Reforms Necessary in Nepalese VAT Law

Reforms Necessary in Nepalese VAT Law

Value Added Tax (‘VAT’) was first introduced in France in 1954 and today, it has been implemented worldwide with tremendous success. In Nepal, after intense debate and deliberation, it was implemented first in 1997. However, it is felt that its positive impacts are yet to be fully realised even after almost 14 years of implementation. The main problem that the government is facing each year is lack of compliance by all taxpayers due to various reasons. In this article, a brief attempt has been made to analyse the radical changes those are required in Nepalese VAT laws with the changes on the ways the business and trades are carried in modern times.

First, to start with the positive impact that VAT laws brings is taxation at every stage of supply chain and credit to taxes paid on inputs and on input services. Therefore, the foremost good factor that VAT laws bring is the removal of cascading effects. The term cascading effects refer to ‘tax on tax’. Therefore, VAT shuts door for multiple taxation, thereby removing cascading effects in supply chain as every buyer and seller will be entitled to avail input tax credits and adjust its credit with its output tax liability. In principle, we have understood VAT laws to be so.

However, in practice, not necessarily the implementation of VAT laws always removes cascading effects. Therefore, we need to have an effective and good VAT law that alone brings the intended consequences to the tax payers. In practice, what has been observed is the concept called ‘exemption of taxes’ on ‘exempted goods and services’ which act as a barrier to smooth supply chain. Mainly, the essential goods and services, for example rice, pulses, flour, fresh fish, kerosene, salt, health services, contraceptives, medicine etc. are exempted from payment of VAT on a simple rationale that these commodities and services are essential for human survival and imposition of taxes will increase the price of these products thereby making it inaccessible and expensive for poor citizen of our poor country. Morally and ethically too, this sounds a great welfare measure taken by the state. But, in practice and in a world which is full of profit making enterprises, this rationale does not work so greatly as think it to be. We can understand the tax exemption behind the agricultural products like wheat, paddy, flour etc. and agricultural tools, shovels, etc. But, Nepalese VAT law even exempts taxes on air travel, gold and silver, mobile phone set etc. which is beyond anyone’s understanding and these types of exemptions have only accentuated the obstacles to smooth supply chain.

While the output goods and services are exempted from the payment of taxes for those goods mentioned in Schedule – I of VAT on its output side, it may not be so in case of input goods/services. Therefore, a vendor who purchases raw materials and services, and manufactures an exempted product, say medicine, cannot utilise its input taxes that it has paid on inputs. Its input tax credit will go to become a sunk cost. In this situation, the only options available to the manufacturer/seller would be to add up the cost of taxes paid in inputs in its final outputs and pass that cost to the customer if manufacturer/seller has to keep its business running. Therefore, while declaring certain goods/services as exempted goods/services, the government is not doing any yeoman’s service to its citizens except those few essential goods.

Keeping goods and services exempt will also have another round of disadvantages – that is to the vendor which buys these exempted products and services, utilizes these input goods and services for manufacture and sells its outputs which are taxable in nature. In this case, this vendor will not have any input tax credit and has to collect the tax amount from the public/customers, which will only increases the price of these products.

Internationally, it has always been a moral dilemma among legislators/governments to frame effective VAT laws containing provisions that leave entire supply chain unaffected. Since revenue and fiscal laws stand on the different footing than other laws, they are enacted as per the economic and fiscal needs of the nation unlike other general laws which may be enacted to curb one or the other evils. Government will also make use of tax laws to control the flow of goods and services as per demand of the country on the prevailing economic condition. Therefore, though it may be desirable not to have ‘exempted products/services’ at all, but practicality, does not allow this to happen. This is fully understandable. Having said so and being fully aware of the government’s constraints, the challenges posed by exempted goods and services in supply chain is not that difficult to address if genuine efforts are made and willingness are shown by the government.

Arguably, the easy and effective ways to curb the threat posed by exempt products/services are to make them taxable by declaring the rate of tax at Zero Percentage for these products/services. This is internationally known as ‘Zero – rated goods/services’. Our Nepalese VAT law has already enumerated this concept but only few categories of items and transactions find place in Zero-rated list.

Currently, the exports are Zero – rated which is in consonance with international tax principle that only the products/services be exported and not the taxes so that our products become competitive in international markets. Other Zero rated transactions in the list are the supplies made to industries located at Special Economic Zone (SEZ), battery used in solar power generation and manufactured by domestic manufacturers etc. The need of the hour is to reduce the number of items/services and transactions currently mentioned at Annexure – I of VAT and move them to Annexure – II so that exempt products would be converted to taxable one, i.e. to convert them to ‘Zero-rated’ goods/services.

By introducing the concept of ‘Zero – rated’ for maximum number of goods and services, the goods and services would get taxable life – making inputs utilised for producing these zero rated goods creditable. Though there may not still be output tax liability, the vendor would be able to use the credits that it has accumulated while producing/distributing ‘Zero – Rated Goods’. Therefore, the expansion of this concept in VAT laws will make a good impact on the business community and ultimately, the impact will be felt by the consumers. A small effort from government side can make a big difference!

