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Taxing thoughts

July 04, 2017

During this fiscal year 2016-17, two major decisions made by the Indian government have changed economic relationships between India and Nepal forever. The demonetisation of 86 percent of the currency bills in India in November changed how transactions are conducted along the border, and Nepal has yet to figure out how they want their currency stock exchanged. And, for the first time in 70 years, India is making an attempt at historic reform by introducing, from July 1, 2017, a country-wide uniform Goods and Services Tax (GST). This will have a big impact on trade and transit arrangements and costs between India and Nepal.

In the run up to the adoption of GST in India, social media—especially WhatsApp and Viber—was abuzz with ways and means to get around the new implementation framework. We South Asians love to find ways around laws and rules. Since we are experts in getting around strict do’s and don’ts of religious rituals, we find getting around these laws and procedures very easy. So, if hotels with rates below IRs1,000 are exempt from GST, then you may land up with a bill of IRs950 for room rent, but then all of sorts of other costs will be added to make your total go up to IRs3,000.

Schools in India, Nepal and the region have mastered the art of charging library fees without having a library, or laboratory fees without having a lab, or sports fees without having any sports facilities. And with the introduction of the GST, there will be innovations on a par with those implemented by the schools. So don’t be surprised if the next time you’re in India, your hotel bill has a line item that claims “Reimbursement on account of usage of toilet paper”, or a restaurant bill that will have an item “Service fee for usage of bottle openers”. After demonetisation, people have spent considerable time figuring out how to get around the move, so we can look forward to some interesting innovations in this field.

Impact on smuggling

‘Informal trade’ is a term extensively found in donor reports in Nepal. In plain and simple English, ‘informal trade’ mean smuggling. Nepal’s policy has been to encourage ‘informal trade’ since the Panchayat days; this is evident in some of the budget speeches of the finance ministers during those times. Since trading and arbitrage are hallmarks of the economy of Nepal and of the bordering states of India, they will suffer the biggest hit. While agriculture, livestock and dairy are exempt from GST, any value addition to these products will attract GST. The transportation of the same will attract Service Tax. Apart from the goods that are transported back and forth along the border in rickshaws, carts and cycles without license plates, it will be difficult to escape this. The Indian government with its nation-wide Unique Identity Number, Adhaar, is connecting people to their mobile phone and tax records, so for an Indian, it will be difficult to take advantage of the earlier lax systems and processes.

Nepal implemented its own nationwide VAT similar to GST 20 years ago, as the country was moving towards pushing reforms. Surely, if the situation back then was as it is now, VAT in Nepal would have never been implemented given the strong nexus between political syndicates and business cartels. Our forward thinking leadership in this has resulted in Nepal having the highest per-capita tax paying individuals in South Asia with the highest tax to GDP ratio. India’s GST implementation will ensure that the vacuum in Nepal’s VAT regime will be filled, thereby making VAT implementation in Nepal more effective. Nepal’s economy is dominated by informal Foreign Direct Investment (FDI) from India and people of Indian origin. These were channelled into Nepal via trade of gold and other commodities and products that offered arbitrage opportunities. Now with the work of Integrated Customs Points being made possible, all these will come under a common purview. And as cross-border operators are the most savvy lot in the entire economic spectrum, they will find ways to beat this, but it will not be easy.

Disinterested government

If this GST issue was for Nepal and the Caribbean or the Fiji Islands, it would have fuelled tremendous interest, as our politicians and officials would have been lured by the visits to exciting places that this would entail. But who is interested to go to Delhi to understand GST? A trip to Delhi is not enough of an incentive when there are multiple agencies sponsoring multiple junkets to exotic locations. Our embassy officials in Delhi can only go and find out what GST means to Nepal if they are freed from the great rituals of receiving the kith and kin of politicians, officials, business people and civil society leaders who are visiting Delhi for medical reasons, getting kids admitted to educational institutions, or shopping for weddings. Therefore, maybe Nepal should outsource such activities to think tanks in Delhi that can figure out which laws being enacted in India affect Nepal. We need to learn from Bhutan how to form task forces and get issues resolved. Bhutan has exchanged all of its demonetised currency through tough negotiations, multiple trips and discussions. Bhutan has task forces in place that are looking at GST implications and are also conducting awareness and educative sessions for traders and businesses.

Nepal’s business, trade and economy will never be the same after India’s GST implementation. Nepal needs to figure out the opportunities created by this new structure that promotes transparency and efficiency, although both are things we don’t like. The discourse should begin and trips to Delhi and Indian border towns should be made by government officials to understand the bottlenecks. This is an opportunity to formalise transactions between India and Nepal; this will benefit the coffers of both governments and promote real entrepreneurs instead of smugglers.