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July 2015 Economy and Policy

Published on: 2015-07-20 00:00:00     1326 times read    0  Comments
The Game of Under-Invoicing
 
Government agencies as well as the business sector seem to be loudly railing against the trend of under-invoicing. Both agree that under-invoicing equals a great loss in revenue, as well as an unhealthy business atmosphere.
 
--By Ganesh Prasad Lath
 
It’s a story about children being underfed at a five-decade old top international boarding school in India. More than 2,000 boys and girls from all over the world study there. The students proclaim that studies, sports, rules and regulations, everything is intact and perfect there, except for one small thing; they haven’t been served a proper decent meal. And so the students have been forced to steal chapattis, rice and vegetables from their school canteen at midnight or they have to buy food from outside. Buying food from outside isn’t allowed. At first glance, it seems like a strange story. But as soon as we look at it in depth, it becomes much more interesting.
 
Two decades ago, such a meal crisis didn’t exist. In those days, the school canteen contractor appeared to find various ways to cut costs and to make more and more savings. As one method of saving money, the contractor used to serve lower quality food to the students while serving better quality food to the teachers and administrative staff. Gradually, greed led the contractor to increase the quantity of water in servings of vegetable curries and daal, etc. Since the school teachers and administrative staff were satisfied with the contractor, they never bothered to check his dishonesty. 
 
In those days, a group of rebellious students started stealing food from the canteen. They only took a negligible amount, so the school administration felt that it was better to just ignore their acts. Such midnight activities as well as the contractor’s bill went on increasing day by day. Students, the contractor and administrators were all happy and satisfied in a kind of silent understanding. However, the school’s income-expenditure balance was badly affected. Nowadays, everyone’s been enjoying those extra privileges. At the same time, everyone has been playing the blame game, pointing fingers at each other. 
 
This little story seems applicable to the trend of under-invoicing in Nepal as well. Everyone seems to be enjoying the extra privileges coming out of under-invoicing while at the same time, enjoying the blame game as well. Until a few decades ago, there was a special hukum (direct order) from the once almighty authority of Shree Panch ko Sarkar, to allow a particular community to bring in foreign goods from overseas for commercial purposes, without paying any kind of tax. The reason given for this directive was to socially uplift a disadvantaged group. Gradually, such kinds of privileges shifted to other traders. 
 
One more example. In those days, regional authorities used to call an emergency meeting of large or small smugglers (involved in the illegal trade) on the eve of Bijaya Dashami to force the supply of sugar and other necessary provisions in adequate quantity to Kathmandu, by hook or by crook. In those days, there was an open instruction to security and customs guards to keep their eyes shut on the border during Dashain times. Gradually, such trends expanded into the rest of the year as well.
 
Presently, government agencies as well as the business sector seem to be loudly railing against the trend of under-invoicing. Both agree that under-invoicing equals a great loss in revenue, as well as an unhealthy business atmosphere. The business sector has been enjoying under-invoicing because they believe that they can only win price competency in the market through this type of mechanism. Consumers have been ignoring under-invoicing because they have learnt that a full invoice means extra payment. Government authorities have been fighting against the trend of under-invoicing mainly through the Goods Re-Valuation section during customs clearance. Post Customs Audit, Full Assessment, Deep Investigations too, are common tools used by the Nepali government to control under-invoicing. Despite all the effort, results are still a long way off. 
 
On the eve of the new budget, we need to expect the announcement of some smart concepts. Can we expect two or three rates of VAT? Can we expect the application of the Uniform Valuation Method across all the customs offices including the Tatopani customs? Can we expect to see independent departments settling tax disputes on a Fast Track basis? Can we expect an unbiased carrot and stick policy for government departments as well as the business community? Working honestly to reach these expectations might lead to a watershed moment in the fight to control under-invoicing in Nepal.
 
Similarly, each customs office, if it suspects the imported goods are under-invoiced, has the authority to buy such goods by paying the amount mentioned on the invoice plus a reasonable profit to the importer. However, this policy has been almost ineffective from day one. Reason no. 1: The budget sanctioned for the customs offices to buy goods is very inadequate. Reason no. 2: There is no designated department/unit to resell purchased goods. Reason no. 3: Government sees such a process as an extra burden. As soon as the government addresses these three reasons, the problem would be solved. Again, working honestly to make this policy more effective could lead to a watershed moment in the fight to control under-invoicing in Nepal.
 
Many from the business sector claim that the basic reason behind under-invoicing is the unhealthy price competition in the marketplace, rather than the idea of making an extra profit. People don’t hesitate to declare that, due to the unhealthy price competition, the marketplace is flooded with low quality products. In general, importers hesitate to declare their company name and the service mark on their imported products. As a result, consumers too, seem confused about better quality products and are tagging themselves behind lower priced products only. The government should intervene when it comes to such kinds of unhealthy price competition. 
 
It should be mandatory for each imported product to carry the name of the importer company as well as its service mark. Through the service mark and the importer company’s name, consumers will be able to determine the quality of particular products imported by a particular company. In this way, consumers would learn to buy only those products whose importer or service marks are tried and tested, rather than going for lower priced products. Here again, an honest approach in this direction too, could lead to significant achievements in the fight to control under-invoicing in Nepal.
 
In a nutshell, using the story of the school again, there should be a bridge of trust between administrators and students. The contractor shouldn’t be allowed to come between the two of them. Let’s hope for some smart moves from the government in the new budget.
 
The writer is a member of the Industrial Promotion Board.

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