Another possible remedy that can be injected to streamline the credit mechanism would be rather than making these products exempt, a small VAT should be imposed on them. In Nepal, currently, there are only two VAT rates – 0% and 13%. In this context, a middle path can be found making majority of currently exempt products taxable, say at the rate of 1%-3%. Though imposition of tax may make these products little more expensive and may not go well with ‘people – centric!’ political class but we must understand that imposition of tax at small rate will not be so burdensome on us- the public and on the other, and helps not to snap the supply chain.

From the point of collection of revenue too, mostly these products are relatively inelastic and therefore, will not have any impacts on their demand. There would be more positives to the economy in the long run with these measures which may not at first glance, look so populist. This second prescription is recommended only when government is unable to declare exempt goods as ‘Zero – rated’ having constraints due to other economic factors. Whatever government does, however, should be for giving impetus to economic development and should propel our economy to forward direction.

Super Freakonomics – A Book Review

In my previous post, I had reviewed the book called Freakonomics. At the end of the post, I had mentioned that the joint authors of Freakonomics have ventured in writing another similar and equally famous book called ‘SuperFreakonomics’. I have just finished reading the book called SuperFreakonomics and the review is here.

Generally, I read books buying. But, this time, I downloaded the book and took print of same in my office. I cannot read soft copy as I do not find coherence and attachment on online reading except short news and columns. If you are interested in downloading this book and like to read, you can get the book from here. (However, you are advised to find out yourself if the e-book you are going to download whether comply copyright laws and if any violation, you alone would be responsible for any consequences, if any.)

Now, coming to the merits of the book, the book is interesting and since it is a sequel of the previous book Freakonomics, the subjects addressed here in SuperFreakonomics are also similarly freakish. The authors have chose very interesting subjects and tried to see their co-relation between economics and these simple topics which seemingly may never have any relation whatsoever in our mind. For example, the authors talk about economics of prostitution and it is very interesting to know that prostitution these days, has been reduced as compared to previous centuries. Thanx to consensual partners, friends and girlfriends and boyfriends. It also shows how the cost of prostitution is going down and shows oral sex is utterly cheap. J Anyway, the point is earning capacity, ability and differences between high class prostitutes – who are good looking, intelligent and ready to serve their customers and the low class street prostitutes. It also shows the violence involved in this profession.

The second interesting issue is about how to deal with terrorists. Is there any way where terrorists can be identified easily before they strike their target. There are also topics in the book regarding drunken driving versus drunken walking and from data, they show that may be drunken walking is always more riskier than drunken driving. They also deal with issues of longer life: the one who gets a noble prize is likely to live extra few years than the one who is just nominated. It seems same thing is also possible in Basketball Game. N the authors also discuss about the effect of name on academic performance and tenure in Universities. The Author having both surname and first name both starting from A seems to be much luckier to get academic nominations than the one having both starting from Z. want to change your name?

So, above are some of the topics that SuperFreakonomics deals with and comes the final topic that has been very much controversial. The topic is about Global Warming. Though the authors take all the topics lightly and try to find out simple and easy answer, in global warming, their easy answer looks something much simpler. They talk of sending some sulphur dioxide in stratosphere, which is as I understood some 25 kilometers above our land, and try to cool the earth and save us from global warming. I am not sure if this works but the Authors have been criticized for their ‘nonsensical’, ‘bizarre’ and for their unworkable approach. The authors have been criticized by New York Times Economist and Nobel Laureate Paul Crugman and other environmentalist for distorting the facts and figures and research of other scientist and economist. Whatever! But, on plain reading too, it looked the issues and ideas look less convincing to me also. So, this Chapter on Global Warming is something, I say, is less researched by Authors before they decided to write a book on it.

You can read other reviews of the books here, here, here, here and here. These reviews are both appreciation and criticisms of the books, especially on global warming chapter and the way to solve it. Overall, the book is good to read. May be, I already read something similar book – Freakonomics and since the matters are addressed and handled in similar manner, this time I found it less interesting but still enjoyed. I recommend you to read it once! Interestingly, the review on The Guardian also did not rate it so highly in comparison to Freakonomics.

In the series of books reading, I am reading next a book called Shantaram written by Gregory David Roberts. The book is about India, especially about Mumbai and autobiographical account and fiction of a person/author who escaped Australian Prison and forged a Passport and came to India. The book is very interesting, I know and what I also know is the book is very very bulky – something about thousand pages. Therefore, I will be taking something about a month; minimum may be, I guess, to complete the book. Therefore, in between reading of Shantaram, I plan to read some small book also – most probably of Manjushree Thapa or of Samrat Upadhyaya. Whatever I read, I come with updates and reviews.

Keep on Reading!

Freakonomics – a Book Review

I had read this book called Freakonomics sometimes back and going to review it here today. The book can be purchased from here:

http://www.infibeam.com/Books/info/steven-levitt/freakonomics/9780141019017.html or from many such other online book stores. I strongly suggest you to look around in various websites before you buy as there will be varying discounts. The book is written by Steven D. Levitt, who is an Economist Professor and Stephen J. Dubner.

