VAT rebate on mobile phone imports not benefiting consumers

• Importers don’t discount the tax rebate while setting the selling price of phones

Kathmandu, May 28

Buyers of mobile phones in Nepal are being short-changed, as the benefit of value-added tax rebate provided by the government is not being transferred to them.

Importers of mobile phone sets are entitled to 40 per cent VAT refund, meaning 40 per cent of the tax they pay at the customs offices is returned to them once the phones are sold in the domestic market.

“This tax discount should be taken into consideration while setting the selling price of mobile phone sets. But that is not being done, which is preventing consumers from reaping the tax rebate’s benefit,” said former finance secretary Shanta Raj Subedi. “This indicates importers are pocketing too much profit, which is not in the interest of consumers. So, the provision should be scrapped.”

Most mobile phone set importers enrol income generated from VAT refund as ‘other income’ in their balance sheets rather than adjusting it in the selling price, a study conducted by the Ministry of Finance around four years ago had found. This practice has not changed, said a finance ministry official on condition of anonymity considering the sensitivity of the issue at a time when the budget for the next fiscal is being prepared. “Thus, the policy of VAT refund has failed to create a positive impact on consumers,” says the MoF report.

The Inland Revenue Department, which oversees rebate disbursement process, said it only monitored authenticity of VAT refund claims filed by importers. “We have a check-list for this purpose. If the claims meet the criteria, we provide rebates,” said IRD Director Hari Bashyal, adding, “We do not monitor whether the benefit of the VAT refund policy has been passed on to consumers.”

The government disbursed Rs 892.7 million in VAT refund to mobile phone set importers in the last fiscal, up from Rs 752.2 million in the previous fiscal.

The concept of providing VAT refund to mobile phone importers was formally introduced in February 2010 to control illegal imports of handsets and curb the practice of under-invoicing. Initially, importers were rebated 50 per cent of the VAT they paid at customs offices. The bar was raised to 60 per cent in fiscal 2010-11. It was later reduced to 50 per cent and currently stands at 40 per cent.

The policy introduced more than eight years ago did meet its objective of controlling illegal imports and under-invoicing in the initial months of its implementation. But the MoF later found huge discrepancy in imports of mobile phone handsets and sim cards sold by telecom companies.

For example, 6.7 million mobile phone sets were imported between 2009-10 and 2012-13, but during the same period 14.98 million new sim cards were sold by telecom companies, adds the MoF report. This implied that tax rebates had failed to control illegal import of cell phone sets. Around two years ago, the Office of Auditor General found that an importer collected more in VAT refund than what had been paid in tax. At that time, the importer had paid Rs 84.4 million in VAT while importing cell phones, but had later walked away with Rs 134 million in tax rebates.  Considering these malpractices, the High Level Tax System Review Commission, the Parliamentary Accounts Committee and the OAG have recommended that the government scrap the provision of VAT rebate as telecom operators have started registering International Mobile Equipment Identification (IMEI) number, which helps track illegal import of phones. But the government has ignored the recommendation.

“The government has been providing the rebate considering the utility of mobile phones in communications. But to communicate, one does not need expensive handsets. This questions the rationale of providing VAT refund on all types of imported mobile phone sets,” said Department of Customs DG Toyam Raya.

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