Reverse Charge in VAT - Section 8(3)

Applicable:

This section applies to the construction of Building Apartments, Shopping Complex including Road, Bridge,  Electricity Production Center, Hall which are not movable for value more than 50 lakhs.

Construction should be for Business Purpose. Business purpose means for sale or for use in income generation.

The construction should be at one place and value more than 50 lakhs. If Business place, Branches are constructed at different places, It shall not be included. But Road, Bridges etc constructed at different locations shall be considered as one unit.

All the works/ purchases shall be done from VAT registered person. If not done from VAT registration party, reverse charge shall be applicable. 

Valuation - more than 50 lakhs

All the cost related to the project (e.g. Electrification, Sanitation, painting, interior decoration etc) are to be included except Financial Costs. 

Calculation of Taxable Value and Tax

Pre-construction costs (e.g. Design, Financial Charges etc.) shall not be included for the computation of Taxable Value.

Construction Period

There is no construction period, rather a project is to be considered for taxation purpose.

Payment of Value Added Tax

Tax amount is calculated on Taxable Amount and should be paid within 25 days from the end of the month on which transaction occurred.

Penalty 

If the payment is not done as per this section 25% of penalty can be imposed.

Input Tax Credit (VAT) - Guidelines

Input Tax Credit

The person who is registered in VAT can claim credit of VAT paid while purchasing the Goods or Services through imports or from any other person registered on VAT. This credit is called Input Tax Credit (ITC). 

Input Tax Credit (ITC) is deducted from the VAT Liability which arises on Sales of Goods or Services (Output Tax). The balance amount is only paid to the government.

What is eligible for Input Tax Credit?

Ans: All purchase in relation to business such as Purchase/ Import of Raw Materials, Packing Materials, Machinery and Equipment, Office Equipment, Telephone Bill, Delivery Van, Diesel fuel and other expenses in connection with the business.

Such Credit can be claimed up to one year of Invoice Date. Tax invoice is the basis of claiming input credit of VAT. If the tax invoice is lost, credit can be claimed on the basis of verified true copy of the invoice.

What is not eligible for Input Tax Credit?

Ans: Soft Drinks/ Hard Drinks, Alcohol, Beer, Petrol, Entertainment Expenses. Such goods and services are eligible for input credit if those are the main business of the person.

On purchase of Automobiles(Three or Four wheeler) used for both personal and business use, only 40% credit can be claimed.

If the automobiles is used for business only(e.g. delivery van) 100% of credit can be claimed. If it for personal use only, no credit is allowed.

What is both Taxable and Non-Taxable goods are transacted?

If any person deals in both Taxable and Tax Free goods, then sales and purchase of taxable and non-taxable goods should be segregated and should be recorded separately.

If it is not possible to segregate the Taxable and Non-Taxable items, then credit can be availed in the ratio of sales.

Input Credit on goods damaged by theft/fire etc.

If goods are damaged due to the reason of theft, accident or fire an application is to be submitted to income tax office within 30 days to claim credit on such goods. After examining the case, the tax office may allow credit.

If manufacturing date is expired for any goods and are not in saleable condition, debit note can be issued for goods return. If goods cannot be returned, then within 30 days an application is to be made to the Inland Revenue Department with all the supporting documents.

In case, the goods are insured, credit is not allowed up to the amount of compensation by the insurance company.

If a business only registered in PAN goes for VAT registration, What will happen for the purchases already made and VAT paid.

In such case, an application is made within 15 to the tax officer for Credit of the stock present on the registration date. Format of application is as per Schedule 16 of VAT Rules. All the invoices relating to the closing stock should be enclosed with the application for verification.

After appropriate inquiry, the Tax Officer will decide on the case and will grant Input Credit.

Input Credit in case of Reverse VAT

If the service is obtained from any foreign party, Reverse VAT is applicable i.e. person making payment to the foreign person is responsible for VAT payment to the government.

The amount of VAT paid on reverse charge can be claimed by the person on the basis of payment (deposit) voucher.

Value Added Tax - Introduction

Taxes are of two types, Direct Tax and Indirect Tax. Income Tax is an example of direct tax whereas Value Added Tax (VAT) is an example of indirect tax. In indirect tax the person paying and bearing the tax is different. 

VAT is levied on the value added of goods and services at each stage in the process of production/import and distribution.

VAT Rates in Nepal:
In Nepal single rate of VAT is applied that is 13%.