The book is amazing to speak in short and in few words. For those like me who want to read on plain economics without going in deep and without being distracted by calculus and quantitative analysis, the book is the one to read. For them, who know economics but do not know how to apply on our common sorroundings, the book is the one to read and ponder. Though the author takes help of the some of the mathematical tools to analyse, what he does is to apply economics principles in seemingly unrelated topics. For example, no one thinks that there is any economic rationality behind drug dealers staying with their mothers. But, the book demystifies this point says that yes there is. Think of the economic linkages between cheating primary school teachers in USA, sumo wrestlers in Japan. You cannot think of anything unless you read the book. Cheating, I mean, cheating in their profession and not in their personal lives. J

This is the greatness of the book. The Authors, one Economic Professor and other a Journalist after constantly observing, researching and applying minute principles of Economics come to the conclusion that there are economic rationality and relations between various social activities. Let us see another example and this is the first topic covered in the book and I found the most amazing among all. What is the reason of reduction in Crimes lately in US, in the decade of 1990s when there were predictions that crimes go unchecked? There were experts who told that crimes would grow but when crimes did actually reduce, then, he same experts came with various explanations like Gun Control Laws, Rise in Affluence, Population Control, and better Police in US etc. etc. These experts could not see these all when they were predicting that crimes would go unchecked but when actually crime rate got lowered, they started devising reasons for that. That may be so, they may be right but Freakonomists say that these experts are either wrong or even they are right, they are fractionally right. So, what is the main cause of crime reduction? They relate the incident of Roe v. Wade, US Supreme Court judgement which allowed the abortions legally. The Authors say that this judgement made sure that unwanted children were not born in US and mainly, the unwanted children used to get birth in poor black ghettos, and reduction of such numbers ensured that the children which were like likely to get driven to crimes were not actually born. So, US got a relief! No one saw this point before authors make a link between a US Supreme Court judgement and a crime and whose effects were to be seen after 20-25 years as the judgement made sure 20-25 years back that a child was not born who is going to be a criminal once he attains an age of 18-20 years later. What a link and what an observation.

The books keep on revealing those economic secrets that once you start, you cannot stop. I am sure that everyone who read it must have liked it. So, it became a bestseller. The greatest point about the book is the book is very simple, written in a simple language and you need not have even college level economic degree to understand it. Authors make it so simple that it is just like reading stories and nothing about economic principles. Second thins about the book is it covers such a simple topics that we wonder what economics has to do with such a mundane things. But, authors are good and very good to demonstrate us what economic link they are trying to unravel.

But, do not be confused that this is not a standard University textbook on Economics. This is not a book that you read and be economist, as one of the Authors is a Journalist here. This book does not help you to score more marks on your Economics Paper in College. But, certainly makes you wiser and takes you to the world that you start thinking for a while, if not for a longer time period. I say, a MUST Read. Enjoy Reading! And Comment here with your views.

For Official Freakonomics Blog, you can visit here and for other reviews, here, here and here.

(A Short Note: The authors were maintaining a blog with New York Times and later have published another book called Super Freakonomics, I shall review the second book shortly.)

Book Review – An Economist’s Miscellany written by Kaushik Basu

I just finished reading a very small and interesting book called ‘An Economist’s Miscellany written by Kaushik Basu’. Mr. Basu seems to be a renowned economist in India which I did not know before I read the book. He is currently the Chief Economic Advisor to Indian Government/Prime Minister and works from Finance Ministry, New Delhi.

Before that a PhD in Economics, Mr. Basu was professor in Delhi University and as a visiting Faculty to other US Universities.

His book can be bought from http://www.oup.co.in/search_detail.php?id=145824 or from many other online sites.

The book is about Economics, his travel reporting, his memoir, his thoughts on current social and political events, and lots more deep thought issues relating to social sciences. He writes on everything and makes the book very very intelligible, easy to understand, relevant and interesting. The book mainly contains the adapted versions of his already published newspaper articles which were written on different subjects. In the book, he makes Economics a very easy one sans derivative, anti-derivative, i.e. without using calculus, without any sorts of quantitative techniques and therefore, makes the complex concepts of economics a very easy one and very easy to understand. He does not go after theorist and theories while talking on economics. He talks of normal social events to demonstrate how things are from economist’s angle.

However, it should not be construed or misconstrued as economics book. It is not. If you want to read economics as per the syllabus prescribed by world’s greatest Universities or searching for some standard textbook on economics, this is not. This is a whole point how this book covers economics of common man for common man and to understand the economics concepts from Basu’s book, you need not have in-depth knowledge of economics. This is a beauty of the book. The Author demonstrates us how sexy! A economics can be without any fashion and cosmetics. The plain and simple beauty of economics, it portrays.

This is about the chapters that deal with economics. But, Mr. Basu deals on more things than economics alone in his book. As already said, he deals on travels and arts. He deals with sexual, minority and women rights. He talks on laws on land acquisitions; he talks on same sex rights; he talks on government enterprises like Air India how badly managed they are! Therefore, the economist gives you handful of things on various subjects and on subjects on much more than economics itself.

