Taxing process of fund reclaiming in Nepal

Almost two decades have passed since the Income Tax Act came into effect in Nepal. But complications abound for taxpayers, even if they have paid their taxes on time and have a legitimate claim to overpaid tax refund.

The Act provides for taxpayers who register more than the liable tax amount to be refunded by the government. The taxpayer is supposed to receive the refund amount within 60 days of application.

However, barring exceptional cases, this rarely happens. The contradiction in implementation is an interesting one—a government that fines the taxpayer for delayed tax payment itself does not pay back the refund.

When approached on the matter, a government officer responded by saying that it is not possible to refund from the ongoing fiscal year's budget, and thus the amount could only be refunded in the upcoming year.

This is a common rhetoric heard in the tax offices, whenever a taxpayer approaches the government for a refund, even if the request is made within the stipulated 60 days.

The Federation of Nepalese Chamber of Commerce Industries (FNCCI) tax expert and entrepreneur, Ashok Kumar Todi says, “It is very, very difficult to get a refund. Actually, it is almost impossible.”

The Income Tax Act 2058 underlines that the taxpayer must pay the due amount for the running year based on estimates within the Nepali months of Poush (December-January), Chaitra (March-April) and Asar (June-July). If the total estimated amount is 100% then the taxpayer has to pay 40% in advance in the month of Chaitra and the remaining 30% in the month of Asar.

In addition, if the paid tax based on an estimate is less than the actual amount, then the taxpayer is liable to be fined. If such tax is paid on installment in theory, and if it so happens that the estimate is greater than actual, then the over-paid amount should be refunded easily.

Income Tax Act Clause 113 and Income Tax Rules number 36, both say that the tax must be refunded. However, in practice, the overpaid tax amount is being withheld by the tax officers, without any explanation.

“The overpaid tax amount must be refunded, but in practice, it is not happening,” confirms tax expert Bhavanath Dahal who says that Gyanendra Shah while still king of Nepal had received a refund for overpaid taxes for his Soaltee Hotel— but only after it was vetted by the Cabinet. There are a few other exceptions in which the taxpayers got their overpaid tax refunded, but the processes were mostly cumbersome.

Tax expert and entrepreneur Todi says that the tax administration should return the overpaid tax at least within the current year. However, in practice, the overpaid tax is passed on the next fiscal year under the heading of ‘government reserve’.

This process repeats itself year after year, leading to the overpaid tax amount being transferred to the next fiscal year on a continuous basis—at the cost of entrepreneurs.

“We pay taxes by taking loan from banks, and the overpaid tax amount just gets accumulated in the government reserve fund. It is impossible to get a refund,” ays a businessman who requested anonymity.

A high level Tax System Review Commission six years ago recommended improvement in the refund process, but it was never enforced. Internal Revenue Department (IRD) officers themselves admit that returning the income tax is very difficult.

IRD spokesperson Arjun Dhakal says the tax amount overpaid by the taxpayer cannot be directly paid back by the IRD itself as the applications are forwarded to the Finance ministry.

“The process to get the overpaid income tax back is a very lengthy and difficult one and as a result, there are very few instances of taxes actually being refunded,” he admits.

Entrepreneurs say that the total amount that the government owes to taxpayers as overpaid tax refund has now accumulated to astronomical amounts. Even IRD Tax Refund Department director Devnarayan Poudel has no idea how much it is.

The IRD has introduced a new process to ease the refund of overpaid taxes, regarding which a circular has been sent to the tax office, but entrepreneur Todi is skeptical.

According to law, if the tax officer makes an overestimate of the tax to be paid then the taxpayer can go to the Revenue Judiciary of Nepal and the taxpayer will get back the amount overpaid. But that is only in paper.

Anyone choosing the path of litigation ends up losing even more. In order to process the litigation for administrative review, the overpaid tax payer has to deposit one-fourth of the disputed amount. If the taxpayer is still not happy with the administrative review, one can deposit 50% of the disputed amount and file a lawsuit to the Revenue Judiciary for further review.

The caveat however, is that it may take several years before a settlement is reached by the Revenue Judiciary. As a result, a large amount of taxpayer’s deposit is accumulated in the government reserves.

Even if the court rules in favour of the taxpayer, by the time the decision comes through, the taxpayer would have been seriously overburdened with the loan and interest. On the other hand, if the taxpayer loses the lawsuit, the government will charge the individual or the firm, an interest on the disputed amount since the beginning or the initial date of the filing of the lawsuit and the disputed amount will not be deducted.

“In some cases, even if the taxpayer has won, the government has refused to return the disputed amount along with interest,” says Arun Raut, a tax expert.

FNCCI Chair Shekhar Golcha, however, says that even though the process of getting back overpaid taxes is difficult, it is not impossible. According to him, since the overpaid tax amount from the previous year is adjusted in the tax payable the next year, it is automatically sorted out.

He says that last fiscal year the total claim amount for overpaid tax refund was Rs6.67 billion, but the IRD refunded only 57% of that amount. In the earlier fiscal year the amount to be refunded was Rs3 billion of which Rs2.26 billion was refunded.

Even so, tax expert Dahal says the non-refund has affected Nepal’s business environment. He says: “It is the right of the taxpayer to get a refund of his overpaid taxes. But the problem is not limited to this. It is a systemic problem.”