS. The previous governments had also introduced VDIS in 1997 and 2001 but the then-governments could not enforce it obviously due to the pressure from all the corrupt quarters.

The current government has meticulously collected all pertinent data on the people, institutions, industrial and business houses and so on from the Department of Transport Management, Revenue Office, Nepal Stock Exchange Board, Import and Export, Agency Brand Profession, and Foreign Currency Exchange Office, and prepared the list of about 1,000 professionals, institutions, business houses and industrial houses, businesspersons and so on liable for voluntary disclosure of their incomes according to the officials of the Ministry of Finance.

Then, the Ministry of Finance sent confidential letters to those professionals, business and industrial community for disclosing their incomes following the VDIS and paying ten percent taxes on their disclosed assets and making those assets available for legally investing in the development of the country.

The government has a target of collecting one billon rupees from the VDIS. However, until February 4, 2009, only a few of the potential disclosures of incomes had disclosed their incomes and paid ten percent tax on such disclosures. So, the collection of tax from the VDIS was only about Rs 40 million well below the target of collecting one billion rupees.

The industrial and business community did not take the VDIS seriously and anticipated its failure as in the past. However, in the first week of February 2009, before the departure for Japan, speaking to the reporters at the international airport in Kathmandu, Minister for Finance Dr. Baburam Bhattarai categorically rejected the demand of the business community for extending the deadline for disclosing their incomes until the mid April 2009, and showed his determination to take strong actions against the defaulters in disclosing their incomes following the evidences his ministry has collected. By the time, the Minister for Finance came back from Japan and at the end of the deadline for disclosing the incomes, the collection of taxes from the VDIS has jumped to Rs 1.04 billion well above the target. However, following the demand of the business community for extending the deadline for disclosing their assets, the Ministry of Finance extended the deadline for another month.

When they received the confidential letters from the Ministry of Finance on disclosing their assets, members of the business community did not take it seriously but when the deadline for disclosing their assets was nearing to end and the Ministry of Finance was preparing for taking actions against the non-disclosures of assets, the business community became concerned with various things very much.

The business community asked the Ministry of Finance various questions relating to the VDIS; and the Ministry Officials made it clear to them that they did not need to pay 10% tax on the hereditary assets, incomes from agriculture, remittances and on the incomes earned by the exemption of taxes provided by the government from time to time according to the Ministry of Finance officials.

Some news analysts say that some politicians, judges, army officials and policemen, custom officials, tax officials, revenue officials, state-employed foresters, and road engineers have been concerned very much with the possibility of the CIAA taking up the issues if they disclose the incomes and assets to the Ministry of Finance following the VDIS. Others believe that once the Ministry of Finance gives them certificates of tax payments on their previously undisclosed assets, none could do anything to them; then they could invest their money in anything they chose to without any fear and anxiety.

Some members of the business and industrial community questioned why they needed to pay taxes when the government could not give them security and protect their factories and businesses. Their contention was that the government needed to be able to maintain law and order and secure the assets and lives of the members of the business and industrial community before the government would take actions against the tax defaulters.

Although the government has collected a large amount of taxes on the previously undisclosed incomes, and has done the task previously thought of to be almost impossible; the disclosed amounts and taxes paid were only a tip of iceberg according to some estimates. So, a large amount of the illegally accumulated wealth particularly by the politicians, judges, army officials, policemen and other civil servants would remain undisclosed. So, the question remains whether the Ministry of Finance would be able to take actions against them or would back off from the idea of taking actions once the target of collecting the taxes on previously undisclosed assets has achieved.

February 13, 2009.