After his articles are chronicled in the book, there are two short stories translated from Bengali to English. The first one deal with money lending business and second one is on religious superstition. Whole book is written in a light hearted manner and so, these two stories also appear to be. These both the stories, I had heard and read before long time back and to read them after a long time, was a very refreshing. In the end, there is a play and put in a lighter manner about Profession, conference and love. The story revolves round Delhi University and Train Journey to Banaras (Varanasi in Uttar Pradesh India), and then, a professor snatching (of course not literally) other man’s wife and marrying (?) with her who happens to be a very bright student of the professor in Philosophy many years ago in Delhi University. And the book is over.

While reading this book, nowhere you feel bored. Since the book itself is a small one, and there are multiple short articles, stories, essays, you can read them without any difficulty. The lucid manner of writing makes each article interesting. You have to travel with Authors to various places around the world and he shows you the world’s some of the best Universities, Professors, of course economists, arts, and museums. Therefore, at no point, you feel fatigued from the book.

The Oxford University Press has taken care to publish the beautiful book and the paper quality is a finest one. Nicely hard covered and appropriately priced, (Of course, I bought with discount from one of the Indian online e-commerce sites and I recommend you to check many of them before you purchase, you get wholesome discount), the book is a one who every intellectual and common man must read it. You must read not because you become economist overnight but it teaches you the quality of being simple and the pleasure of reading stuffs which are simple and therefore, beautiful.

I had almost forgotten one aspect of the book that was: author frequently makes reference to his mother. Maa was 90 years old woman and always with love and insights to the author who lately started losing memory power and the Author lost her in October, 2010. Our condolence to Mr. Basu on her demise!

Overall, I rate the book 4/5 and strongly recommend reading and sharing your views.

You can read its review here , here , and here as well.

Farewell to YSR and The New York Times Archive

This post is not intended to be a detailed one. Just a small post out to bid goodbye to Dr. YSR.

First the sad news, The Chief Minister of Andhra Pradesh Dr. Y.S Rajashekhara Reddy’s untimely demise on helicopter crash yesterday has brought this State of Andhra Pradesh in a state of shock, despair and grimming situation. The man was popular as the recent landslide victory of his in State Assembly Election and Lok Sabha Election has brought him again in power after being his victory in 2004 Election. He has just surpassed his 100 days in office. Despite numerous allegation of corruption against him, and allegation of factional politics in his native place Cuddapah, he was the man of masses. He promised a lot to the poor and the reports says that he promised most of them. That was the reason that he was elected again to serve the people of State of Andhra Pradesh. But, the God was very unkind to him and God wanted something otherwise.

Dr. Reddy was travelling to some remote village in Andhra Pradesh in a small helicopter and there were only five people. The climate and the nature’s fury, as the reports says, compelled the pilots to change the route. The plane left on wednesday morning around 9 and the helicopter went contactless with ATC immediately after some 15 minutes and nothing was heard. All machneries of state and Central Government was pressed in action and he was found along with 4 others, almost after 24 hours of his departure from Hyderabad, but when he was found, he alongwith other 4 were already with God. How merciless the God can be !

All the national Indian media have widely covered this incident and human sea on Hyderabad are there on the streets to pay their last respect. My office has also been closed for two days, yesterday and today, to pay respect to him. Eventhough I know him little and his political career, I had lots of respect for his hardwork and feel utterly sad for his untimely demise.

What we can do, when god has some other ideas! My farewell to Dr. YSR, and I am sure State of Andhra Pradesh will miss him for years.

Goodbye Dr. YSR, and May you rest in peace! Wish the God bestow courage to family members to bear this hard truth.

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Sometime back, I was browsing The New York Times, one of the best newspapers in the world with wide range of information for any readers. The Economic and technology related columns are the things that are most read by me(by me!, I do not know about others.) While browsing the website, I stumbled on a great service of this NYT. About this, I wanted to write sometime back. This was the archive service.

The archive section gives you all the news from 1851 AD. You can read the free preview and to read the full article, you have to buy/subscribe. For all those reachers, I think it is a very great service though for normal common man like me, It may not be of that much value, or may be I can not afford.

But, I feel it is a revolutionary service.It helps greatly for the researchers and specially for the students of economics, political science and history, it should be of great help.

You can access NYT’s archive section from here:http://query.nytimes.com/search/query?frow=0&n=10&srcht=a&query=nepal&srchst=p&submit.x=30&submit.y=11&submit=sub&hdlquery=&bylquery=&daterange=period&mon1=01&day1=01&year1=1981&mon2=09&day2=04&year2=2009

There you can see that I had searched the term Nepal and some of the news were of 1960-70 when there was Panchayat era in Nepal under the leadership of King Mahendra and there are archived news about B.P. Koirala, the first elected Prime Minister of Nepal.

You can see another link where it reports that King took the direct control of Government.

http://select.nytimes.com/gst/abstract.html?res=F30814F73A541A7A93C4A81789D95F448685F9

Okay all, read this news and make the full use of them.

Have a good day.

Nepal-India Trade:My Comments

These days, I am doing some kinds of research on India Bangladesh Trade. The issue is simple that one of my clients wants to produce some garments and textiles and wants to sell in India. The issue is whether the client should produce cloth in India and sell or should it produce it in Bangladesh and bring to India and sell. The issues involved are Indian excise duty rate v. customs duty applicable in imports from Bangladesh.