Schedule II of the VAT Act, 2052 list out the goods and services which are zero rated. Zero RATE means VAT is charged with 0% (No VAT) but the person can avail Input Credit. This is also known as exemption with credit. Following are zero rated:

1. Export of Goods and Services.
2. Goods stored or for retail sales or for consumption on flight to a destination outside Nepal.
3.  Services provided to any person belonging to outside Nepal.
4. Diplomatic supply
5. Prior Exempted Projects (with prior agreement)
6. Supply to Economic Zone
7. Supply to power sector
8. Art work, Sculpture, Paintings by Small enterprises in Nepal for export through Export Trading House. 

Schedule I list out the goods that are exempt from VAT. The person dealing in such goods are not required to collect VAT. At the same time they are not allowed to avail input credit. They only need to get registered under VAT (on the basis of turnover or voluntarily). Agriculture, Goods of Basic Needs, health, Education etc. are some of the sectors that are exempted under VAT.

Illustration:

Suppose X Limited imported Goods worth Rs. 10,00,000/- and paid VAT 13% on it i.e. Rs. 130,000/- (Consider it as stage - I). These goods are sold to Y Private Limited for 11,00,000/- Plus VAT 13% (11,00,000 X 13% = 143,000/-) (Consider it as Stage – II). Again, Y Private Limited sold these goods to Mr. Z who is final consumer of the goods for Rs. 12,50,000/- Plus VAT 13% (VAT = 162,500/- = 12,50,000/- X 13%) (Consider it as Stage – III).

The concept of VAT is tax on Value Addition. In this example at stage I VAT is Rs. 130,000/- i.e. 13% of import value Rs. 10,00.000/-. At stage II profit of 100,000/- has been added to the actual import value and the goods are sold for Rs. 11,00,000/- to Y Private Limited. Since VAT is charged only on value addition VAT is equal to Rs. 13,000/- (i.e. 13% of Rs. 100,000). At stage III Y Private Limited has made profit of Rs. 150,000/- VAT on this would be Rs. 19,500/- (i.e. 150,000/-X 13%).

Thus, Total VAT = 130,000/- + 13,000/- + 19500/- = Rs 162,500/-

The final consumer has paid 162,000/- VAT to the Z Private Limited. This shows that burden of VAT is on the ultimate consumer.

Input Tax Credit

In this example, total of Rs. 162,000/- has to be paid to the government, but who will pay (deposit) this amount to government actually. Does Y Private Limited has to pay the full VAT amount of Rs. 162,000/-.

The answer is NO. Y Private Limited will get Input Credit of Rs. 143,000/- which is charged by X Limited while selling goods. Hence, the liability of Y Pvt. Ltd. is Rs. 19,500/- (162000/- Less Rs. 143,000/-)only.

Similarly X Private Limited gets Input Credit of Rs. 130,000/- which has been paid while importing the goods and has to pay Rs. 13,000/- (143,000/- Less 130,000) only to the government.

X Limited is the importer and has paid Rs. 130,000/- while importing the goods at the customs point. 

In summary, The liablity of Y to government is Rs. 19,500/- and the Liability of X is Rs. 13,000/-. Since Rs. 130,000/- has already been paid to the government at the customs point, total Tax collection of government is Rs. 162,5000/-. This tax amount is actually on head of  Mr. Z who has borne total amount of tax.

Input Tax Credit is Not Allowed in the following Situations:

1. If the purchase is made from the party which is not registered under VAT.
2. Input Credit cannot be claimed from the following invoices:

• Liquor/ Alcohol
• Drinks 
• Petrol (for Diesel Input Credit can be claimed)
• Entertainment Expenses
• Abbreviated Tax Invoice
• On Purchase of Automobiles (Three or Four Wheeler) which is used in both for personal and Business - 40% of VAT can be claimed as Credit. If it solely for business purpose e.g. delivery van, 100% VAT can be claimed as input credit.

Exception: If the person is engaged in above mentioned business 100% credit is allowed. For example, if a person is a dealer in liquor, it can claim 100% credit of VAT on the purchases.

Registration under VAT:

Threshold: If any person has turnover less than NPR 5 million for a continuous period of 12 months (2 million in case of services) need not to register in VAT. But Such person can voluntarily register itself in VAT.

Compulsory Registration under VAT:  Person dealing in:
Hardware Sanitary, Furniture, Fixture, Furnishing, Automobiles (Motor Parts), Catering Services, Party Palace Business, Parking Business, Dry cleaners using Machinery, Restaurant with Bar, Color Lab, Boutique, Tailoring with Shirting and Suiting, Uniform Supplier to Educational institute/ Health institute and Ice Cream Industry.

Temporary Registration: person involved in Industry, Business promotional short-term exhibitions are required to obtain VAT registration. VAT registration should be obtained before starting such exhibitions.
 

Salaried person, Banking and financial services, education and health services, agriculture produce etc. are not required to get register in VAT.

only person registered under VAT can claim input VAT as credit.