This topic was unfolded during a conversation I had with one of the prominent business owner in Kathmandu. At first I was ignoring it like any other individual although everybody has heard about it including regulatory authorities and government officials. I, personally, was not engaged with any of those clients who were part of this issue, I am writing about today. But, being a law-abiding citizen, I felt it’s time for me to voice up and give more insight as to how it happens. It’s very important that we all understand the real problem in Nepalese accounting system and what are the driving forces. I, wish, regulatory officials and government officials will read this post, start dwelling little more on this topic and come up with permanent solution.
Until last week, before I met this gentlemen, I always used to think that real problem in our accounting system is lack of awareness among users the real value and power of accounting information and their use of accounts, merely, to prepare financial statements to meet Tax Office requirements. I can’t deny these are not problems anymore, but I came to know from this gentleman how limited numbers of people are sucking revenue out of government’s pocket, entity’s pocket and grooming institutional corruption. Entities are equally guilty as they are accomplice for this task but the question that arises in my mind is a) Does most of the entities evade tax intentionally? b) Are these entities trapped in this vicious circle of institutional corruption leading to forceful tax evasion? Whatever may be the reason, one thing is clear, that this institutional corruption is the root cause of the problem in the Nepalese Accounting System.
How? Let me now explain taking an example of the Customs Agent. By definition, customs agent acts on behalf of entities to import and exports goods in and out of the country charging service fee for the service rendered. Being an import oriented economy, we imported NRs. 984 billion worth of goods in FY 2073/74; an increase of 27% compared to FY 2072/73. I have sourced this out of the Department of Customs website which is officially true but is it the real picture? Okay, let me take you to some of the stories that have been covered in the media. Have you heard about under declaration and/or mismatch of the goods imported at customs? Yes, these are the two major problems that ultimately lead to all other problems.
Under-declaration is declaring the value of the goods at lower value than actual import price or declaring the quantity in lower quantity than actually imported. Hypothetical example could be import of XYZ Laptop at Rs. 50,000 per piece but decalered only Rs 40,000 for customs purpose or import of 5 XYZ laptop and declaration of only 2 XYZ laptop or combination of both.
Mismatch happens when item imported and item declared do not match at all again Importing XYZ laptop at Rs. 50,000 while declaring import of spare parts for XYZ laptop worth Rs. 10,000 or importing XYZ laptop at Rs. 50,000 but declaring ABC laptop at Rs. 40,000.
In both cases you can see loss in government revenue as declared prices are lower than actual prices. Motive; tax evasion for entities, hefty commission for custom agents, under the table income for involved government officials. Factor in the amount of import we did in FY 2073/74 and you will know how big this institutional corruption is.
Now, let’s move on to the real issue for the write up. How these institution corruption impacts accounting system? Well, let’s first look at the definition of accounting. Accounting is the systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating financial information. According to this definition, what does accountant require to record transactions in books of account? An identification document which at minimum should be, proof of transaction such as invoices, receipts and payment confirmation. Do you think these tax evaded transaction will have any of these documents? Although from entity’s point of view there is real cash outflow, a) entity has no option but to pay foreign supplier for imported goods (not through banking channel but through hundi for the difference in declared value) b) payment of commission to customs agent (% of the evaded transaction value) c) under the table amount to government officials (again % of the evaded transaction value). Hence, these illegal transactions never form part of entity’s accounting and inventory records. Result, you cannot show sales income, issue tax invoice or record any other related expenses for these illegal goods for that matter. Only reason, why when you go in the market, you find business houses preferring to sale goods without tax invoices and/or issuing tax invoice for the lower amount than the actual price you pay for the goods or asking for additional 13% if you really are after VAT invoice. As a normal buyer, you must have faced it prominently on imported furniture, fixtures, hardware, construction materials, electronic equipments and manufactured goods.
Ultimately, entities have no other option than to keep two set of books of account and take a route of illegal channel to run their business. Personally, I found this gentleman frustrated of this illegal practice, all the hassles it brings to his entity and wants to start fresh, single, clean and compliant books of accounts but he still do have a fear if it’s at all possible. Unless there is a mechanism to crack down institutional corruption as explained in this write up, no matter how hard one tries, it will not be easy to get out of this vicious trap.