We are analysing the situation and that’s all for the now. I personally wish that they manufacture such garments in Nepal and bring to India and sell here. Hopefully, it makes these Indian manufacturers/importers these kinds of transactions more cost efficient but my wishes have nothing to do here. At least till now, Client has not thought about Nepal as a viable option.

In this context while doing India-Bangladesh Trade Treaty through Google and other legal database, I stumbled on the below presented article in Nepali magazine-telegraphnepal. I liked the one and already presented to readers in my previous blog entry. The same article is presented here with my comments in bold. I hope that you enjoy reading it and benefit by knowing the reality about Nepal India Trade.

We have just heard that Nepal and India entered into another Trade Treaty recently when Nepalese PM Madhav Kumar Nepal visited India. I have not had the benefit of seeing the text of the treaty yet. If someone has the treaty file or link from where I can see it, kindly let me know.

“Enhancement of Nepal-India bilateral Trade & Commerce Ties

Rajesh Agrawal National Council Member, Confederation of Nepalese Industries

The bilateral framework for trade and transit is provided by the India-Nepal treaties of Trade, of Transit, and Agreement for cooperation to control unauthorized trade 1991. The trade treaty valid for five years was renewed through an exchange of letters on December 3, 1996 and March 5, 2002 and automatically renewed for another five years in March 2007.

Under the Treaty of Trade, India provides, on a non-reciprocal basis, duty free access, to the India market for all Nepalese-manufactured articles barring a short negative list (cigarettes, alcohol and cosmetics), subject to the conditions, since march 2002, that the exports meet the domestic value addition requirement of 30% and change in its classification at four-digit level in the course of manufacture or processing in Nepal.

After the March 2002 revision, annual quotas have been prescribed for duty free exports to India for four sensitive items-vegetable fats (100,000 tons), acrylic yarn (10,000 tons), copper products (10,000 tons) and zinc oxide (2,500tons).

Bilateral trade takes place generally in Indian rupees, but Nepal’s Central Bank maintains a list of items that can be imported from India in us dollars.

The India–Nepal Treaty of Transit, renewed every seven years, provides for port facilities to Nepal at Kolkata and specifies 15 transit routes between Kolkata and the India-Nepal border for bilateral trade, 22 entry/exit points are provided along the Indo-Nepal border. The transit treaty was last renewed in March 2006. The agreement for cooperation between India and Nepal to control unauthorized trade was automatically renewed for five years in March 2007.

The two governments are negotiating a bilateral investment protection and promotion agreement.

India and Nepal signed a rail service agreement in May 2004, to extend cargo train service to the inland container depot (ICD) at Birgunj in Nepal. ICD has been constructed with World Bank assistance of US$ 17 million, while India has constructed the rail tracks which link the ICD with the Raxaul railway station in India. The ICD became operational on 16th July 2004. A container corporation of India-led joint venture Himalayan Terminals Private LTD. is operating the ICD.

I do not know how the operation of ICD in Nepal is. I hope that the businessmen are making full use of it. Irrespective of what kind of political relation we share with India now, in economic areas, we are heavily relying upon India. It is beyond any doubt that India alone is our one of the main trading partners. Given the situation, Nepal should be very serious to gain the advantage that we can have from this relationship. India’s population is so huge that if we focus our supply only to some of the Indian population, Nepal has much to gain. In the bilateral trade, the role of transpiration, storage, warehousing and easy customs clearances are some of the prime factors. Both countries should immediately address these concerns. However close and great neighbor we may be with China, the trade from Chinese side will not be going to increase anytime soon as lack of market routes, lack of road and transportation and immense cost of infrastructure involved. But, if we see the south plain of Nepal, Nepal can be easily connected to broad gauge of Indian Railways which has all India connection. Nepal can reap a lot of advantages from these well networked and connected Indian Railways. For this, he existing ICD should be made fully functional and well connectivity with India adds value to our International Trade.

A motor vehicle agreement for passenger vehicles, initialed on 23rd February 2004 awaits formal signature. The agreement envisages bus services between India and Nepal on 14 routes through 5 borders on reciprocal basis. 53 buses will operate under this agreement everyday. Individuals traveling to either country in their personal vehicles would also be able to cross over into the other country without payment of any charge for the first five days.

Why this treaty is not signed yet? This treaty is citizen centric and it helps people of both countries travel freely and without much hassles. As we have already visa and passport free regimes, motor vehicles also should be allowed without any fees but only registration at entry point. Nepal has much to gain from tourism if this treaty is signed. Nepal and India are great pilgrimage sites for many people and many people can travel easily to each other’s countries. Even the presence of few lakhs of Indian people in Nepal annually among those thousand of lakhs people will help our tourism to grow a lot.

Now I would like to high light some of the issues related to trade:

The trade treaty between India and Nepal has made specific provision which allows access of Nepalese manufactured goods to the Indian market without payment of any customs duty.

