Lease and rent tax has quite a long history in Nepal. However, its contribution in country’s total revenue doesn’t seem satisfactory from its very beginning to the present. The provision of lease and rent tax was included even in Income Tax Act 2031. Now Gharbahal Tax Act 2058 is in implementation.

If we see last five year’s data, it covers only around 0.7 per cent of the total revenue and around four per cent of total income tax. It is also a source of revenue in which the government has never been successful to meet the target.

In fiscal year 2006/07 and 2007/08, the government collected around Rs. 760 million and Rs. 721 million respectively from rent tax. The revised estimate of tax collection in fiscal 2008/09 is around Rs. 994 million under this heading. In the current fiscal year, the government has set a target to collect Rs. 1.36 billion in the form of lease and rent tax.

The government targeted areas for collecting lease and rent tax are the main cities of the nation. Kathmandu Metropolitan City is the main target city for collecting lease and rent tax. In Kathmandu, there are three Inland Revenue Offices to collect taxes. The lease and rent tax collected by Area No. 1 Inland Revenue Office Kathmandu by mid-April of fiscal year 2007/08 and 2008/09 were Rs. 103.73 million and 166.2 million respectively.

According to chief tax officer Vhumi Ram Sharma, this significant increase in rent tax collection in 2008/09 as compared to 2007/08 was due to the Voluntary Declaration of Income Scheme (VDIS) which attracted new taxpayers.

The revenue office had targeted to collect Rs. 211.5 million lease and rent tax by mid-April 2010 but it succeeded to collect only Rs. 137.74 within that period. The cut in tax rate from 15 per cent to 10 per cent is the main reason behind the lower percentage progress this year, Sharma said.

Area No. 2 Inland Revenue Office collected Rs. 85.97 and Rs. 102.45 million revenue in 2007/08 and 2008/09 respectively under this heading. The target for these two years was Rs. 96.76 million and 125.24 million respectively, the office informed. The office had targeted to collect Rs. 73.73 million taxes under this heading by mid-April of current fiscal year but succeeded to collect only Rs. 60.57 million.

Similarly, from Area No. 3 Inland Revenue Office Kathmandu Rs. 103.2 and 173.2 million was collected under this heading in 2007/08 and 2008/09 respectively. The targets were Rs. 119.7 and Rs. 162.2 millions respectively. Within mid-April 2010 of current fiscal year, the revenue office aimed to collect Rs. 163.2 million, but the office collected only Rs. 97.34 million by this deadline.

During the last three years, around 80 per cent of targeted revenue was collected under the heading of lease and rent tax in Kathmandu district. In Kathmandu, there is a potential of collecting more revenue from lease and rent tax. Most of the houses here have been rented for business and residence but only few of them have been brought under the tax net.

Talking about the problems faced by tax authority to bring all the households under the tax system, Vhumi Ram Sharma, chief tax officer of Area No. 1 Inland Revenue Office Kathmandu said that Gharbahal Act 2058 itself had loopholes in favour of those wishing to evade taxes. It mentions that the rent of a house will be as per the contract between the two parties. So in order to evade tax, the two parties show smaller amount of rent in the contract than the actual amount paid and received, he said.

"To tackle this problem, we had proposed minimum reference rate for house rent in the Department of Inland Revenue, but the Department hasn’t approved the proposal yet," he informed. "In the absence of minimum reference rate for rent, house owners are easily evading tax. To attract the taxpayers, we are providing education in various parts of the valley through our officials and volunteers. This education is expected to have a positive impact in future," he said.

In minimum reference rate proposed by Area No. 1 Inland Revenue Office, there is a provision of minimum Rs. 5 per sq. feet to maximum Rs. 100 per sq. feet of rent. It has proposed Rs. 100 per sq. feet for Darbar Marga from Narayanhity Palace to Mahendra’s statue and Rs. 5 per sq. feet for Village Development Committees without motorable roads.

Since fiscal year 2008/09, all the three Inland Revenue Office in Kathmandu have hired volunteers to work in the field for collecting tax in different headings effectively.

"We have sent thousands of letters to the house owners to pay 10 per cent tax from their income from rent, but taxpayers are ignoring our calls. Some people also threaten us by phone," the chief tax officer of Area No. 3 Inland Revenue Office said.

The house owners argue that for the incentive of the taxpayers the service delivery of Kathmandu Metropolitan City must be satisfactory. They demand for proper supply of water and electricity and other services effectively before tax people come to their doors to collect tax, he said. "In my neighborhood, there are many houses rented to individuals for residence but we have been unable to bring them under the tax system. Tax evading culture rooted in our society is the main cause behind this," he said. While meeting the house owners to ask them comply, some of them say the residents of their houses are not actual renters, and are their relatives from whom they don’t accept any rent, he added.

According to Dan Bahadur K.C., a tax officer in Area No. 2 Inland Revenue Office of Kathmandu, the Income Tax Act 2031 was clearer and more effective for the collection of lease and rent tax. As per this Act, the tax office could determine the minimum reference rate of rent in particular areas but after the enactment of Gharbahal Act 2058, the office has to consider the contract between the owner and renter to collect the revenue from lease and rent tax. Due to this, it has become easy to evade rent tax, he said.

The renters could pay lease and rent tax deducting it from the source (TDS), but the house owners wouldn’t accept the deducted amount of rent. Vhumi Datta Poudel is a temporary resident of Kathmandu. He has rented a flat having four rooms at a rent of Rs. 7,000 per month in Teku but he was unknown about how he could contribute to government revenue from his rent payment. However, after getting information about the TDS system, he said that he would be ready for TDS. However, the house owner would not accept the deducted amount of rent. So the lease and rent tax should be taken from the house owners directly, he said.

According to the information provided by all three Inland Revenue Offices in Kathmandu, of the total amount of tax collected under this head, there is a nominal contribution from the houses which have been rented for residential purpose. Houses rented for business and corporate purpose alone are contributing to the total tax figure. Dhaniram Basnet is a permanent resident of Kathmandu Metropolitan Ward No. 14. He has a house with three floors. He has rented two of them from which he gets Rs. 16 thousand rent each month. However he has not paid rent tax to the government yet. When asked why he is not paying tax to the government, he said before collecting tax from its residents Kathmandu Metropolitan City Office must deliver services properly. Collecting tax alone without effective services would not be acceptable, he said. What his response would be if renters paid tax by deducting from source (TDS), with a smile in his lips and without any hesitation he said that he would increase the rent to cover the deducted amount.

Dhaniram is only an example. Thousands of such house owners are evading tax in Kathmandu, and there are similar problems in other cities of Nepal as well. So to bring all of them under the tax net, there must be an effective tax policy and strict tax administration.

coutesy:rising nepal