Generally, when they exempt from customs duty, it is exemption from Basic Customs Duty (‘BCD’). As per Indian law, Customs Duty (‘CD’) has three components. They are Basic Customs Duty (‘BCD’), Additional Duty of Excise (‘CVD’ – It should not be said ‘CVD’ as ‘CVD’ means Countervailing Duty as per WTO laws and will be imposed on different condition and situation but In India, even though, it is a wrong expression, all say it ‘CVD’ with an admission that it should not be called ‘CVD’, and this duty – ‘CVD’ – is imposed in lieu of excise duty, which would be imposed had goods been manufactured in India), and Special Additional Duty (‘SAD’) (imposed in lieu of State level sales tax/Value Added Tax or VAT). So, the major components of can be written down as follows:

CD=BCD+CVD+SAD, and there will be education cess separately and in some products coming from some special countries, there could be anti-dumping duty as well.

Therefore, most of the time when treaty between two countries exempt customs duty in its text, it is only exempt from BCD. So, still there CVD+SAD remains and importer in India has to pay that. Typically, in India, the Trade Treaties are entered by Ministry of Commerce; and they will not be laws automatically. After Treaties are entered by Ministry of Commerce, Ministry of Finance, Central Board of Excise and Customs (‘CBEC’) will issue a Notification as per the treaties entered and most of the Notification, generally as a matter of rule, only mentions the exemption of BCD and do not talk about CVD and SAD. This is not only with respect to Notification issued as per Nepalese treaties but also in Notifications issued as per treaties with other countries like Bangladesh, and other African Countries.

But in the past, through national budgets additional duties to the extent of 4% has been imposed on Nepalese exports, later on at the request of Nepalese’s exporters as well as Nepal government these duties were called off. This problem is because of the CBEC Notification only mentions exemption from BCD.

Eventually when the 4% additional duty was waived by other notification, it was made applicable only to those items, which were being exported by the date of the notification as per the list approved by the finance ministry on the basis of H.S. Code classification.

Many items which could have been exported or are exported from Nepal are still subject to this 4% additional duty. This 4% additional duty is called SAD and is in lieu of state level sales tax and VAT in India. Though the VAT rate in India is different for different products, and different for the same products also in different states of India, the SAD is a standard one and is 4% as most of the goods in India are liable to VAT @4% across all the states. The really SAD story about this SAD is that Indian government by Notification has allowed the refund of SAD under certain circumstances. That means importer in India first pays the SAD component while clearing the goods from customs and later, has to file application within one year to ask refund of SAD component if the importer satisfies certain conditions laid down in the Notification. Unfortunately, in India, it is easier to tie a bell in tiger’s neck than to get refund from tax authorities and importer will lose this money which he recovers from final customers and costs of goods will go high which effectively means the exports from Nepal becomes expensive and makes Nepal less competitive.

By this the exports under Nepal India trade treaty has virtually frozen to the items enlisted prior to the notification and for the new items, the treaty is virtually extinct.

As a result of such discretionary levy of the additional duty, Nepalese exports have been badly impacted.

Agro based industries are facing problem of quarantine and lab testing and borders. There is another problem I want to highlight from my practical experience. My home is in eastern Jhapa and cross kakarbhitta Border many times. I see almost all the time, the trucks loaded with wheat ready to go to Bangladesh from Phulbari Banglaband Marg are lined up on the roadside almost for 10-15 Kilometers by not getting customs clearance from India. There is a need of warehousing and large containers to reduce the costs of exports. And this should be done by Nepalese Customs Authorities as well.

The garment industries are facing problems of levy of CVD in India on the basis of MRP.

On this aspect, Nepal should talk with India firmly and much hyped Nepal India Trade Treaty may cover this. But, one thing I want to highlight here is that in this case Nepal is not singled out, almost all the countries are subject to CVD but we should talk with Indian Government and should convince Indian Government to exempts from CVD as well. Interestingly, because of economic recession, Indian government reduced excise duty on almost all goods by 4% in December, 2008 to give impetus to domestic market, and the rate of CVD also automatically went down as CVD rate corresponds to the excise duty rate. On comparative advantage analysis, it may not be that great news to Nepalese exporters as ultimately they have to compete Indian products but in absolute terms, the duty of CVD has gone down by 4%.

Quota and canalization on vegetable fat, acrylic yarn copper products, zinc oxide

On specific items like steel pipes it is required to take ISI mark from BIS before they can be exported though they have already taken ns mark from Nepal bureau of standards.

Pharmaceutical industries are unable to export their products to India, because the registration of their pharmaceutical products in India is almost impossible.

The indo Nepal trade treaty allows for sending any machinery for repair & maintenance only within 3 years of importation from India to Nepal. Whereas in normal cases, it is after 3-4 years of installation that a machinery requires repair and maintenance.

On this point, Nepalese importers will have difficulty to bargain with Government of India as in India, even imports from third countries to India are allowed to send out and bring without payment of duty only within 2 years. I am not so sure about the time period but I am sure not definitely after three years.

By products not being allowed to be exported in India;

These are products where main finished products are allowed to be exported in India, but by–products generated during the course of manufacture of the finished products are not allowed for export to India due to some prohibitions either due to the Exim policy of India or some other notification.

Heavy congestion at Kolkata port resulting in delay and cost increase of import cargos.

Road and customs infrastructure not sufficient, very weak at the borders.

Recommendations

It should be specifically provided in the treaty that neither the central government of India nor the state governments will levy any form of additional duty on goods imported into India from Nepal as per the provision of the India Nepal trade treaty. This is difficult to mention in the treaty as federal structure in India does not allow deciding central government on the matters of taxation of States. However, should Indian Government try to implement this thing, some sorts of relief to Nepalese exporters can be expected. And whatever products it is being levied currently should be waived immediately.

Regarding quarantine testing Nepalese labs should be accredited for the testing.

Third party pre-shipment inspection and their certification is the norm for the exports all over the world, the same can be made applicable for India-Nepal trade on agro products.

Initiations had started for negotiating a bilateral cooperation agreement on standards between bureau of Indian standards and Nepal bureau of standards and meteorology. It should be finalized with both recognizing quality standard marks provided by each other.

Nepal allows the import of Indian products with the minimum of non-tariff barriers and the Nepali exporters also expect the same treatment from the counterpart.

Provision for allowing the sending of machinery for repair and maintenance within 3 years of import only to be amended to remove the 3 years boundation.

The motor vehicle agreement for passenger vehicles should be formalized to allow Nepalese vehicles into Indian Territory which at present require a permit.

Removal of quota and canalization; when the quota was prescribed in 2002 on vegetable ghee, acrylic yarn, copper products, zinc oxide, the import duties in India on these products were very high, but now they have been significantly reduced and in some cases it is even 0%, so there is no logic in continuing with the quota.

Nepali manufactured goods out of Indian and or Nepali raw materials should have a separate procedure for export to India. They should be given national treatment as given by the central government of India to the states like Assam, Meghalaya, Uttarakhand and Himachal Pradesh in terms of tariff and non-tariff issues.

The DRP system (duty refund procedure) was introduced for goods exported from India to Nepal in Indian currency with a view to increase trade with Nepal as well to reduce the landed cost of goods to the consumers of Nepal. Under this system the amount of excise duty paid on Indian goods is given as rebate in the customs duty levied by Nepal and that amount is refunded to the Nepal government by the Indian government. During that time import duties were about 25% in Nepal so the full excise amount would be exempted but now the duties have fallen to the range of 5-10% resulting in the full excise not being exempted hence Indian goods becoming expensive.

So for all exports from India to Nepal in Indian currency excise duty should not be charged as in the case of dollar exports.

For the congestion being faced in Kolkata additional sea ports with railway connection for Nepal as JNPT, Kandla, Vishakhapatnam and ICD Tuglakabad for import and export of goods from Nepal should be provided.

ICD Birgunj should be connected with major ICD of India for bilateral and overseas cargo.

The facilities of concur should be extended to carry export material from Nepal to major cities of India and vice versa

Goods imported from third country into India are not allowed to be re-exported to Nepal. This provision should be removed and goods imported into India from third country should be allowed to be re exported to Nepal.

Improvement of cross border trade related infrastructure such as upgrading major customs check points at Birgunj-Raxaul, Biratnagar-Jogbani, Bhairawaha-Sunauli and Nepalgunj-Rupediya to international standards, upgrading approach highways to the border on the Indian side and the Nepalese side; and broad gauging and extending rail links to Nepal.

Lastly rivers flowing from Nepal into India constitute an important part of the Ganges river system. Nepal’s enormous hydropower potential estimated at 83,000 mw, of which 44,000 mw is considered economically feasible, could transform Nepal’s economy.

There is considerable scope for mutually beneficial cooperation between India and Nepal in developing small and medium sized hydropower projects in Nepal for internal use in Nepal or exports to India. Nepal’s hydropower development policy permits private and foreign investment in generation of hydropower, including for exports.

Some Customs Notification issued by CBEC in India:

In this portion, I have presented some of the Notifications issued by Indian Government in relation to customs duties on various goods imported from Nepal. Some of the Notifications may have been withdrawn or superseded by subsequent Notifications, therefore, all may not be valid Notification now but this list should give general idea to you:

http://www.eximkey.com/contents/showpage1.asp?pageid=4215

The Notification is CUS NTF NO. 03/1997 DATE 16/01/1997, Exemption to goods imports from NEPAL and This Notification has been superseded by Cus Notification No. 85/98 dated 5-11-98.

http://www.eximkey.com/contents/showpage1.asp?pageid=4448

The Notification is Cus Notification No. 85/1998 Date 5-11-1998, Exemption To Specified Goods Imports – Nepal and SUPERSEDES 3/97 DATED 16-1-97.

http://www.eximkey.com/Search_CUSTOM.asp?Section=9

Nepal and Foreign Currency Issues

I had written a post here sometimes back. The post was titled as “India and Foreign Currency Conversion”. There, in that post, I had promised at the bottom of the post that I would write something about Foreign Currency issues and conversion related matters on coming days.

Therefore, here it goes-something about Nepal and Nepal’s foreign currency related laws. First of all, to be frank with you, I do not know anything about foreign currency law of Nepal. So, what I am going to write is my experience of almost six years back. This issue is being talked here in the light of difficulties that we face in India to convert your Indian money to foreign currency from Nationalised or Private Banks. If you have already read my earlier post about India, You will know by this time that it is very very easy to get your Indian currency converted to US Dollar or other recognised foreign currency in private open market albeit the rate might be different from what Reserve Bank of India would prescribe.

In this background note, I am talking experience from Nepal. The story is of 2003 June. First time, I was on a foreign tour/trip. For the first time, I was stepping out of my country and was heading to foreign territory. The Country of destination was India :), the foreign land where I was venturing to.

I knew that Nepalese Currency is of no use in India. I required either Indian currency or USD or something like that. At that time, I did not know much about forex law of Nepal and how to get foreign currency. First of all, I was not sure which currency to get or some kind of cards.

Problem in Nepal is that Rs. 500, and Rs. 1000 currency notes of India are not legally recognized. So, if I wanted those notes, I had to contact some businessmen of Terai and I did not have much time to do so. Another problem was that I did not want to do something illegal which may put me in some kind of trouble in the Airport-Tribhuwan International Airport. Now, legally, the problem was that I could get only Rs. 100 Indian currency and at that time, I was carrying something around 50,000 INR. First time, I was travelling to India and I did not know how much money I need and to get 100 Rs. currency note for that amount would make me to carry a big bunch of papers. I was little irritated with this idea.

My brother had suggested me to make Traveller’s Cheque, which he himself did not know what was that and neither I had any damn idea of what’s that. I thought I should contact with Bank people itself. Then, I visited to Everest Bank, in New Baneshwor where I had maintained my Savings Accounts at that time. I went to Bank told them that I am going to India and asked them to suggest what is the best method to carry some money.

They had only one suggestion-get Indian currency from us and go. I inquired about Traveller’s Cheque, Debit and Credit Card. They had low opinion about India and said me it’s not worth of doing any such things. They asked me about the city where I am heading to, and I said Hyderabad. From their facial expression that they had very low opinion about Hyderabad and in a manner of contempt to this place, said there it will be difficult for you if you do not have hard cash. I myself, did not know much about this place, and did what they suggested. I gave my Nepalese Currency and they gave Indian Currency-bunch of INR 100. The conversion rate was same as it is today as Nepalese currency is pegged with Indian Currency. N I headed to India with inner pockets of pants and shirts filled with Indian currency bunch.

In Nepal’s International Airport, while frisking my body, a policeman asked what’s there? I said-money, Indian Currency. He further said that he does not think that I have 500 INR currency note and I affirmed his thoughts. He said me to move and I moved. That’s all about my experience.

Now, let me add little more of my story before I conclude this. That day, the trip was in many ways a new for me. First foreign trip as already said, first time, I went to any International Airport and first time, I was traveling by Plane, among others. My sister Minu and Brother Rewati Raman Pokhrel came to Airport to see me off. We used to stay in Babarmahal Area and we took bus. There was no need of taking taxi. My sister had recently passed Nepal Telecommunication’s Exam and she had training in Kathmandu at that time. She skipped the half’s day training and came to see me off.

I will write more on this later. Keep on reading !!!

Nepal, India and Trade

I found this excellent Article in Telegraph Nepal of which link is provided below, while researching on India-Bangladesh Trade. I will have some comments on this as per my experience in Indian Customs Laws. The Copyright of the Article vests with Author/Publisher.

http://telegraphnepal.com/news_det.php?news_id=6067&PHPSESSID=b5a1f280b3a7b036693e0927fe7b1267

Enhancement of Nepal-India bilateral Trade & Commerce Ties

Rajesh Agrawal National Council Member, Confederation of Nepalese Industries

Bilateral trade takes place generally in Indian rupees, but Nepal’s Central Bank maintains a list of items that can be imported from India in us dollars.

The two governments are negotiating a bilateral investment protection and promotion agreement.

A motor vehicle agreement for passenger vehicles, initialed on 23rd February 2004 awaits formal signature. The agreement envisages bus services between India and Nepal on 14 routes through 5 borders on reciprocal basis.53 buses will operate under this agreement everyday. Individuals traveling to either country in their personal vehicles would also be able to cross over into the other country without payment of any charge for the first five days.

Now I would like to high light some of the issues related to trade:

The trade treaty between India and Nepal has made specific provision which allows access of Nepalese manufactured goods to the Indian market without payment of any customs duty.

Many items which could have been exported or are exported from Nepal are still subject to this 4% additional duty.

By this the exports under Nepal India trade treaty has virtually frozen to the items enlisted prior to the notification and for the new items, the treaty is virtually extinct.

As a result of such discretionary levy of the additional duty, Nepalese exports have been badly impacted.

Agro based industries are facing problem of quarantine and lab testing and borders.

The garment industries are facing problems of levy of CVD in India on the basis of MRP.

Quota and canalization on vegetable fat, acrylic yarn copper products, zinc oxide

On specific items like steel pipes it is required to take ISI mark from BIS before they can be exported though they have already taken ns mark from Nepal bureau of standards.

Pharmaceutical industries are unable to export their products to India, because the registration of their pharmaceutical products in India is almost impossible.

By products not being allowed to be exported in India;

These are products where main finished products are allowed to be exported in India, but by –products generated during the course of manufacture of the finished products are not allowed for export to India due to some prohibitions either due to the Exim policy of India or some other notification.